Full-cost accounting

Chances are you’ve grown cynical about discounts. You harbor the suspicion that the vendor has artificially marked up the retail price to give you the false impression you’re getting a bargain. Or marked down an item that’s about to be superseded by something newer, or cheaper, or better (or all of the above). Most discounts are illusory, aren’t they?

In fact, most vendors are looking for a little more from their customers. Airlines charge for movies, for meals, for baggage, even, in one case, for lavatory access.  They’ve gotten very clever about identifying their “best” customers, and occasionally give the appearance that they view the rest of us as domestic animals to be milked.

The financial sector has made great investments to ensure that you and I pay full cost (by their calculation) for the house we live in, the car we own, and the things we buy. Try to make a mortgage payment or withdraw money from an ATM when there’s no money in your checking account. The response is instantaneous and negative. Or buy something with your credit card when you’re something when you’re over the limit. Those bankers are right on top of it, aren’t they? In the old days they sometimes weren’t so quick.

But for the moment, it feels as if we’re still living on our environmental credit card. And, at the moment, credit limits come into play here only in the most egregious circumstances. When you car fails its emissions test. When you try to put a housing development on a wetland.

The real world, however, never, ever offers a discount.

You and I, and the whole of humanity, for that matter, will always, ultimately pay back to the Earth the full cost (read consequences) for everything we do. Take fossil fuels. When we buy a gallon of gasoline, we may pay a range of prices at the pump, depending upon whether we top off the tank in Brooklyn, or Houston, or Coeur d’Alene – or Mumbai or Paris or Jeddah. The price at these pumps will even vary day-to-day and over a wide range. Why? They echo comparative advantage, local policies and regulations and reflect “good-old free-market competition.”

Economists tell us that in most locations, if not all, this price fails to incorporate fully the environmental costs of oil extraction itself, the refining process, and then the ultimate consumption of the gasoline. They refer to these unincorporated costs as a special case of an “externality.” According to the Wikipedia, an externality is “a cost or benefit, not transmitted through prices, which is incurred by a party which did not agree to the action causing the cost or benefit.” So, when I bought gasoline today, and drove to the Metro, I let you deal with any costs of my emissions – but I didn’t ask your permission. Similarly, if you add hurricane straps to your beachfront home, you reduce your neighbors’ risk of hurricane damage, at no cost to them. Your roof is less likely to come off and smash through their picture window! In that case, the externality is a benefit.

Economists struggle to deal with externalities. But the insensate Earth – the real world – doesn’t see any problem here whatever. Instantly, unceasingly, thoughtlessly, effortlessly, seamlessly, and inexorably (I know, it’s a stupefying train of adverbs, but they each matter!), the Earth system makes all the needed adjustments in response to our every action, according to its rules. Initially, the effects are confined locally, but wait enough time, and the uppermost several meters of the planet, the atmosphere, and the oceans, are never again the same. The intrusion on the landscape or the sea, or the actual underground penetration to extract resources? That can’t be negated. The adjustment isn’t momentary. It sets into motion a series of events and changes, which in turn interplay with countless others to alter the future. The same realities apply to driving the car on that fossil fuel. We’re injecting particulates, generating heat, and releasing carbon dioxide along the way. Those impacts can never be undone either. And there are costs (and also some benefits) associated with all this. Sooner or later they’ll emerge.

Many of these consequences – maybe most of them – not only propagate worldwide, but actually magnify over time. Ed Lorenz, a mathematician and meteorologist, made his mark by pointing out that the Earth’s atmosphere is a chaotic system. Small disturbances don’t die out; rather, they grow and expand their effects. He famously and repeatedly captured this idea in his oft-repeated statement that “the flapping of a butterfly’s wings changes the weather forever.” We can’t offset the effects of that first butterfly by releasing a moth into the wilds 100 kilometers away and three months later.

It follows that the idea of offsets generally is a bit of an oxymoron, isn’t it? Through our actions at another time and place – reforestation, say, or planting of seagrasses, or making someone’s coal-fired utility cleaner and more efficient – we’ve changed things, maybe even for the better, but we haven’t really negated what we did at the extraction site. At best we set into motion another set of consequences. Don’t get me wrong. These ameliorations are far better than doing nothing. But when we claim these activities offset, we’re really testifying as much to the inadequacy and poor resolution of our observations and predictions as anything else. Quite simply, we’re not smart enough to comprehend fully the downstream impacts.

Just because economists and policymakers struggle with this doesn’t mean they should give up. They might draw encouragement from physicists, who have faced a similar, and ongoing but simpler challenge for centuries. Consider for example the idea of conservation of energy. For physicists, a problem isn’t considered “solved” unless all forms of energy are fully accounted for and their sum across a system is either conserved or equal to the energy either gained or lost by the system. They don’t consider energy conservation in some partial way. That is, they don’t look at the energy of bulk motion to the exclusion of thermal energy. They know when that bowling ball slows down and stops, its energy is being converted to heat. They include in their sums any gravitational potential energy that might be around (engaging in a little loose-speak here; please forgive me). They make sure to include electrical potential energy. Radiative energy. Einstein’s relation between energy and matter.

For physicists, this has been a long journey. Each one of the energy forms described above? They got added to the mix only after the discovery of apparent anomalies in a law physicists have considered foundational: energy is conserved. Whenever that rule has seemingly been violated, physicists haven’t shrugged their shoulders and kicked energy conservation into the trash bin of failed ideas. Instead they’ve poked around and investigated, always (so far) discovering a new form of energy to account for the discrepancy. So, for example, when a flywheel comes to rest, what happened to its mechanical energy? Converted into heat energy. So, does a photon moving toward the center of the Earth gain a little energy from “falling” in the Earth’s gravitation field? Turns out that it does. And just the amount that theory would expect. And the energy from a nuclear reactor corresponds precisely to the small loss of mass in the fuel rods. And so on.

But physicists have few grounds for being smug. Although they (we) have encouraged our non-scientist friends to think this is rather difficult stuff, in fact it’s simple compared with the task of trying to sum up all the economic and environmental costs and benefits associated with extracting and producing that gallon of gasoline. So economists and policy makers struggle with a much more difficult problem.[1]

In case of physics, the struggle has been worth the effort. Harnessing electricity, and understanding the equivalency of matter and energy, to take two examples, have paid huge dividends. In the same way, as economists master full-cost environmental accounting, and as policymakers and the private sector combine to put that knowledge to work, the world that is likely will start looking more like the world that we want.


[1]Meteorologists can be sympathetic here; we spend our careers hearing from people that astronomers can predict where the Moon will be relative to the Earth a million years from now to within a gnat’s eyelash, whereas “meteorologists can’t predict what the weather will be five minutes from now.” Turns out, per Ed Lorenz, that weather prediction was just a far more complicated problem.

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One Response to Full-cost accounting

  1. Pingback: Today’s Twain of thought – and its bearing on tomorrow’s elections. | Living on the Real World

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