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Are business externalities really this big?

Friday, February 19th, 2010

How much does pollution (and other environmental impacts) from corporations cost each year?  These costs, borne by society rather than corporations, are called negative externalities.  An example is the cost of medical expenses and the loss of forests caused by air pollution.

The Guardian is running a story by Juliette Jowit suggesting that the total cost of externalities for the 3,000 largest companies in the world could be as much as $US 2.2 trillion in 2008.  As the story points out, that’s a lot:

  • more than the economies of all but 7 nations
  • about one third the value of the profits of these companies

Excerpts (links by Jowit):

Later this year, another huge UN study – dubbed the “Stern for nature” after the influential report on the economics of climate change by Sir Nicholas Stern – will attempt to put a price on such global environmental damage, and suggest ways to prevent it. The report, led by economist Pavan Sukhdev, is likely to argue for abolition of billions of dollars of subsidies to harmful industries like agriculture, energy and transport, tougher regulations and more taxes on companies that cause the damage.

“What we’re talking about is a completely new paradigm,” said Richard Mattison, Trucost’s chief operating officer and leader of the report team. “Externalities of this scale and nature pose a major risk to the global economy and markets are not fully aware of these risks, nor do they know how to deal with them.”

“It’s going to be a significant proportion of a lot of companies’ profit margins,” Mattison told the Guardian. “Whether they actually have to pay for these costs will be determined by the appetite for policy makers to enforce the ‘polluter pays’ principle. We should be seeking ways to fix the system, rather than waiting for the economy to adapt. Continued inefficient use of natural resources will cause significant impacts on [national economies] overall, and a massive problem for governments to fix.”

Another major concern is the risk that companies simply run out of resources they need to operate, said Andrea Moffat, of the US-based investor lobby group Ceres, whose members include more than 80 funds with assets worth more than US$8tn. An example was the estimated loss of 20,000 jobs and $1bn last year for agricultural companies because of water shortages in California, said Moffat.

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