Have you heard of “True Cost Accounting”?

An article in the December 2, 2023 New Scientist Magazine has me puzzled.

The article deals with “True Cost Accounting” (TCA), which attempts to account for all the costs associated with the creation of products and services. Most importantly, this includes environmental costs.

While I sympathize with the desire to identify environmental problems and solve environmental needs, I question whether TCA helps or hurts that mission.

Here are some excerpts from that article:

How counting the true cost of cheap food could make a better world,  Graham Lawton

What we pay for food and other goods doesn’t reflect the environmental and social damage they cause. But a radical new approach to economics could change that. By Graham Lawton, 28 November 2023

IN THESE difficult times, it seems utterly bananas to say that food is underpriced. In the UK, average grocery bills have risen by more than 12 per cent in the past year. But it is.

The price tags on food are way lower – by about two-thirds – than what they would be if we were paying the full cost. Don’t worry, though, there are plans to sort this out.

In reality, we already pay the true price, it is just that most of it is stealthily hidden from us. “We pay overall four times for our food,” says Alexander Müller at the sustainability think tank TMG in Berlin.

First, we pay at the checkout.

Then we pay for the health, environmental and social costs of producing that food, mostly though taxes.

Uh oh. My antennae go up when I see the word “taxes.”

Though taxes indeed are a cost to the public, they are not the result of health, environmental or social problems.

The U.S. and UK governments, unlike city, state and county governments, are Monetarily Sovereign (MS). That means they both (and other MS) governments have the infinite ability to create money.

They never unintentionally can run short of their own sovereign currency.

Former Federal Reserve Chairman, Ben Bernanke: “The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”

For that reason, “we” don’t pay for health, environmental, and social costs via taxes. Our central government’s taxes pay for nothing. In fact, U.S. federal taxes are destroyed upon receipt.

One purpose of government taxes is to help our central government control the economy by discouraging what the government doesn’t like and by rewarding what the government likes.

Taxes also assure demand for the U.S. dollar by requiring dollars to be used for tax payments.

And that’s it. Though local taxes fund local government spending, U.S. and UK government taxes do not fund any spending.  

Even if those central governments stopped levying taxes, they still could continue spending indefinitely.

These costs are “externalities” – things that are treated as free even though they aren’t, such as the environmental damage caused by farming or the health costs of obesity.

Right now, producers ignore them and let the rest of us pick up the bill.

What constitutes “the bill” and exactly who are “the rest of us.”? If the soot particles from a coal-fired furnace make you sick, how would you measure the cost? Is your sickness, in of itself, considered a cost, and if so, can it be measured in dollars?

Perhaps, under certain circumstances:

1. You become sick enough to require medical care, the cost for which is borne by you, your insurance company, or the government.

2. You need to stay home from work, which is a cost to your company. If you are docked for being out of work, you bear the cost.

3. Your productivity is affected, which is a cost to the economy as well as your company.

4. You require medicines and healthcare, which are counted as sales to healthcare providers and pharmaceutical companies.

5. And, of course, there is the emotional cost, the lifespan cost, and the lifestyle cost, which are difficult to measure in dollars.

But why would you need to measure the costs? It’s like measuring the cost of being shot in the head. You simply want to avoid it. Are you going to ask, “How much would a grazing wound cost me vs. a direct shot?”

Is belching smoke into the air OK if it only sickens ten percent of the population? 

Economists and accountants have been working on a system called true cost accounting (TCA), which aims to internalize these externalities and upend decades of economic orthodoxy.

For decades, economic success or failure has been measured in purely financial terms. Consider the global yardstick of economic progress, gross domestic product (GDP) – the value of all the goods and services produced in a country.

The concept became the internationally accepted indicator of economic success after the second world war. If GDP grows, the economy is deemed to be healthy, and GDP growth has long been an overriding priority of most governments.

Is the implication that in a healthy economy there’s no need to save the air and water from pollution? Should we worry about pollution only when GDP is down?

GDP contains some glaring absurdities. For example, it omits services provided by the state, such as healthcare.

Really? The formula in the U.S. is:

GDP = Federal Spending + Nonfederal Spending + Net Exports

Every service provided by the government (including state/local governments) is paid for by government spending, which by formula, is part of GDP.

Unpaid work also doesn’t count, even though it often displaces activities that, if paid for, would.

That’s true. If you mow your own lawn, and as a favor mow your neighbor’s lawn, GDP doesn’t reflect either mowing. But, there is a time and effort cost that can’t be measured.

Car accidents boost GDP because they stimulate economic activity in the insurance and repair sectors. Waste contributes to GDP as long as the discarded stuff was bought with money.

Here, the implication is that we worry about car accidents and waste only if they impact GDP. Therefore, to take action against car accidents and waste, we first must measure their social cost as part of an overall economic scale. Huh?

Worst of all, GDP keeps many aspects of economic activity entirely off the books – the aforementioned externalities, which the Organization for Economic Co-operation and Development defines as “situations when the effect of production or consumption of goods and services imposes costs or benefits on others which are not reflected in the prices charged“.

Natural capital, such as trees, is invisible to the GDP system until it is destroyed and turned into products. Ditto environmental degradation, which largely doesn’t attract any financial penalties in calculations of GDP.

In fact, deforestation and pollution can positively contribute to GDP if they generate economic activity. Health and social problems caused by industry are also swept under the carpet, even though somebody will eventually have to pay for them.

Sorry to keep interrupting the narrative, but the implication remains that taking action against deforestation and pollution requires the costs of these problems be part of GDP or a similar measure.

When we buy stuff – food, clothes, energy and so on – the price we pay often fails to reflect the full cost of producing, consuming and disposing of those goods and services across their entire life cycle.

The price of a tank of petrol, for example, doesn’t include the cost of dealing with climate change and the air pollution caused by its combustion products.

The price of a pair of jeans doesn’t reflect the social cost of producing them in a sweatshop and the environmental cost of growing the cotton, transporting the jeans halfway around the world and managing the landfill they will probably end up in.

The price of food doesn’t reflect the social cost of low agricultural wages, the environmental cost of soil erosion, water and pesticide use, and the health costs of obesity and other diet-related conditions.

These externalities are arguably one of the main causes of our myriad environmental and social problems. “Destruction of biodiversity costs nothing, therefore, let’s destroy it,” says Müller, who is a former assistant director-general of the Food and Agriculture Organization of the United Nations (FAO).

“Polluting the atmosphere with CO2 has no cost immediately. These ignored real costs are leading to a global crisis.”

In today’s economy, companies can deplete natural resources, pollute the environment, drive down wages and create harmful products, safe in the knowledge that they will reap the rewards while taxpayers pick up the tab.

True for monetarily non-sovereign governments; not true for Monetarily Sovereign governments, which pay for everything by spending newly created dollars.

This is what is known as “privatized profits and socialized losses”, according to Lauren Baker at the Global Alliance for the Future of Food in Washington DC.

Indeed, companies are incentivised to do so, as those that are more successful at externalising their costs will be more profitable, more competitive and better at raising capital for more of the same, says Baker.

This is where TCA comes in. It aims to capture all of the pluses and minuses that arise from economic activity, not just raw profit and loss. That means tallying up the cost of the environmental, human health and social harms (or benefits) of production and adding them to the balance sheet.

Here is where ignorance of Monetary Sovereignty begins to take its toll.

The spending by MS government is free to taxpayers. If you live in the U.S., the UK, or other MS nations, not one penny of your taxes are spent by your government. Your governments could eliminate tax collection as still spend whatever they wish.

But you do pay for goods and services. So, if environmental costs become business costs, that will increase the price of goods and services, which you will pay. 

In short, if the government pays it costs you nothing. If business pays, you pay.

This is not to say that business should be allowed to pollute at will, and let the government clean it up. The government has the power to pass laws that prohibit degrading the ecology. 

But putting the cost of polluting on business’s balance sheets actually gives tacit approval to pollute so long as polluting is cheaper than not polluting.

Until recently, that was almost impossible. But years of progress on methodologies such as life cycle assessment, which tallies the full social, environmental and economic impact of products from cradle to grave, have made TCA tractable.

Life cycle assessment has been in development for 50 years, but, until now, has been largely non-monetary. TCA is a way of converting life cycle assessment into cold, hard cash, says Ulrike Eberle at sustainability consultancy Corsus in Hamburg, Germany.

Some food companies have embraced it to reduce their negative impacts on society and the environment. One example is Dutch chocolatier Tony’s Chocolonely, which aims to charge the “true price” of its products (see: “Shopping with true costs”).

In essence, Tony’s Chocolonely tells you how much extra you should pay for its products that are having a negative impact on society. Think about that, for a moment.

Insurers are increasingly interested in TCA to assess their clients’ future exposure to climate change and environmental breakdown, says Baker, and financial advisers use it to help socially and environmentally conscious investors.

Translation: TCA will open the door to every business, large or small, being sued for legally polluting the air, water, or land.

Now realize that you yourself pollute the air, water, and land by breathing, creating garbage, having children, and . . . well, existing. So do businesses. 

In short, TCA could become the attorneys’ family enrichment and retirement program, with everybody suing every other body for damaging the environment, based on TCA’s estimates.

It is also attracting interest from other sectors, notably clothing and aquaculture, she says. But TCA must spread further and wider. “The concept needs to be applied to everybody, to all economic activities,” says Müller.

And since all activities are economic, TCA would be applied to you and your family. (Now, what shall I do about my baby’s full diapers?”)

Right now, consumers spend a total of around $9 trillion a year on food. But if they paid for the externalities, that bill would rise to $29 trillion.

Who could resist such a wonderful program?

Around $10 trillion of the extra is the health costs from diet-related cancers, diabetes and cardiovascular disease; most of the rest is from fixing environmental damage. “Cheap food is very expensive if you consider the externalities,” says Müller.

Hendriks emphasizes that the $20 trillion extra cost is only a rough estimate, and also that it is incomplete.

Actually, TCA always will be a rough, incomplete estimate, filled with personal biases.

“It doesn’t include social externalities, such as underpayment of wages and child labour,” she says.

Nor does it include the health costs from obesity, though some of these will be captured by the three conditions in the analysis. When all this is factored in, that vast underpayment is likely to rise even higher.

Encouraging overweight (define?) people sue food companies for selling products that contain calories — what a cheerful future. 

Does that mean we need to pay more for food? This is a misunderstanding that dogs the TCA movement – that it will push up prices at the checkout. “People say, ‘You with your TCA, you want to make food even more expensive’,” says Müller.

“That’s nonsense. We are applying the ‘polluter pays’ principle.”

That means the agribusiness and food companies would foot the bill, incentivizing them to change their business practices so as not to go into the red.

If agribusinesses somehow determine what “the bill” is and are forced to pay it, won’t they simply have to raise prices? The $20 trillion cost doesn’t magically disappear.

Detractors who bleat about hard-pressed consumers having to pay more are simply defending the status quo so they can continue to externalise their costs, says Müller.

See, it’s like this. People who don’t want to pay more for what they buy are “bleating.” 

And in any case, consumers are already paying – or will pay in the future – for those externalities. “Even today, we pay for it,” he says. “Maybe future generations pay for it.

Other regions pay for it, or a combination of everything. It is not that true cost accounting is inventing costs. We are only identifying already existing costs.”

No, you’re not just identifying existing costs. You are arbitrarily defining and assigning costs under the cloak of “do-gooderism.” 

Let’s stop to address some realities:

1. If “agribusiness and food companies would foot the bill” that would be part of GDP. It has nothing to do with TCA. That merely has to do with passing laws that charge polluters for cleaning up pollution.

2. That’s the easy part. The hard part is measuring the negative life effect of any industry. What is the TCA effect on one person living one year less than he would have if he had not been breathing certain toxins that are 50% not natural and are spread by thousands of different companies.

Specifically, who is responsible for that and by how much?

Redirecting harmful subsidies would soften the blow. The world currently subsidises agriculture to the tune of $600 billion a year, says Müller, most of which props up unsustainable practices, such as factory farming and excessive use of pesticides.

That money should be redirected to pay for the industry’s externalities, he says.

3. But what is the cost of reduced food production? The cost of starvation? If we eliminate factory farming we will have to use other forms of farming (aka “alternative farming), which includes such efforts as:

-Organic farming, , -Permaculture, -Hydroponics,  -Agroforestry

All involve more immediate direct production costs along with scarcities due to lower output. This will increase the price of foods and hunger. 

Of course, we aren’t going to transition to a TCA world overnight. “I’m lobbying for a phased approach: try to gain friends, try to win some companies who can benefit from true cost accounting,” says Müller.

It’s difficult to see how companies benefit from true cost accounting. The environment will benefit from ecologically sound practices, but the program will have to be funded by Monetarily Sovereign governments.

(Monetarily Sovereign governments like the U.S. and UK, can spend without taxing. Monetarily non-sovereign governments — Germany, France, Italy et al — would have to increase taxes to fund the ecological effort. So, if food prices were not raised, taxes would be.)

“Otherwise, you’re looking like people who have crazy ideas and will never be successful.”

That is exactly what I see.

Dutch supermarket chain Albert Heijn has launched a True Pricing trial in the coffee bars of three of its To Go supermarkets, to raise awareness about the hidden costs associated with products.

During the trials, grocery shoppers in Groningen, Wageningen and Zaandam are offered the option of paying the normal price, or the so-called “real price.”

The “real price” includes the social and environmental costs throughout the product chain, such as CO2 emissions, consumption of water, use of raw materials and working conditions. 

At some shops, the prices reflect the true cost of making the products.

Translation: Customers of Albert Heijn are given a choice. Pay Albert Heijn more for a product that creates social environmental costs or pay less for the same product. Who could resist such an offer.

Then we come to the way in which the “True Price” is calculated. Go to The True Cost Accounting Agrifood Handbook for that.  You will find thousands of cost estimates each of which has an impact on TCA. Here is a partial list of notations:

– Collection and adoption of impacts and respective indicators/ metrics: Over 100 indicators and metrics from existing approaches were collected in order to select or create formulars/models to qualitatively assess the impact of agri-food products.

– Identify monetization method and factor corresponding to the indicators: For each indicator a suitable monetization approach was chosen with the preference for prevention cost approach. For the estimation of the true cost of food and agricultural product’s impact, monetization factors were assigned to each indicator in line with the chosen approach. A wide range of monetization approaches and factors exist – those here provided represent one option for monetization estimates.

-Testing: The indicator and the collection of the respective data were tested in two iterative pilot phases and were adjusted according to the feedback and lessons learned. Table 3 provides a summary of the final indicators. Some of the tested indicators (e.g. health impacts from pesticide ingestion) were not included in the final list of indictors because of insufficient performance during the piloting (e.g. lack of accurate impact modelling, insufficient proof of causality).

  For instance, on page 25 you will find this. It contains examples of the millions of calculations to be made:

It is as near to a black box as anyone ever will find. So many arbitrary values, weights and opinions are baked into the process, that TCA makes the calculation of original GDP look precise.

(Our) friends might be companies that have adopted a circular economy approach, where everything is reused, and can showcase their environmental credentials via TCA.

I’ve not seen a company “where everything can be reused.” Does “everything” include shipping, heating, hiring, marketing, etc. — all the things a company does to exist?

Or they might be firms that want to assess their future risks and take pre-emptive action, perhaps on the assumption that consumers will increasingly punish companies engaged in environmentally destructive activities, or that their assets will become less valued as the world transitions away from unsustainability.

Wishful thinking that seldom becomes widespread. There may be some limited cases where consumers are willing to pay a higher price for the ecology, but generally, price, quality, and availability rule.

“I think most of them have realized that they will have to do it sooner or later,” says Müller.

When it comes to increasing costs with no profit results, businesses usually choose “later” rather than “sooner.”

It probably would lead to a finger-pointing contest, with everyone denying culpability.

For example, who is responsible for internal combustion engine air pollution — the farmer driving the tractor? The engine manufacturer. The oil processor? The gas station? The boat owner that brought the oil to the processor? The company making the gas pump?  The pipeline company? The steel mill that rolled the pipe. Etc., etc., etc.

And what is the cost of air pollution? How are the various pollutants evaluated and calculated?

But getting from where we are now to where we need to be will be difficult. “Right now, we have a lot of people on the starting line,” says Baker, “but the short-term incentives aren’t there and you really are penalized in the market right now if you’re an early adopter.”

There needs to be legislation, she says, to force companies to move towards TCA.

Yes, it’s a government job. but rather than forcing companies to increase their own costs, the government must reward companies for adopting ecologically sound management.

In any event the whole process seems like a “do this really difficult thing before we even begin to attempt that other difficult thing.”

Personally, I would immediately, not delay, work on that “other difficult thing” (where feasible, legislating against polluting activities, plus federal government paying for prevention and cures.)

Expanded government financial support for adopting solar panels is one example of what would be needed.

There also needs to be institutional backing, and it is coming. At last year’s COP27 climate summit in Egypt, Máximo Torero, the chief economist at the FAO, threw his organization’s weight behind TCA.

“FAO is taking this extremely seriously,” he said. “It’s a huge challenge, and we are afraid, like many of you, but we are going to overcome our fear and we are going to do this.”

That could be a catalyst for real change, says Müller. “We will have it in the heart of policies, we will have a debate about the concept. Then the field is prepared for in-depth discussion.”

The drive to internalize externalities seems to be catching on more widely too. The way GDP is calculated changes every 15 years; the next iteration, in 2025, will reportedly include measures of sustainability and well-being.

As you saw with the The True Cost Accounting Agrifood Handbook, sustainability and especially, well-being, are quantified.

Quantified well-being? I question whether it can be done with any meaning.  Combining life expectancy with lifestyle, happiness, health and other well-being factors seems to be a fool’s errand. 

The transition to TCA will be a long, hard slog, however. “The construction of GDP took many, many centuries,” says Müller.

Overturning such entrenched economic orthodoxy is a tough ask. But if we recognize GDP for what it is, the transition will be easier, he says. “GDP is a social construction. It’s not a natural law like the speed of light, it’s an agreement in society.”

It’s not clear why every life experience must be combined into one number. GDP is difficult because of change, but it’s an understandable concept. Blending the emotional with the financial seems a step too far.

In Amsterdam, a pioneering supermarket displays two different prices for its goods. One is the market price, as you would see in regular supermarkets. The other is the “true price”, which factors in the environmental, health and social costs of the creation, consumption and disposal of the product.

Unsurprisingly, the true price is always higher than the market price. Customers can choose which price to pay: if they opt for the true price, the premium goes to environmental and social causes.

In the True Price Supermarket, which opened in 2020, bananas are sold at either the market price of €2.79 per kilo or the true price of €2.94 per kilo – a measly extra 15 cents per kilo to cover the social costs of low-wage farming and impacts on land, water and climate.

But some products have a much bigger mark-up: a hot chocolate rises from €2.79 to €3.70 because of the real price of cocoa and milk.

These premiums reflect the true cost of these products, as evaluated by a methodology called true cost accounting. Even though making the consumer pay the “true price” isn’t the actual goal of this accounting method, the movement is spreading.

True Cost Accounting is a bad idea. It attempts to quantify what cannot be quantified — numerical changes to what affects people emotionally and physically.

Work to accomplish TCA could delay what really needs to be done: Government support for ecologically sound farming, manufacturing, marketing, and research practices.

A Monetarily Sovereign government could set and fund any ground rules it chooses. The most important step requires answering one question: Given infinite money, what should be done to save the world for future generations.

The U.S., UK, and several other governments have infinite supplies of their own sovereign currencies. There remains only the need for these governments to do what needs to be done and/or to reward the private sector for doing them.

When money is no object, there is no need to wait for impossible precision. Spend the money to do the research, fund cleaning the air, water, earth, and do whatever is necessary to help the ecology.

That could begin tomorrow, without the busywork dithering required to reinvent GDP.

And that is the whole point of this post.

Rodger Malcolm Mitchell
Monetary Sovereignty

Twitter: @rodgermitchell Search #monetarysovereignty
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