By Geoff Ross
In most human endeavours, from managing a home, to managing a major business enterprise, it is important to consider all the costs and all the revenues, and to ensure that the latter meets or exceeds the former. If not, we all know that the endeavour is not sustainable. Mortgage defaults and bankruptcies are the likely consequences of not adequately accounting for costs.
But some costs, such as environmental damage, are routinely ignored. This is not by mistake — it’s common accounting practice. Economists call these costs “externalities” — that is, they are “external” to conventional economic accounting.
Let’s consider a human-health and climate-change success story: the closure of Ontario’s coal-fired power plants. Money was required to build and run these plants, and the price of the electricity produced was set at a level, in part, to recover those costs. But such plants also imposed costs that were not part of that economic equation. Plants released large quantities of pollutants that were detrimental to human health.
In 2005, the Ontario Medical Association estimated that air pollution (to which coal-power plants were a major contributor) would have human-health costs of at least $8 billion annually in Ontario alone. But those costs were not paid for by the power plants or other emitters. Nor did they appear on their books as debt. Instead, they were “external” to the economics of the emitters. In effect, the atmosphere was being treated as a “free” dumping ground for pollution. But the costs were there, and people paid them through their overall quality of life and often with their own health. Closing Ontario’s coal plants not only significantly reduced the emissions associated with health costs, but it was the biggest contributor to the eventual reduction of the average Ontarian’s carbon footprint measurement from the 1990s to today.
The problem of not accounting for “external” costs goes far beyond pollution from coal plants.
Vast quantities of packaging waste wind up in landfills, as unsightly litter, and, as in the case of microplastics, a danger to various living organisms. These costs are “external” to the economic equation involving producers, distributors and consumers of packaged goods, but certainly have economic costs to the natural environment.
The loss of forests and wetlands, and their replacement by hardened surfaces such as roads, parking lots and roofs, are all consequences of development, and they all contribute to increased risk of flooding. But the costs of flooding are “external” to the economics of development initiatives.
These examples, and many more, involve costs to our natural capital of clean air, land and water, and the living ecosystems that sustain life on our planet. These natural-capital costs that have not been paid by us thus far amount to a very large and growing deficit in our account with Mother Nature. This deficit is not sustainable. Sooner or later, Mother Nature will “call in” our debts.
Those who consistently do not honour their financial obligations are often called “deadbeats.” Until we deal with the deficit in our natural-capital account, Mother Nature will consider us all to be “deadbeats.”
So how might we deal with this problem? One solution that has received huge support from scientists, engineers, industry, politicians and economists is to ensure that these costs are included in the cost-accounting process — that is, they are “internalized.” Looked at another way, we “pay our own way” instead of leaving our debts to other people and other times.
One example of this would be a “carbon tax,” paid by those who release carbon according to their use of carbon-emitting fuels. The reasons that this has gained so much support (and also some controversy) will be examined in a future article.
Geoff Ross is a member of the Muskoka Watershed Council