Unaccounted for Costs of Doing Business

by Duncan Gromko

Coal Plant (Source: Arnold Paul)

Businesses contributed $7.3 trillion - 13% of global GDP - in damages to the world's "natural capital" in 2009. That's the headline finding from the new TEEB for Business report on the unaccounted for costs of doing business. This figure is so high because of the value that ecosystems provide to human well-being.

When a business purchases a building or hires workers, these costs are privatized - only the business pays. However, when the costs of production are not paid for by the business (or government or community or individual), the costs are socialized. These "externalities" are what TEEB is measuring. Socialized costs don't have to be environmental, but that is what TEEB is focusing on. An easy is example is a coal plant. The owner of the plant buys the coal, the plant itself, the machinery needed to operate the plant, and hires the people needed to run the plant. What the owner doesn't pay for is the damages done by production to society. These costs can be local - if particulate emissions from the plant damage nearby communities' health. Or they can be global - the CO2 emitted by the plant contribute to climate change and the associated costs.

TEEB breaks these costs down by sector and by world regions:

In terms of absolute damages to natural capital, the greatest damages are done by power generation (coal) and agriculture (cattler, wheat, and rice). Most of coal's damage comes from its greenhouse gas emissions; TEEB estimates that total damage done from greenhouse gas emissions amounted to $2.7 trillion in 2009. Coal also does damage via air pollution (cost of air pollution = $0.5 trillion), but its impact on climate change is what makes it the villain. Agriculture's damages are a little more disbursed. Agriculture contributes to damages via land use change (natural ecosystems converted to agriculture - $1.8 trillion), water consumption (cost of water consumption = $1.9 trillion), greenhouse gas emissions (like methane from grazing animals), and land and water pollution (cost of land and water pollution = $0.3 trillion). 

The report ranks the top 100 most damaging sectors by region, so if you want greater detail about the most damaging sectors, check out the full version.

Geographically, the location of the these five sectors is unsurprising. Coal is biggest in East Asia and North America; energy consumption drives the Chinese and American economies, the two biggest in the world. Agriculture is huge in South America and South Asia, where population explosion is driving continued expansion into natural ecosystems. These regions also export a significant amount of agricultural goods.

An interesting finding of the report is the impact ratio. What TEEB is doing here is dividing the natural capital cost by the revenue generated from the sector. Although coal has huge damages, its monetary benefits nearly equal those costs. It is damaging, but productive. Agriculture, however, has returns that are much lower, meaning that its impact ratio is higher. Cattle ranching in South America, is the biggest culprit. I'm reminded of the trip that Nick and I took to Brazil, where we researched forestry issues in the Atlantic Forest. A big eye-opener for us was how unproductively deforested land was being used - an entire hectare of land was needed to support one cow. 

David Roberts wrote about this report just before I did (as he always seems to). He highlights one finding from the report:

"Of the top 20 region-sectors ranked by environmental impacts, none would be profitable if environmental costs were fully integrated. Ponder that for a moment. None of the world’s top industrial sectors would be profitable if they were paying their full freight. None!"

I'm not sure if Roberts means it this way, but the tone of this quote and that of the TEEB report sort of suggests that business is at fault for the situation. If everything else was equal, yes, internalizing environmental costs would make businesses unprofitable. But, if costs were internalized, business revenues would be higher. If farmers had to pay the full social costs of production, they wouldn't just go out of business. We still need food! Instead, some of these costs would be passed onto consumers. Food and energy would cost more. Internalizing costs would change incentives for producers and consumers, leading to a radical restructuring of the economy. Sectors with low impact ratio (say, solar production) would become more profitable compared to sectors with high impact ratios. Coal production would most likely be unprofitable.

What's to be done about all this? TEEB has a long list of recommendations for businesses, governments, investors, and even for itself. They are excellent suggestions for economic methodologies to internalize socialized environmental costs. However, what's really missing is the political will to enact these changes.