Time to internalize those externalities and get prices right

  An “externality” is code in economics jargon meaning any cost of producing a product that can be omitted (i.e., externalized) from the producer’s balance sheet and passed on to taxpayers, the public or hidden in the environment for future generations to pay.

This scam, still buried in obsolete economic textbooks, assumes that our air and water are free and can be used to dump companies’ waste. A classic Freudian slip: The word “externalities” refers to any cost, hazard or risk that can be shifted to others. This shifting of risks, costs and responsibilities is still presented at many business schools’ as a rationale way to maximize profits to shareholders and management. Financial engineering courses copied this model in externalizing risks and costs to taxpayers (now on the hook for their bailouts); to employees and pension plans; small businesses and Mom and Pop investors, all of which turned finance and Wall Street into the global casino of today.

All these uncounted, hidden costs of our current unsustainable polluting production methods piled up during the 300 years of the Industrial Era. Today, we see a tipping point in the volume of waste, pollution and risks globally: loss of forests, biodiversity; massive debt overhangs; bailouts foisted onto governments and taxpayers; austerity, budget cuts, unemployment; offshoring production to pollution havens and unsafe factories in a worldwide race to the bottom.

Corporations and their allies on Wall Street and Washington are finally facing up to this externalities explosion and their complicity in enabling this shift of responsibilities from finance and producers to citizens and our common future. These externalities were encouraged by perverse subsidies to these polluting, cost-shifting activities: notably to the fossil fuels industries and to nuclear power – now revealed as imposing unacceptable safety and health risks while construction and even insurance liabilities were imposed on consumers and taxpayers.

We also see externalities in our industrial agriculture food sector: obesity, diabetes and hunger among the poor due to speculation in commodities, as shown by computer models (Curbing Speculation in Food). Even pension fund managers try to maximize financial returns by betting on food futures! Let’s account properly for all these “bads” which have silently accompanied the “goods” we enjoy. Once these externalities are fully reflected in company balance sheets, such costs can be internalized and lead to a correction of prices.

Yes, prices for some goods will rise so we can make clearer decisions on what we buy and retail workers might get living wages. Gas-guzzling cars will be more costly to run if gasoline rose to the world average price of $7.00 a gallon while 50 mpg hybrids will be cheaper. Governments can ease these painful transitions by raising pollution taxes and standards to save consumers billions: energy efficiency in buildings, appliances, factories, government and military facilities. Most of these efficiency standards result in job-creating retrofits that save money and energy in payback periods of 2 years. State renewable energy standards for electric utilities, now under attack by fossil fuel groups and ALEC, can improve health, safety and reduce environmental hazard while phasing in the cleaner green economy we track in the Green Transition Scoreboard® and approved by 193 nations at the Rio+20 Declaration, June 2012.

Responsible investors internalize these externalities in their “triple bottom line” ESG accounting in their financial decisions (SIF) as do institutional investors of the UN PRI with $32 trillion AUM.

Externalities are now too obvious and can no longer be the basis of business models. False “profits” and toxic sub-prime assets are being flagged in company accounts. They are becoming questioned in GDP, now a Grossly Distorted Picture of a country’s “progress.” New scorecards: Canada’s Index of Wellbeing, OECD’s Better Life Index, the UN’s Human Development Index, Bhutan’s Gross National Happiness, these new multi-discipline “dashboards” of quality of life. Going beyond money-based measures to account for health, education, poverty gaps and the environment helps clarify that money is an accounting unit – not the real human and resource wealth it tracks.

Policy Matters, by the American Sustainable Business Council, identifies public policies where a business voice, grounded in principles of innovation, fairness and environmental stewardship, can make an essential difference in the advocacy process.