The concept of “externalities”, favoured by some economists, has had a growing influence on decision-makers and on the media. Although controversial, it has enabled an increasing proportion of the population to become aware of the hidden costs of something (what is its “real” cost?) as well as its social cost (what is the cost to society?). Just as the idea of the “carbon footprint” altered how we view consumption, externalities could form the basis for strategic indicators on the sustainability of our production and consumption patterns.
All economic activity has hidden costs that it passes on to society. Thus, the costs of treating radioactive waste and decommissioning nuclear power plants have long remained invisible (or strongly undervalued) when it comes to comparing different energy production scenarios in France. Recent studies show that the intensification of agricultural practices leads to a loss of biodiversity and to the degradation of “eco-systemic services” (plant pollination by bees, for example). Air pollution from the transport and industrial sectors involves health costs that are just starting to be quantified. These examples illustrate various forms of what economists call “externalities”. What do they have in common? In each case, third parties – future generations in the case of nuclear and bees, social security and patients’ families in the case of air pollution – have or will have to pay costs resulting from decisions and practices that are not of their own making. As these costs are not valued by the market, the consumer does not pay for the real cost of a product or service. Part of this real cost is shifted, externalised to others and to future generations. The concept of “externalities” has gained wide currency, particularly in institutions and in the financial sector. Institutions evaluate externalities at a macro level (national or international) to demonstrate the merits of their proposals (advocacy, public policies, bills, etc.). For companies and their finance departments, the goal is to integrate costs, and especially benefits, which are usually ignored by the market or by their customers, into their accounts and communication strategies: “how do I value the services I provide indirectly, or the benefits related to the use of my products?”
In recent years, we have seen a surge in new international initiatives dedicated to assessing externalities and hidden costs, with suggestive names such as True Cost or True Price. Their objectives may be to factor externalities into balance
sheets (International Integrated Reporting Council, IIRC) or to value the eco-systemic services provided by Nature in monetary terms (see for example the Natural Capital Protocol or The Economics of ecosystems and biodiversity, both little known to the wider public). Most are multi-stakeholder initiatives, driven by both public institutions and global corporations, especially large audit firms (PricewaterhouseCoopers now has a commercial offer called Total Impact Measurement and Management). They are usually based on a concern for environmental protection and resource conservation. However, they are also controversial, particularly in relation to the fact that they seem to extend the reach
of the commercial sphere even further to address environmental problems – an extension that is prone to abuse.
Side effects and limits of externalities
Most criticism is targeted at the very premise of all these initiatives (apart from a few exceptions, such as the CARE method. Externalities are seen simply as failures of the economic system, a situation easily rectified by integrating
them back into that system. In this paradigm, it is possible for corporations to offset their negative externalities, through compensation mechanisms, by enhancing their positive externalities elsewhere, in a totally different context: “I have a polluted river? No worries, I will plant trees or fund a social inclusion programme.” This type of compensation is highly questionable. If pollution has destroyed a fish species in a river, for instance, how can the company responsible for the pollution claim to have “made up for” this loss and cleared its debt towards the rest of society? Such a view is not compatible with the concept of “environmental thresholds”, on which there is now a consensus within the scientific community. Indeed, when environmental degradation is too severe, a tipping point is reached – the environmental threshold – which causes irreversible changes, and is therefore impossible to offset at the level of ecosystems or natural regulation mechanisms. The concept of threshold is also relevant in the social sphere, for instance in regards to so-called “poverty traps”, or losses caused by forced child labour.
Valuation methodologies are also controversial, such as the contingent valuation method, which produces valuations through surveys including questions such as, “How much would you be willing to pay to conserve this resource, or reduce
the number of victims of this disease?” Such questions obtain significantly different results depending on how informed the respondent is on the issue at hand, their social and cultural background, trends at the time, and how researchers interpret and weigh up responses. This valuation method was first used in the 1970s in the United States to measure the benefits of national parks and quantify the economic interest in protecting them. Increasingly used throughout the 1980s, contingent valuation methods were first implemented on a large scale during the trial following the 1989 Exxon Valdez oil spill, in order to calculate the amount of damages that the company responsible for the disaster would have to pay. In France, they have been used over the last twenty years to produce cost-benefit analyses on major public infrastructure projects, especially in the transport sector. The best-known recent case, the Notre-Dame-des-Landes airport project, is perhaps the one that best illustrates the limitations of this type of valuation method. After factoring in negative and positive externalities, a first cost-benefit assessment concluded that the project would be beneficial – and should therefore be pursued – yet the results of a second, more recent evaluation came to the opposite conclusion. The reason for this discrepancy was the different valuation of the time that would be “gained” by those using a new airport. Aside from the question of which of these assessments was the most accurate, this example illustrates how important or crucial policy decisions are based on figures and valuations of questionable relevance and impartiality, which most citizens are not able to verify, especially since detailed valuation methods are generally not made available to the public, or when they are, it is
only after decisions have been made.
Although the scope of externalities is currently expanding (controversially) into the valuation of eco-systemic services, this remains limited to a small number of environmental issues (climate, pollution and other forms of environmental damage). Social externalities are ignored, especially when they touch on issues already valued in some way by the market, such as labour, even though they are also, in fact, a source of hidden costs. For instance, the costs of working conditions in Asian or African sweatshops, which are borne by workers and their families, are not considered an externality, but the result of a balance between supply and demand of labour.
“Societal costs” as sustainability indicators…
The concept of “societal costs” seems more useful than the concept of “externalities” both because it doesn’t have the same limitations and partialities as the aforementioned methods, and because it offers an institutional perspective on the issue of hidden costs. German economist Karl William Kapp developed the concept at the beginning of the post-war boom. It can be defined as all the losses and expenses, direct and indirect, present and future, supported by third parties or by society as a whole because of the social, environmental and health impacts of production and consumption patterns. In his works, W. Kapp explains that societal costs are not “one-off failures”, but effects inherent to our economic system. Because this system is fundamentally based on the endless pursuit of short-term growth and profits, it both generates increasing environmental and social impacts and shifts the costs of these impacts from those who are responsible for them (companies, individuals, institutions, etc.) to third party individuals or groups. Ultimately, profits are privatised, and costs are socialised. When the damage exceeds environmental or social thresholds, the sustainability of society as such and of ecosystems is at stake.
Societal costs can therefore be used as indicators for the sustainability or unsustainability of our lifestyles. The notion of “footprint” (ecological footprint, carbon footprint, etc.) has already served to raise awareness among different audiences
of the negative consequences of our societies’ over-exploitation of natural resources and CO2 emissions. Much in the same way, an analysis of societal costs could help identify the economic models that should be prioritised and those that should be proscribed in a perspective of social and ecological transition. Ultimately, a “zero societal costs” society would approach the ideal of a circular economy.
Take for example the French dairy sector, which we at Le Basic have experimented with in order to determine societal costs. We calculated these costs on the basis of key environmental and social hidden costs generated by the production, processing and consumption of dairy products. Then we compared these total societal costs to the French dairy sector’s revenue. We calculated this ratio for the dairy industry as a whole, and then for each type of production model separately.
The global average ratio was 0.28 euro, i.e., for every euro of revenue, the dairy industry generates 0.28 euro societal costs. This ratio drops to 0.18 euro for organic dairy production and to 0.10 for protected geographical indication (PGI) dairy production. This calculation thus allows for quantification of the difference in environmental or social impacts between different production and consumption models, beyond existing certifi cation systems.
…at the service of a public interest collective project?
Based on the initial studies that we have produced for civil society and on our own research and development activities, we now wish to team up with other partners from civil society and establish an “observatory of societal costs”. Our aim is to carve out another approach to societal costs – that is not about refusing to recognise the costs associated with environmental and social impacts, nor about attempting to thoughtlessly monetise everything.
More specifi cally, such an initiative would:
- Put the concept of hidden costs and societal costs at the service of citizens and stakeholders wishing to encourage the emergence of new, low-impact economic models.
- Improve the accessibility and transparency of information on the societal impacts and costs of our economic activities and our lifestyles.
- Investigate the relationship between the privatisation of value creation and the socialisation of societal costs associated with this creation of value.
- Fuel existing platforms and discussion on sustainability issues in relation to industry sectors and their supply chains and distribution channels.
The initiative could help citizens and institutions to overcome dilemmas that are currently a source of confusion as to the best path to choose for a social and ecological transition (What about geo-engineering? What about agro-forestry? Green tech or low tech? etc.). These choices are both critical and urgent given the challenges we are facing.
 CARE for “Comptabilité adaptée au renouvellement environnemental” (Accounting adapted to environmental renewal) : http://www.novethic.fr/empreinte-terre/economie-circulaire/isr-rse/la-comptabilite-environnementale-doit-permettre-la-conservation-du-capital-naturel-138138.html
 See Jacques Weber, L’évaluation contingente. Les valeurs ont-elles un prix ?, Sciences Po-Ceri, July-August 2003.
 See Linda Brinke, Jasper Faber, Examen de l’analyse globale coûts-bénéfices de l’aéroport du Grand Ouest. Comparaison avec des améliorations sur Nantes Atlantique, Rapport Delft, October 2011
 K. W. Kapp, The social costs of Business Enterprise, Spokesman, 1963.