PCDForum Column #56,  Release Date June 25, 1993

by Kristin Dawkins and Chirag Mehta

Many environmentalists have joined theoretical economists in holding up "full
cost accounting" as the way to achieve the sustainable use of natural
resources through the use of market mechanisms. They argue that adding the full
costs of resource depletion, pollution and waste to the price of products would
reduce consumption and encourage conservation. Indeed, adding to the costs of a
dam in India or to logging in the Amazon could dampen many a developer’s zeal.
President Clinton’s proposed tax on the British Thermal Unit (BTU) content of
fuels would have raised energy costs and discouraged some consumption. But what
are the full environmental costs of any product, and is the accurate valuing of
products and services adequate to redress the skewed results of current free
market practices?

  • The determination of which costs to include and at what price is
    necessarily a political choice. Do we count the costs to society of unemployment
    and black lung disease among West Virginia’s mine workers? Of petrochemical
    contamination along the various "cancer corridors" including New
    Jersey, New Orleans, and the Mexican border? What is the full cost of leukemia
    among Navajo Indians where uranium is mined, in communities where nuclear waste
    is stored? What is the full cost of war in the Middle East?
  • Pricing and values are not absolutely comparable and monetization is a new
    and inexact art. Who would decide what to include? Who would calculate their
    monetary value? Who would decide the full value of each lost tree and its
    contribution to the ecosystem?
  • The oft-cited "polluter-pays-principle," which postulates that
    international policy should ensure that producers bear the economic
    responsibility for ecological damage, is based on a fallacy. If producers are
    allowed to pass the full costs of production on to the consumer, what will
    motivate them to alter their production behavior? If consumers with little
    purchasing power are excluded from the market by full cost prices, how will they
    meet their needs? Even if raw materials are more highly valued, how can pricing
    alone correct the exploitation and loss to a community’s or region’s ecological
    resource base?

The problem with the current discussion of full cost accounting is that it
is too limited to market-oriented financial tinkering and seeks to convey an
impression that such tinkering is a substitute for regulation. It neglects the
extent of public intervention required to internalize otherwise externalized
costs in "market" prices.

It presents itself as consistent with the political thrust toward "free
markets," i.e., freed from government intervention. It is important that
those who advocate full cost pricing face up to the fact that their solutions
are a form of governmental intervention, not a substitute for it. It is a simple
truth that governmental intervention is absolutely essential in addressing
issues such as the environmental crisis where the costs involved will never be
internalized in market prices in the normal course of business. Furthermore,
governmental intervention is almost impossible when national borders are
completely open to the free flow of goods and capital as presently advocated by
free traders.

Contrary to the current thrust of international negotiations, international
trade agreements should be demanding the environmental accountability of
business, wherever it operates, by prohibiting firms from moving their
production to countries with low social and environmental standards and then
competing for markets against firms observing high standards elsewhere. At the
same time, international agreements should ensure the necessary resource and
technology transfers to help low income countries upgrade their standards.

Some advocates suggest dealing with the open border problem by taxing goods
that are not produced according to acceptable ecological or social standards.
Aside from the strong likelihood that "compensatory tariffs" would be
challenged as barriers to trade under GATT, most of these proposals would
capture the revenues of compensatory tariffs for the treasury of the country
with more stringent standards. This would penalize countries that cannot afford
stronger regulations. As yet there are no multilateral institutional mechanisms
to capture such revenues and invest them in ways that raise standards elsewhere.

Given geopolitical trends, economists and international planners need to
broaden their approach to environmental issues. Full cost accounting should be
viewed only as one tool among the variety of essential regulatory mechanisms for
reorienting market choices to the larger community interest. Dealing with global
scale issues of ecological exhaustion and economic injustice will require a good
deal more than simply getting the prices right.

Kristin Dawkins and Chirag Mehta are respectively Senior Fellow and Research
Coordinator, Institute for Agriculture and Trade Policy, 1313 Fifth Street S.E.,
Suite 303, Minneapolis, Minnesota 55414-1546, U.S.A., Fax (612) 379-5982. This
column was produced and distributed by the PCDForum based on their article "Reflections
on Full Cost Accounting," Economy and Environment, Spring 1993.

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