
The world’s top industries would be unprofitable with externalities priced in - AndrewDucker
http://grist.org/business-technology/none-of-the-worlds-top-industries-would-be-profitable-if-they-paid-for-the-natural-capital-they-use/
======
rayiner
A study I found incredible was The Harvard study on the external costs of
coal: [http://cleantechnica.com/2011/02/17/cost-of-
coal-500-billion...](http://cleantechnica.com/2011/02/17/cost-of-
coal-500-billion-year-in-u-s-harvard-study-finds). Half a trillion in external
costs in the U.S. alone.

An environmental group our law school worked with (ELPC) lobbied hard to get
two coal in the middle of Chicagoland (Fisk and Crawford) shut down. They did
a study estimating the negative externalitiesmofnthe two century old plants at
$127 million, the majority of which fell on working class people in the areas
around the plants.

A related phenomenon I found interesting is an LSE paper (can't find the link
offhand) arguing that the GDP calculation vastly overstated the GDP of
countries built on resource extraction. Income is change in wealth, but when
$100 of coal is sold, it is counted as $100 to GDP. But the bulk of that price
is offset by the decreased value of coal reserves in the ground, which isn't
counted in GDP even though its part of the change in wealth.

------
RyanMcGreal
There's quite a bit of evidence for _induced innovation_ from energy prices.
As the cost of energy goes up, so does the rate of innovation in finding more
economical ways to use it.

Of course, a corollary is the _Jevons paradox_ : as energy efficiency goes up,
demand for products that use energy also goes up when energy price is held
steady. A popular example is the home refrigerator, which has gotten bigger at
about the same rate that it has gotten more efficient.

One way around this is to ensure that energy prices continue to increase so
that efficiency gains don't lead to increased overall energy consumption. That
means some kind of green tax - preferably something designed to be revenue
neutral via equivalent cuts to, say, income tax.

~~~
AnthonyMouse
>One way around this is to ensure that energy prices continue to increase so
that efficiency gains don't lead to increased overall energy consumption. That
means some kind of green tax - preferably something designed to be revenue
neutral via equivalent cuts to, say, income tax.

The key is that it doesn't have to be "energy prices" but only "unsustainable
energy" prices, i.e. fossil fuels. And then you have your method of making the
tax revenue neutral: Tax fossil fuel, use the money to subsidize non-fossil
energy. Result is that net energy prices don't rise by very much, but they
shift away from fossil fuels and toward sustainable energy.

You can control how fast this happens just by adjusting the amount of the tax.
And yes, imposing an immediate 10000% tax on oil would get people to stop
using it very quickly indeed, but a somewhat more gradual phase out may be
less disruptive -- a 50% tax, for example, with a promise to raise it even
more as time passes to encourage people to buy electric cars and corporations
to stop wasting money looking for new deposits of fossil fuels.

~~~
RyanMcGreal
Yes, absolutely. A nuanced, evidence-based approach is best.

------
sbanach
Sensationalist headline. "Top industries" - when ranked by environmental
impact. Kinda renders the article a tautology?

~~~
podperson
True, although measuring industries by environmental impact is just as valid
as using, say, revenue or profit or number of people employed.

------
zeteo
>coal is the enemy of the human race

What a spoiled, Western-centric, historically ignorant point of view. Without
coal mining in England, there would have been no steam engine, no railways,
and no modern economy. Preaching to the Chinese about the evilness of coal is
a classic case of pulling up the ladder after you've climbed on it.

~~~
rayiner
Nobody ever seems to realize how un-economic arguments like these are. Say
there had been a coal tax from day 1 in England that internalize the external
costs of coal. Saying the market wouldn't have still gone through the
industrial revolution is tantamount to saying that industrial society is not
economically efficient! Because that's exactly what things like coal taxes do
--let the market manage the externality to allow an efficient equilibrium to
be reached.

~~~
epistasis
Exactly, he externality argument is about economic efficiency, and does not
value environmentalism at all. It's about discovering the dollar cost that a
single entity is extracting from others property. Many environmentalists hate
it because of that; it's an argument that inherently trusts in free markets,
instead of environmental purity.

~~~
rayiner
A lot of environmentalists hate it not because of the trust in the markets per
se, but because they see policy makers tend to discount the economic value of
the environment. If you show that something is causing $100m in externalized
costs, even if the government acts to mitigate it might only shift $20m in
costs (because "jobs"). Which is un-economic, of course.

------
ams6110
If you are going to try to account for the costs of "externalities" you also
need to make at least the same effort to account for the benefits. How many
people live longer, healthier lives due to the availability of cheap, abundant
energy?

~~~
rayiner
The difference is that the benefits of electricity are generally priced in,
either through taxes (for public lights and whatnot) or through utility bills.

Here is an illustration. Would you rather live next to a coal plant or a solar
farm? Would you rather get electricity from a coal plant at 2 dollars, or a
solar plant at 3? Note how in the first case, the price of electricity is
irrelevant because the external effect of the plant on you is the same no
matter the price of electiricty. You can't decrease it by using less. In the
second case, price is the only relevant consideration. The coal electricity
doesn't have any positive benefit to you not accounted for in the price.

"cheap" by definition can't be a positive externality because the definition
of externality is costs and benefits not accounted for in price.

~~~
crusso
_benefits of electricity are generally priced in_

The societal benefits of cheap electricity are no more "priced in" than the
negative environmental externalities of coal use.

You can't put a benefits dollar value to society on all the women in the work
force who would otherwise be preparing a lot more meals from scratch. You
can't put a benefits dollar value to society on the productivity gains from
all the people who would have died of childhood diseases that we have cures
for thanks to western medicine.

You're obviously in favor of accounting for one factor in the cost/benefit
analysis of coal power and ignoring the others. I think it's hubris and folly
to do so.

~~~
rayiner
The exercise here is accounting for costs and benefits external to the power
producer/consumer transaction. Any costs and benefits arising from the
transaction are factored into the price of electricity. If electricity allows
women to participate in the work force instead of making meals from scratch,
that presumably increases demand for electricity, which affects the price. In
theory, the benefits that stem from people having electrical service should be
reflected in the price of that service.

Accounting for externalized costs is a wholly different exercise. It's an
accounting of the costs that do not arise out of the producer/consumer
transaction and thus cannot affect the price of electricity through
bargaining. Health costs of coal are one such cost. People bear that cost
whether or not they even have electric service, and their level of usage does
not affect the level of the costs they incur. This kind of cost is not priced
into the price of electricity from coal. The benefit that would be relevant in
this accounting is a benefit from electricity that you get whether or not you
directly or indirectly pay for electricity. Your wife being able to work is
not such a benefit--you only get that benefit if you pay for electricity.

Note the wiggle word both you and the poster above use: "cheap electricity"
not just "electricity." It's not "electricity versus no electricity" its
"cheap electricity versus more expensive electricity." The benefits from
cheaper versus more expensive electricity are entirely internal to the
producer/consumer relationship an are thus priced in to the price of
electricity. They're not the same as external environmental costs which are
not priced in to the price of electricity.

~~~
crusso
_People bear that cost whether or not they even have electric service_

Just like a child cured by Western medicine gets the benefit without having to
necessarily be a consumer of electricity. When I mentioned women in the work
force as a benefit, I didn't mean to the individual. I was talking about the
societal advantage to having a more productive work force. That is not
factored into the purchase of a KWh of electricity.

No, "cheap electricity" aren't wiggle words that describe an internal
relationship. Cheap electricity was a necessary condition for the cascade of
advancements we've made over the last 60 years. In this thread, I've seen the
argument, "If only we had charged for externalities from the beginning of
electrical generation" - as though we would be where we are today in all other
areas of Western life if we had stalled the production of CHEAP electricity
for 80 years while we waited to develop alternatives that were themselves
predicated upon the cheap electricity we got from coal in the first place.

~~~
rayiner
> I was talking about the societal advantage to having a more productive work
> force. That is not factored into the purchase of a KWh of electricity.

But it is. If society as a whole benefits more from electricity, their demand
goes up, which raises the price of electricity. You're just trying to double-
count the benefit.

> as though we would be where we are today in all other areas of Western life
> if we had stalled the production of CHEAP electricity for 80 years while we
> waited to develop alternatives that were themselves predicated upon the
> cheap electricity we got from coal in the first place.

The situation isn't banning the use of coal from the beginning. It's forcing
the external costs of coal to be accounted for from the beginning. Economic
theory tells us that this wouldn't have stalled our development.

~~~
crusso
_their demand goes up, which raises the price of electricity_

If that were true, then electricity should be astonishingly expensive because
we use astonishingly more of it than we did 60 years ago, yet the last time I
looked, inflation adjusted prices for electricity were remarkably flat.

 _Economic theory tells us that this wouldn't have stalled our development_

What economic theory is that? Plus, if you want to compare Economic theory vs
History; I'll take History. History is filled with discoveries and technology
advancements that were the results of cascading advances which were the result
of an advancement that made due to some basic resource becoming available
and/or cheap. Advances are in no way inevitable. Advances are in no way
unhindered by prices of resources.

Really what we did early on was to trade our environmental resources for cheap
power. From that tradeoff, we have reaped extraordinary benefits. Why are
those benefits so hard to recognize in this discussion?

~~~
rayiner
> If that were true, then electricity should be astonishingly expensive
> because we use astonishingly more of it than we did 60 years ago, yet the
> last time I looked, inflation adjusted prices for electricity were
> remarkably flat.

So, the price of computers has gone down even with skyrocketing computer use.
But nobody would say that the benefits of computers are a positive externality
that isn't priced into their price.

> What economic theory is that?

Bog-standard neo-classical economics. See:
[http://www.libertarianism.org/media/around-web/negative-
exte...](http://www.libertarianism.org/media/around-web/negative-
externalities-coase-theorem).

> Advances are in no way inevitable. Advances are in no way unhindered by
> prices of resources.

There is a "right price" for resources. If the actual price for the resources
is too high, that will retard development. If the actual price for that
resources is too low, development will happen in a way that uses an
inefficiently high amount of the cheap resource. The market will generally
arrive at the "right price" for resources, except in the presence of
externalities.

> From that tradeoff, we have reaped extraordinary benefits. Why are those
> benefits so hard to recognize in this discussion?

It's not a matter of recognizing those benefits, it's a matter of not double-
counting those benefits.

~~~
crusso
_nobody would say that the benefits of computers are a positive externality
that isn't priced into their price_

You're the one who said that the increase in price of a resource already
accounted for its benefit to the producer. You can't use the fact that I broke
your argument to then construct a straw man. Besides, if someone used the same
one dimensional environmental argument against the pricing of computers (which
they sometimes do), then I would be consistent in the defense of the
beneficial externalities of computers.

 _Bog-standard neo-classical economics_

You got me there, you named A theory. Hey, here ya go:
<http://en.wikipedia.org/wiki/Externality>

Right there they mention "invention". My claim is that inexpensive electricity
has led to many inventions because people have more time to invent and more
resources with which to invent. Because of cheap electricity, we have more
people alive because they could afford air conditioning and well refrigerated
foods. Some of those people have invented things.

If "Invention" is a beneficial externality (or more properly has positive
externalities), then the predicate of invention, "cheap electricity" is also a
beneficial externality.

 _If the actual price for the resources is too high, that will retard
development_

Use of a resources normally has a critical minimum price before it's used
commonly or at all. Why do you think the title of this article is "Cost of
Gene Sequencing Falls Raising Hopes for Medical Advances"?

[http://www.nytimes.com/2012/03/08/technology/cost-of-gene-
se...](http://www.nytimes.com/2012/03/08/technology/cost-of-gene-sequencing-
falls-raising-hopes-for-medical-advances.html?pagewanted=all)

Gene sequencing has negative externalities too. There's a loss of privacy.
There is a possibility that terrorists could release gene-based biological
agents that could wipe out segments of societies. Should we price that into
gene sequencing now "just in case"?

 _it's a matter of not double-counting those benefits_

I could just as easily say you're double-counting the costs of electricity
since society (to a small and appropriate degree) views its generation as
harmful to the environment and so they already have less of a demand for it.
That would be a nonsense argument to since consumers don't typically factor in
non-sequitor benefits and negativities during price negotiation.

------
fpp
Some of these estimates are certainly on the very conservative side.

Example: NUCLEAR ELECTRIC POWER GENERATION (page 59 bottom table) all
estimating an impact ratio of 0.1 (cost of waste / revenues)

Actual cost of nuclear waste and other related cost are more likely about 100
times or more than estimated in this study - they are pushed to future
generations or just passed over to tax payers globally by subsidies or cost
covers e.g. cost for dismantling / building back a nuclear power plant after
its commercial lifetime - from 3 Billion to 20+ Billion depending on the power
plant etc. - power company will only cover a marginal amount of that, majority
is paid from taxes. Storage cost for nuclear waste (thousands of years - most
likely hundreds if not 1000s of Billions in cost)

About 2 years ago in Europe an in-depth scientific study into the actual cost
of (uranium based) nuclear power has been undertaken (paid by various European
institutions) including all subsidies provided to the power companies for
building these nuclear power plants (in Europe hundreds of Billions) and (as
far as I remember) also parts of the actual cost for waste - the outcome: true
cost per KWh ~1.20 EUR - cost base used in business / profit calculations
about 0.02 EUR

------
dllthomas
Haven't read the article (not loading), but with regards to the headline:

In a competitive market, this is precisely what we should expect. The price is
driven toward the cost of production by competition. This doesn't include the
externalities (it's not a part of the cost of production paid by the
individual firms), so when you add them in the price is too low.

------
robryan
If they were forced to price all this in things would just cost more and they
would go on being profitable.

Also there would be a ton of innovation in negating these costs.

~~~
praptak
> things would just cost more and they would go on being profitable

Unless they got replaced by something other that is currently unprofitable due
to the de facto dumping prices of those industries.

~~~
dagw
Food and Electricity aren't really things that can be replaced. Sure the
details of the particular methods currently used to produce them would change,
as would the level at which their consumed, but the underlying companies and
industries would simply adapt to these new realities.

~~~
patrickk
What food is consumed and how electricity is generated can be changed though.

If for instance, you wanted to reduce the impact of cattle farming in South
America, you could encourage people to eat alternative sources of meat and
protein (substitutes) or tackle the problem by pouring more funding into
research into synthetic beef[1].

For electricity generation, you could gradually ramp up taxes on the dirtiest
sources of power generation, coupled with economic incentives for individuals
and companies, which would guarantee lower monthly bills for those who switch,
and guarantee a certain price for excess power that is generated to sweeten
the deal. You could also introduce heavier taxes on inefficient home
appliances, and subsidise LED bulbs (for example) to encourage adoption.

It's not that these problems are insurmountable, it's people's attitudes and
entrenched interests.

(a thought experiment- if you could say for certain that sea levels would rise
by some amount within say 50 years, and this would guarantee that many major
coastal cities would be flooded within our lifetime unless we do x within the
next decade, do you think people would do x?) Again, it's attitudes. No one
wants to be out of pocket, and many people just don't see any visible downside
to continue eating beef or getting their electricity from a coal fired power
source.

[1]
[http://www.globalpost.com/dispatch/news/business/technology/...](http://www.globalpost.com/dispatch/news/business/technology/130307/freaked-
out-horse-meat-try-vitro-beef-burger)

------
mcherm
The article title made a very interesting point. It would be surprising and
interesting if the most biggest or most profitable industries all had such
huge externalities that they would be unprofitable if those were taken into
account.

But the headline does not match what the TEXT of the article says. The text of
the article says:

> Trucost’s third big finding is the coup de grace. 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!

In other words, the industries THAT HAVE THE MOST EXTERNALITIES have
externalities greater than their profits. No longer surprising at all. And the
entire frenzy the article is trying to whip us up into is based on this one
misstatement of their actual results.

------
ef4
Economic behavior is not static.

Industries use lots of free resources _because they're free_.

It is not possible to say a priori whether they could be profitable with
different input prices, because there are myriad complex ways to economize and
substitute.

------
iwwr
How are "natural capital costs" calculated?

~~~
praptak
This is complicated and will probably always be the area that is most prone to
critique. The authors of the report put some effort to explain their methods -
see p. 3.2.2, Valuation, pages 18-27 of the report.

They seem to have used abatement costs (how much for removing the damage?)
where available. For other factors like air pollution, estimates on increased
health costs, crops, water, increased corrosion, etc. were used.

IMHO the most tricky is the part on "opportunity costs" of things like land
use - it's hard to put an uncontroversial price tag on the fact that you
cannot go hiking on parts of land used by some industries.

------
bornonmars
Wait a second, _we need a revolution_?

We all agree on the negative effects of those externalities, but pricing them
in before completing the transition to sustainable systems would only make
resources MUCH less affordable for the end-consumer - you, me and everyone
else, given the basic needs those goods fulfill.

~~~
AndrewDucker
Except that other, more sustainable, systems would be financially viable _now_
if they were competing with the true cost of the current ones.

------
oroup
I wonder if there's some economic equivalent to the second law of
thermodynamics. If entropy is always increasing, perhaps the environmental
costs of a system can never be non-positive. Entropy can only increase. I
haven't fully thought it through but it's an intriguing idea.

~~~
geon
Entropy can/will decrease in a system with a flow of energy.

------
benbou09
It would be nice to pass a law forcing companies to publish their profit and
loss accounts amended with the externalities costs (or gains). It would be
just for information but the psychological impact would be great.

