Last week, David Roberts over at Grist flagged a report carried out by the environmental consultant group Trucost, at the behest of The Economics of Ecosystems and Biodiversity over at the United Nations.
The idea behind the report was simple. Tally up all the world’s natural capital — land, water, atmosphere, etc. — that doesn’t currently have a dollar value attached to it, and figure out the price. But the next step was where it got interesting. Figure how much of that natural capital is being consumed, depleted or degraded without the responsible party paying the cost for that use. The number the study hit on was a staggering $7.3 trillion in 2009 — about 13 percent of global economic output for that year.
This brings up what economists call “negative externalities.” That’s a technical term for what happens when one actor in the economy has to pay for another actor’s mess. In a theoretically perfect market, the price of consuming, degrading or depleting a resource would be paid by the party responsible.
But getting the theory of markets to map onto the real world is difficult. Dumping trash on a neighbor’s lawn is technically free, so a lot of us should be doing it more. But because we’ve built societies in which our neighbor can sue us, or the cops can fine us, we’re forced to internalize that cost. Lots of costs can only be internalized through smart institutional design and government policy, rather than by leaving the markets free to do their market thing.
What Trucost found is that when you scale this problem up globally — all the river, air, and land and air pollution that isn’t paid for, all the water and land use that isn’t paid for, and especially all the carbon emissions dumped into the atmosphere that aren’t paid for — the numbers get very big:
Global Greenhouse Gas Emissions: $2.7 trillion. This was by far the biggest single problem, and East Asia and North America were the two biggest culprits. That lines up with an International Monetary Fund study that determined the United States is the world’s biggest subsidizer of fossil fuels — with Asia the runner-up — because it’s failed to put a price on carbon emissions through a carbon tax or a cap-and-trade system. Trucost assumed a social cost to carbon emissions of $106 per metric ton. That’s higher than the IMF’s assumption of $25 per ton, but well within the overall range of costs studies have found.
Global Water Consumption: $1.9 trillion. Wheat farming was the biggest problem here, followed by rice farming and general water supply, mainly in Asia and North Africa. That’s probably largely because developing and poorer countries have fewer institutions or infrastructure for managing water use.
Global Land Use: $1.8 trillion. Cattle ranching in South America came in first here, followed by cattle ranching in South Asia. Besides the usual uses, the effects of logging and fishing were also included. Trucost estimated the value of unused land using metrics laid out in the United Nations’ Millennium Ecosystem Assessment.
Global Waste And Land, Air, And Water Pollution: $850 billion. Sulfur dioxides, nitrogen oxides, and particulate emissions were the big culprits for air pollution ($500 billion total) mainly in North America, East Asia, and Western Europe. Land and water pollution ($300 billion total) was actually mostly fertilizers, from North America, Asia, and Europe again. Global waste was the remainder, mostly hazardous materials. Trucost figured out these prices mainly through the costs of clean-up and health effects.
On top of that, the study’s next conclusion was equally dramatic: whole sectors of power generation, materials production, farming and ranching across the globe would become entirely unprofitable if they had to pay the true cost of their natural capital use. The top five biggest regional industries the study looked at are in the chart below, and even in the best case their natural capital costs effectively wipe out their revenues:
In fact, of the twenty biggest regional industries the researchers examined around the globe, none of them would be profitable. Much of the global economy, in other words, is a giant Ponzi scheme that is (temporarily) viable only because markets fail to account for the value and use of the natural ecology — on which civilization depends for its crops, water, air, its very livelihood.
But that bill will ultimately be paid in full are — by our children and countless future generations.
The Consequences For The Economy
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