Environmental Cost Accounting And Ecological Truth

WorldCom, Enron, Tyco: These company names have become very familiar because they all used accounting tricks that masked the truth about the true state of the companies' financial health. In the end, disaster befell each of them.

What if the entire planet was being run that way? Gulp. Unfortunately, to a large extent, it is. And it puts us all in peril - peril way, way worse than the danger Martha Stewart's cell mate would face if she criticized Martha's hand-carved carrot shiv.

The key to restructuring the economy is the creation of an honest market, one that tells the ecological truth. The market is an incredible institution.... It allocates scarce resources with an efficiency that no central planning body can match. It easily balances supply and demand and it sets prices that readily reflect both scarcity and abundance. The market does, however, have three fundamental weaknesses:

1) It does not incorporate the indirect costs of providing goods or services into prices.

2) It does not value nature's services properly.

3) It does not respect the sustainable-yield thresholds of natural systems such as fisheries, forests, rangelands, and aquifers.

Throughout most of recorded history, the indirect costs of economic activity, the sustainable yields of natural systems, or the value of nature's services were of little concern because the scale of human activity was so small relative to the size of the earth that they were rarely an issue. But with the sevenfold expansion in the world economy over the last half-century, the failure to address these market shortcomings and the irrational economic distortions they create will eventually lead to economic decline.

As the global economy has expanded and as technology has evolved, the indirect costs of some products have become far larger than the price assigned to them by the market. The price of a gallon of gasoline, for instance, includes the cost of production but not the expense of treating respiratory illnesses from breathing polluted air or the repair bill from acid rain damage. Nor does it cover the cost of rising global temperature: ice melting, more destructive storms, damage to agricultural productivity, or the relocation of millions of refugees forced from their homes by sea level rise. As the market is now organized, the motorist burning the gasoline does not bear these costs.

Something is wrong. If we have learned anything over the last few years, it is that accounting systems that do not tell the truth can be costly. Faulty corporate accounting systems that overstate income or leave costs off the books have driven some of the world's largest corporations into bankruptcy, costing millions of people their lifetime savings, retirement incomes, and jobs.

Unfortunately, we also have a faulty economic accounting system at the global level, but with potentially far more serious consequences. Economic prosperity is achieved in part by running up ecological deficits - costs that do not show up on the books, but costs that someone will eventually pay. Some of the record economic prosperity of recent decades has come from consuming the earth's productive assets - its forests, rangelands, fisheries, soils, and aquifers - and from destabilizing its climate.

Once we calculate all the costs of a product or service, we can incorporate them into market prices by restructuring taxes (without raising them overall). If we can get the market to tell the truth, then we can avoid being blindsided by faulty accounting systems that lead to bankruptcy. As Oystein Dahle, former Vice President of Exxon for Norway and the North Sea, has pointed out: "Socialism collapsed because it did not allow the market to tell the economic truth. Capitalism may collapse because it does not allow the market to tell the ecological truth."