Consider this common scenario: raw materials are extracted from the earth, transported to a processing facility and with the use of various chemicals and human labor, are transformed into a product. This product is transported again, to a store, where it is sold. You buy it, and assume you are paying a fair price because all the costs to produce, transport and sell the product are included in the price you pay.
Wrong! Only some of the costs are included in the price – the rest are actually born by society as a whole.
If we look more carefully at everything that happened to get our product to the marketplace, we see a host of costs not accounted for in the price tag. For example, perhaps the raw materials were mined in a way that forever altered the landscape or geology at the site. Or, consider the pollution costs due to fossil-fuel-based manufacturing and transportation. And think about the employees at the store, who may be paid minimum part-time wages, which they need to supplement with government assistance for food or healthcare.
Few consumers are aware that the prices they pay for most products and services are artificially low and don’t reflect the full cost.
Businesses are free to use, abuse, consume, and destroy nature with no financial consequences thanks to a phenomenon called cost externalization. Tacitly blessed by governments and the accounting profession, the externalization of costs is a tradition that’s become deeply imbedded in our economy. But its days are numbered, just as our planet’s resources are limited. The more we see the environmental and social destruction that it is responsible for, the more we see that this accounting trick is, in a word, unsustainable.
While some leading businesses are voluntarily taking responsibility for some of these costs by either internalizing or, better yet, simply eliminating them, what really needs to change are the ground rules. We need agreed upon standards on how to measure these externalized costs, incentives to fully document these costs and ways to provide accountability.
The U.S. economic system subsidizes businesses that harm the public welfare and creates an uneven playing field for businesses that do it right. We need new policies that create incentives to do good, which includes accounting for the full cost of doing business so that those who already internalize those costs can thrive. We need an economy that is responsible to the environment and puts community accountability ahead of profits.
The good news is that there are already creative thinkers figuring out ways to make this happen. In many cases, the search for cost effective solutions takes creativity, systems-based thinking, and most effectively, transforming the root of the problem. Going beyond the traditional cap and trade, and polluter pays principles, there are new laws, policies and initiatives being explored that reevaluate what we as a society consider important.
For example, my home state of Vermont is taking a cue from the country of Bhutan by implementing a policy that requires the state to analyze “progress” in an entirely different way. Instead of measuring progress by the traditional GDP, this new measurement evaluates progress in terms of the effect on public welfare as a whole, which takes into account community relationships, public spaces, environmental preservation, and the standard of living for each individual and family. Initiatives like this are springing up all across the country (and world) and could be a promising start to full cost accounting. When the focus moves from simply focusing on profits to how the business impacts the public, external costs will be internalized by the business itself, or eliminated completely.
Another promising practice we have seen is the emergence of worker-owned cooperative networks that are growing throughout the world. Networks such as the Mondragon Cooperatives and the Evergreen Initiative in Cleveland allow the workers to own their enterprise and network with other owners to develop sustainable business strategies. They have the ability to put a higher priority on democracy, education and the sustainable development of their surroundings, rather than solely maximizing profits at the expense of their community. While cooperative developments do not avoid externalizing costs all together, having ownership over an enterprise is an important step in directing where the costs of externalities go.
Nothing will change unless the people and organizations involved in correcting issues begin to collaborate, pool resources and realize that at a very fundamental level, many of us are working toward a common goal: the pursuit of a better future. Multi-sector organizations that bring a strong unified voice to distinct groups to set forth a new economy are crucial in transforming our system. A partial list of these important organizations includes: the American Sustainable Business Council, Green Recovery (Energy), Embrace Obama’s Agenda, National Council on Science and the Environment (biodiversity in a rapidly changing world), AME, UNEP – Green Job, New Economics Institute, NEW (New Economy Working Group), NER (New Economy Round Table), Business Alliance for Local Living Economies, Social Venture Network, Social Enterprise Alliance, B Lab, Fourth Sector Network, and New Voices of Business. These are the leaders who can best push for the policy changes – both in Washington and in board rooms – that put in place new rules that will end the practice of externalization.
These organizations, policies and initiatives are critical to establishing a new economy: one that works in harmony with the planet and puts human welfare above profits.
Jeffrey Hollender is co-founder and former CEO of Seventh Generation. He is the author of the bestseller, How to Make the World a Better Place, a Beginner’s Guide, as well as five additional books, including The Responsibility Revolution and Planet Home. He is a board member of Greenpeace US and Verite and also co-founder of the American Sustainable Business Council.
Policy Points is produced by the American Sustainable Business Council. The editor is Richard Eidlin, Director – Public Policy and Business Engagement.