Paying for the environmental damage they do would render global industries unprofitable overnight

The externalities are massive.

Grist's David Roberts reports on a paper produced by environmental consultancy Trucost, which assess the value of the externalities used by the world's industries, and comes to an astonishing conclusion:

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!

Backtracking a bit. An externality is a cost or benefit of production which is not internalised into the cost of production. If I use electricity to make widgets, I have to pay for it; but if I "use" the atmosphere to make widgets, by releasing pollution into it, then I don't have to pay a dime.

What that means is that the standard logic of the free market – that voluntary transactions will always make everyone better off – breaks down. If I make £1 profit from each widget I produce, but cause £2 of damage to the environment, then my incentive is to keep pumping out widgets, even though there's a net loss of £1 to the world for every one I make.

The standard economic response to this problem is to call for externalities to be "priced in". If I have to pay the £2 damage that my pollution causes, I won't make widgets until I clean up the production process.

That is the logic behind calls for a carbon tax, but it actually applies to a lot of environmental problems. The Trucost paper looks at water use, land use, air pollution, land and water pollution, and waste as well as just greenhouse gas emissions, and puts a cost on each of them. And when it does, it finds that a lot of industries might not be profitable if they had to pay the full cost of what they do:

(Click to embiggen)

Coal power generation in Eastern Asia, which generates revenues of $443.1bn, has a natural capital cost of $452.8bn (that's unpriced natural capital – the report already takes into account the various ways in which industries are forced to price in their externalities), largely due to greenhouse gases. Cattle ranching in South America, with revenues of $16.6bn, has capital cost of $353.8bn, due to the unpriced cost of land use. And so on.

You can quibble the figures – and doubtless many will – but what is clear is they are large. Really, really large. Many of the biggest industries in the world can only exist because they don't have to pay the true environmental cost of what they do. The word "unsustainable" is thrown around too much these days, but it seems to fit here.

Argentine Cattle. Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

Photo: Getty Images
Show Hide image

There are risks as well as opportunities ahead for George Osborne

The Chancellor is in a tight spot, but expect his political wiles to be on full display, says Spencer Thompson.

The most significant fiscal event of this parliament will take place in late November, when the Chancellor presents the spending review setting out his plans for funding government departments over the next four years. This week, across Whitehall and up and down the country, ministers, lobbyists, advocacy groups and town halls are busily finalising their pitches ahead of Friday’s deadline for submissions to the review

It is difficult to overstate the challenge faced by the Chancellor. Under his current spending forecast and planned protections for the NHS, schools, defence and international aid spending, other areas of government will need to be cut by 16.4 per cent in real terms between 2015/16 and 2019/20. Focusing on services spending outside of protected areas, the cumulative cut will reach 26.5 per cent. Despite this, the Chancellor nonetheless has significant room for manoeuvre.

Firstly, under plans unveiled at the budget, the government intends to expand capital investment significantly in both 2018-19 and 2019-20. Over the last parliament capital spending was cut by around a quarter, but between now and 2019-20 it will grow by almost 20 per cent. How this growth in spending should be distributed across departments and between investment projects should be at the heart of the spending review.

In a paper published on Monday, we highlighted three urgent priorities for any additional capital spending: re-balancing transport investment away from London and the greater South East towards the North of England, a £2bn per year boost in public spending on housebuilding, and £1bn of extra investment per year in energy efficiency improvements for fuel-poor households.

Secondly, despite the tough fiscal environment, the Chancellor has the scope to fund a range of areas of policy in dire need of extra resources. These include social care, where rising costs at a time of falling resources are set to generate a severe funding squeeze for local government, 16-19 education, where many 6th-form and FE colleges are at risk of great financial difficulty, and funding a guaranteed paid job for young people in long-term unemployment. Our paper suggests a range of options for how to put these and other areas of policy on a sustainable funding footing.

There is a political angle to this as well. The Conservatives are keen to be seen as a party representing all working people, as shown by the "blue-collar Conservatism" agenda. In addition, the spending review offers the Conservative party the opportunity to return to ‘Compassionate Conservatism’ as a going concern.  If they are truly serious about being seen in this light, this should be reflected in a social investment agenda pursued through the spending review that promotes employment and secures a future for public services outside the NHS and schools.

This will come at a cost, however. In our paper, we show how the Chancellor could fund our package of proposed policies without increasing the pain on other areas of government, while remaining consistent with the government’s fiscal rules that require him to reach a surplus on overall government borrowing by 2019-20. We do not agree that the Government needs to reach a surplus in that year. But given this target wont be scrapped ahead of the spending review, we suggest that he should target a slightly lower surplus in 2019/20 of £7bn, with the deficit the year before being £2bn higher. In addition, we propose several revenue-raising measures in line with recent government tax policy that together would unlock an additional £5bn of resource for government departments.

Make no mistake, this will be a tough settlement for government departments and for public services. But the Chancellor does have a range of options open as he plans the upcoming spending review. Expect his reputation as a highly political Chancellor to be on full display.

Spencer Thompson is economic analyst at IPPR