On June 11–13, 2012, the American Sustainable Business Council (ASBC), a national public policy and advocacy organization, is bringing more than 125 innovative and triple bottom line business leaders from across the country to meet with at the White House with senior administration officials and congressional leaders at its Business Summit for a Sustainable Economy.
This is a critical moment for forward-thinking business leaders to help map out a long-term policy agenda and to discuss strategies to create jobs and rebuild America.
Here’s the message I’ll be delivering.
I’ve thought to myself a thousand times, if I could wave my magic wand and change only one thing in the world – what would it be? The answer is always the same: change the rules of commerce to make sure that every business on the planet uses full-cost accounting.
OK, I know that sounds strange, but the ability of business to externalize its negative impacts on society and the planet is the single most destructive practice we face on the planet.
If you let me wave my want again, my clear second choice would be the elimination of environmentally harmful and socially inequitable subsidies, although both issues are related sides of the same problem.
Our economy is designed to encourage the consumption of unsustainable products by artificially lowering their costs. Misguided federal subsidies and cost “externalization” put sustainable products and services at a marketplace disadvantage.
I’ll be blunt: There is no such thing as a free market. Federal subsidies are an excellent way of understanding why. Our market is designed to produce winners and losers – and, more so, to tilt the balance in favor of certain trade associations, industries and companies who invest heavily to see that rules supporting their way of doing business frame the playing field.
This translates into “bad” products being cheaper than “good” products, confusing consumers – and putting them in an ethical bind (“Do I buy what’s cheaper for myself and my family, or do I invest more in a product that’s in the better interest of the world?”). We are encouraging the purchase of products that are harmful to our health and the planet.
Green Scissors 2011 identifies more than $380 billion in wasteful government subsidies that are damaging to the environment, harmful to taxpayers, and destructive to the market for sustainable products. With the federal government facing a $1.65 trillion deficit and $14.6 trillion debt, the research and insight provided by the Green Scissors’ report is more critical than ever.
So how do subsidies relate to full cost accounting? They both create an unfair advantage for “bad” products and unsustainable business practices.
Though nature is clearly an intangible asset for the planet and the human race does not appear on any company’s balance sheet. As a result, we are free to use, abuse, consume, and destroy people and the planet with little or no financial consequences. And we do, thanks to a phenomenon called cost externalization that has been tacitly blessed by both governments and the accounting profession.
David Korten, a lifelong opponent of externalized costs, describes the process this way in his book When Corporations Rule the World:
“(A) basic condition of efficient market allocation is that the full costs of production must be borne by the producer and be included in the producer’s selling price. Economists call it cost internalization. If some portion of the cost of producing a product are borne by third parties who in no way participate in or benefit from the transaction, then economists say the costs have been externalized and the price of the product is distorted accordingly. Another way of putting it is that every externalized cost involves privatizing a gain and socializing its associated costs onto the community.
Externalized costs don’t go away—they are simply ignored by those who benefit from making the decisions that result in others incurring them. For example, when a forest products corporation obtains rights to clear-cut Forest Service land at give-away prices and leaves behind a devastated habitat, the company reaps the immediate profit and the society bears the long term cost.
When the seller retains the benefit of the externalized cost, this represents an unearned profit—an important source of market inefficiency. Passing the benefit to the buyer in the form of a lower price creates still another source of inefficiency by encouraging forms of consumption that use finite resources inefficiently.”
The key to a sustainable and resilient economy is the elimination of subsidies and externalized costs. It’s that simple!