We can’t maintain the illusion that a free-market system is valid, when for decades externalities and government subsidies have been the foundation for big profits and healthy returns for investors at the expense of nature.
Externalities are any business costs that are borne by ‘somebody else’ (nature, government, taxpayers, another business, customers etc.). The currently accepted way of doing business is to outsource the true costs to the environment and the community to maximise profits for company executives and shareholders.
In relation to biodiversity and sustainability, today pretty much all ‘ecosystem services’, pollution and waste released into the environment are treated as externalities. Business is not paying for these, and it is allowed to ignore them in its accounting and financial performance. When it comes to the extraction of biomass from nature, most industry processes are optimised for economic efficiency. They are not designed to respect the integrity of ecosystems and the long-term sustainability of renewable resources.
Triple bottom line accounting, launched over 20 years ago, was supposed to address this lack of accountability, but it never took off and is no longer talked about other than in the context of B-Corporations and similar entities. The new discussion, around Environmental, Social, and Governance (ESG) company criteria is a diluted and much softer form of triple bottom line accounting. While market-hyped ESG investing is getting more airtime, it is good that a growing number of experts are calling it out for what it is. It clearly isn’t designed to save the planet, though companies, asset management firms and even conservation organisations are happy to let the confusion go uncorrected.
Business and shareholders not only profit from ignoring externalities but also from government subsidies; harmful environmental subsidies are commonplace. These subsidies take many forms – direct spending, reduced fees and levies, tax exemptions and rebates, access to cheap credit and insurance, lite-touch regulation and favourable terms of access to resources.
According to the latest report into these subsidies, they amount to a staggering US$1.8 TRILLION every year, about 2% of World GDP! As the report also acknowledges, lack of transparency and lack of business reporting means that for many of these subsidies not enough data is available to estimate their true scale or value.
Of the subsidies that could be investigated, around one third are fossil fuel subsidies, to make extraction viable or cheaper, such as fuel subsidies for long-distance fishing fleets. The second largest class of harmful subsidies are for industrial agriculture, especially in OECD countries.
Water subsidies amount to US$350 billion a year, especially in providing mining, industry and agriculture with below-market priced water or free access to water. Forestry received at least $155 billion in subsidies based solely on the value of illegal logging as estimated by the World Bank (tolerating illegal activities amounts to a subsidy). But the industry profits from many other subsidies that the report could not estimate due to lack of data.
What are some examples of externalities? A good illustration is provided by the operations of a shale oil drilling company. Shale oil drilling uses enormous quantities of water (~200 trucks per well), sand and toxic chemicals to force oil and gas out of rock formations through hydraulic fracking, a process that creates massive amounts of contaminated wastewater, frequent earthquakes and ongoing methane emissions. In most instances the company is allowed re-inject the wastewater or dump it into the environment in trailing ponds. The methane, a potent greenhouse gas, escapes during well operation into the atmosphere.
And even with allowing for these externalities shale oil companies have still lost money. Large U.S. oil drillers spent a combined $1.18 trillion over the past decade, but only generated $819 billion in cash flow from their operations, according to the Wall Street Journal. In other words, oil drillers have lost more than $350 billion over a ten-year period. For much of that time, oil prices were trading at $50 per barrel or higher.
Fishing is similarly full of externalities – bycatch being the tragic example. Whilst the focus of environmentalists has too often been on marine mammals, turtles and albatrosses when it comes to bycatch, the problem is much broader than that. The majority of bycatch is juvenile or inedible fish, which are discarded dead back into the ocean. When the target species is narrow (say prawns) and the method is indiscriminate (trawling), then most of what is being caught is going to be ‘bycatch’.
As long as bycatch is an externality, there is no incentive to modify fishing gear to address environmentally harmful fishing methods such as trawling. Externalities in fishing also include wastewater from ships, discarded fishing gear and discarded waste from factory ships. Unless there are specific laws in place regarding this type of pollution in a fishery and the compliance with those laws is actively monitored, they can all be treated as externalities by the fishing industry.
It is time for an honest assessment of these industries and businesses. Because they are not only big business, in reality they are heavily subsidised, unsustainable big business if we want to give them their true definition.
It they are allowed to continue operating as they have done for decades, propped up with subsidies, while externalising their true, cost, biodiversity loss is going to continue to accelerate with catastrophic consequences for all life on earth.
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Lynn Johnson is a physicist by education and has worked as an executive coach and a strategy consultant for over 20 years. In her work she pushes for systemic change, not piecemeal solutions, this includes campaigning for modernising the legal trade in endangered species, to help tackle the illegal wildlife trade.