Financial methods in environmental decisions
Financial methods in environmental decisions

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Financial methods in environmental decisions

2 External costs

They hang the man and flog the woman,

Who steals the goose from off the common,

Yet let the greater villain loose,

That steals the common from off the goose.

This widely used traditional quotation is generally thought to have arisen in seventeenth-century England at a time when parliament was passing Acts that allowed landowners to enclose common land for their own use. This practice led to many people losing their rights to cultivate land, graze their livestock and take wood for fuel use. In effect these families lost their livelihood.

Moving to the present day, ‘the commons’ has a wider meaning for environmental specialists. It refers to any resource held in common for the use or benefit of society as a whole such as air, water, land and eco-systems. In the modern context, the above quotation suggests that the commons can be degraded or removed at no cost to the person or organisation causing the damage.

Activity 8 Sustainable resource management

Timing: Allow 20 minutes to complete this activity

Take a few moments to write down some commons in the context of sustainable resource management.

Answer

Your list will no doubt reflect your own concerns about the environment, but the commons that I am most concerned about at present are:

  • the global atmosphere and the build-up of carbon dioxide and other greenhouse gases
  • the local atmosphere and vehicle exhaust fumes in the high street of the town where I live
  • the depletion of fish stocks
  • the possible loss of the green belt (an area of undeveloped land separating my town from the neighbouring towns)
  • depletion of fossil fuels.

This is quite a wide-ranging list covering global and local issues, different environmental media (land, air and water), quantifiable areas such as local atmospheric levels of oxides of nitrogen (NOx) and less quantifiable issues such as the loss of green-belt land.

In conventional economics, the cost of damage to the commons is neglected when compiling balance sheets, profit and loss accounts and financial statements. The cost of producing a good or providing a service is calculated by summing the costs of raw materials, energy, labour and other direct and indirect costs. These costs are known as the private costs.

It can be argued that, to calculate the true cost of an activity to society as a whole, costs should be apportioned to any damage caused to the commons and these damage costs should be taken into account. In this context, the commons could include people’s health, the general environment, buildings and crops. These damage costs are often referred to as external costs (or externalities). The discipline of environmental economics involves determining the level of these external costs and using economic instruments to make organisations and individuals liable for the external costs that they generate. Considering external costs raises significant questions such as:

  • How should the commons be valued?
  • Who should receive any payments made for causing damage to the commons?
  • What should ultimately happen to such payments?

In this activity, you will look at the first of these questions.

Activity 9 How should the commons be valued?

Timing: Allow 20 minutes to complete this activity

You have probably realised that quantifying these external costs is a highly complex subject. Spend a few minutes thinking about the examples that follow and then write down some of the problems in determining the external costs and how you would set about determining their correct level in each case:

  • a.the emission of carbon dioxide and other greenhouse gases from power generation
  • b.the emission of arsenic (which is carcinogenic) from a metal-refining plant
  • c.the extinction of a particular species of butterfly due to farm pesticide use.

Answer

(a) Greenhouse gas emissions

Much of the problem lies with determining who is affected by the damage and who should be compensated. For example, in the case of emissions from a fossil fuel power station in central USA should damage to the local community only be considered, or should rising sea levels that affect communities in (say) Asia be taken into account?

If this question can be solved there are several ways of determining costs such as:

  • equating the damage cost to the cost of capturing and storing the carbon dioxide generated
  • equating a given emission to a given rise in sea level and setting the cost equal to the cost of dealing with that rise through sea defences
  • estimating the global loss of life due to temperature and sea level rises and allocating a sum to each life lost.

(b) Arsenic emissions

In this case, the impacts will be generally felt in the local environment, but several questions still arise:

  • What value should be put on each fatal and non-fatal cancer?
  • Should this value be different for younger and older people?
  • How are cancers with long latency periods dealt with? (Should cancers caused now and in 20 years’ time have different values?)
  • Is just the cost to the health service of treating each cancer considered or is a sum added to cover the loss of earnings of the victim, or is an additional sum included to attempt to compensate society for the loss of or harm to one of its members?
  • Are employees at the plant treated differently from non-employees? It could be argued that the former have some choice in their decision to become exposed.

(c) Species extinction

This is an even more problematic area. On one hand, it could be argued that a species has no intrinsic value and therefore there should be no external cost. On the other hand, imagine a species of butterfly that pollinates a particular plant that forms part of a chain that has some ultimate value to humankind. In this case, it could be reasonable to allocate a value to the butterfly. Alternatively it is possible to take a less anthropocentric view and argue that the loss of any species devalues the planet as a whole and some level of compensation is appropriate.

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