The new math for the new accounting
Currently, the laws of nature and the rules of business are in direct collision. Every financial transaction has an environmental impact and the environment is embedded in every financial transaction. But these environmental impacts are not yet included in business rules, regulations or accounting. This omission has left society with a massive environmental debt.
In my book, Environmental Debt: The Hidden Costs of a Changing Global Economy, I expose the link between our financial and environmental crises — from the cost of coal to the impacts of extreme weather on taxpayers. I use the term “environmental debt” to explain the cost of polluting and/or damaging actions that will cost other parties (people, business, governments) real money in the future. We can pay now or pay later — but we will pay. Through our public, private and individual spending, we are already in the hole for environmental degradation.
For example, China recently calculated that its annual environmental degradation costs it 3.5 percent of its GDP, or about $250 billion a year. Environmental degradation costs Pakistan 6 percent of its GDP and Colombia 3.7 percent. (The United States has made no such calculation, although President Obama has recently suggested researching the “social cost of carbon”.) This is real money paid by real people, governments and institutions. What makes this environmental debt even more fraught with danger is that it is often irreconcilable. Once an ecosystem is destroyed, it cannot necessarily be resuscitated. This is the precipice on which we now perch.
If we recalculate the costs of all business by embedding the costs of air, water and carbon pollution as well as habitat destruction, we will end up changing our consumption practices and production protocols. What is cheap now (conventional agriculture, virgin paper products, meat, all gizmos, and, in the United States at least, gasoline) will become more expensive because the full impacts of their production, usage and disposal will be incorporated into their prices. This would translate to coal costing about 23 cents/kWh versus its current average price of 8 cents/kWh. And no burger would ever cost a buck again.
These changes would lead to a future where a business’ return on investment would be aligned with the survival of nature. Sounds good, but there are at least two tricky questions that must be answered simultaneously:
• If the price of coal, oil and pollution were to reflect their true costs, won’t that melt down the economy? Low-income people, in particular, will find higher prices very difficult.
• If coal, oil and pollution continue to be underpriced, won’t that melt down the environment? We already know the answer to this, as the environment is in a free-fall.
In order to change course, we need a transition agenda that links the health of our lives and health of our livelihoods.
A transition agenda is necessary so the changes to business as usual do not displace, dispossess and disrupt tens of millions of people, businesses and communities. If coal mining is put out of business (as it should be), we must train coal miners to weatherize the nation’s buildings and encourage coal companies to invest in cleaner technologies so that shareholders and investors do not go bankrupt. But this could also mean the financial devastation of some coal mining towns. What happens to the diner, the hardware store, and the supermarket in towns when coal miners leave? The promise that new jobs will come to where these workers have lived for generations is simply not a certainty. Much of the land and water around these towns is degraded, leaving few options and increased health risks for those who remain. Overall, we must regard these workers, towns and companies as more than collateral damage.
Policymakers and businesspeople cannot separate business from the world it inhabits, and we cannot address large public spending deficits by incurring ever-larger environmental debts. New jobs in dirty industries that help local economies and garner profits in the short-term will cause grave financial (as well as environmental) consequences in the medium- and long-term. This does no one any good, but our current business rules encourage this de-coupling of our natural and financial needs.
In my book, I recommend the following three guiding principles for twenty-first century commerce. I call them the “Nature Means Business Framework.”
1. Pollution can no longer be free and can no longer be subsidized.
2. The long view must guide all decision making and accounting.
3. Government plays a vital role in catalyzing clean technology and growth while preventing environmental destruction.
Moving these ideas into actual business policy is one tall order. It will only happen after political will is activated across many sectors. Fortunately, many people are already tilling this terrain. Thousands of civil society organizations (health, economic development, human rights, and environmental groups), companies and even governments are working to alter the current business and accounting rules. This is why I have teamed up with Resolve, a DC-based organization that specializes in negotiation and arbitration to overcome intractable problems between business, government, and civil society, especially in the environmental policy sphere. We are creating a web platform for the public to participate in solution building of all kinds. We ask you to help create A Transition Agenda to usher in these new rules for the twenty-first century economy. We encourage you to use the Transition Agenda as a way to share your own efforts and change the public conversation so that we can connect our financial and environmental decisions in the public, private and individual sectors.
Yes, this is going to be really hard, but we have got to do it. So let’s roll up our sleeves.
The Financial and Environmental Crises are connected