The Future of Sustainability
Though research has continually shown the increasing severity of climate change over the past decades, public opinion has only recently seen change. Currently the conversation around climate change has turned to a discussion of “when” and “how”, no longer an “if” as it was at the turn of the century. Not only a worldwide dilemma for its environmental effects, climate change now poses a problem for companies’ reputations and revenues, incentivizing profit-seeking businesses to put the mitigation of climate change at the forefront of concern.
Climate change is a frequently debated topic, however the statistics of business contributions to climate change are often overlooked. The contemporary culture of overconsumption has caused the global consumption index to increase thirty fold in the past 50 years, from roughly $2 trillion to $62 trillion (World Bank 2021). In the same period, we see similar patterns in atmospheric carbon dioxide levels–the main indicator for climate change statistics–which has correspondingly increased from 325 ppm to 412 ppm since 1970 (Climate 2021).
In a 2015 article explaining “environdevonomics”, economist Michael Greenstone calls climate change “the standard problem of externalities and public goods on steroids” (Greenstone 2015). According to Greenstone, the presence and acceleration of climate change is due to the modern big business culture of overproduction and overconsumption. While these two phenomena are clearly correlated, overproduction can be attributed to private companies’ apparent costs being less than those of society. For example, when manufacturing a car, a private company solely factors in economic costs to find its optimal level of production, which for profit-seeking businesses, is a usually high level of production. However, if the company’s costs matched those of society, it would find itself at a much lower level of production. Societal costs factor in the economy, planet, and people, meaning the socially optimal level of production is one that understands business, climate change, and the public’s needs. The indifference of companies to account for the true costs of their products results in drastic increases in production, leading to excessive pollution.
Corroborating Greenstone’s notion, a recent study published by The Guardian found that only 100 businesses around the world are contributing to 70% of total global emissions, and that half of the total is caused by just 25 of those companies (Riley 2017). Major contributors to these emissions are large energy companies such as ExxonMobile, BP, and Shell, which have all seen decreases in stock value over the past five years presumably due to the public’s recent shift in opinion on climate change. A recent McKinsey study reported that more businesses than ever are in support of sustainable practices because of ethical reasons, as well as concerns over reputations and profits (Bonini, Görner 2019). Companies want to make the switch to ‘Green’, but how will they do it? Some companies such as Apple, Facebook, and Google are commiting to renewable energy, and others, like Volvo, are remodeling their products to be more environmentally friendly (Bonini, Görner 2017). But for companies with high emissions like ExxonMobile, BP, and Shell, true cost accounting may be the future.
True cost accounting (TCA) is simple: it is a form of bookkeeping that accounts for all effects of a product or service when calculating the costs of a product. The overarching goal of TCA is to create a goods market where the most sustainable products have the lowest prices to consumers. Companies are constantly incentivized to lower costs to increase profits, so if the true costs of goods are accounted for during production, companies will divert their power to lowering them. Say, for instance, in the making of a T-shirt, a company emits 7kg of CO2. If TCA is implemented, the company would factor in all monetary costs while producing their product, including the monetary ‘cost’ of the CO2. These costs affect the company's level of production, providing an incentive to the company to do everything possible to lower them, and consequently increasing production and profits. This would result in the shirt being both the most profitable and environmentally friendly product it could be.
If TCA were to be implemented for all products, environmentally friendly goods would also be the least expensive for businesses and the biggest bargains for consumers. With this ideal in place in the market, a profitable business would be synonymous with a sustainable business. Consequently, excess production wouldn’t do any harm to the planet, the steroids that Greenstone talks about would be taken out of public goods, and climate change would ultimately trend towards mitigation. We know that TCA would help the fight against climate change, but the new problem now lies in how to make TCA effective. To do this, TCA must accurately account for environmental externalities, but how does one quantify those effects?
Putting a price on environmental effects is an extremely difficult task due to the amount of variables involved. Quantitative evaluations of environments are relative, costs are ever-fluctuating, and it is often hard to find who is truly responsible for damage. Who is to say that the trees in the Amazon are worth more than the water in India? Or that the timber businesses are to blame more than the paper businesses? The presence of ambiguity within the process restricts it from being an exact science, but our accounting of environmental effects can be improved to get closer to the truth. In the past decade, many corporations have taken large steps towards their goal of effective TCA. Organizations including the United Nations, the World Bank, Conservation International, and PriceWaterhouseCoopers have all been innovating ways to more accurately quantify their environmental footprints (Chouinard et al. 2011). The foundation of this work begins with setting the monetary values of the planet’s ecosystems. In 2011, the World Bank set an overall evaluation of the world’s natural resources at $44 trillion, and since then PriceWaterhouseCoopers and Conservation International have been working on similar frameworks scaled for individual businesses (Chouinard et al. 2011).
Accurately measuring environmental impacts is currently a work in progress, but once precise evaluations become more available for businesses, effective TCA will be their next step towards their mission to eradicate climate change.
References
Bonini, Sheila and Görner, Stephen. 2019. "The Business of Sustainability." McKinsey & Company. Accessed November 02, 2021. https://www.mckinsey.com/business-functions/sustainability/our-insights/the-business-of-sustainability-mckinsey-global-survey-results.
Chouinard, Yvon, Ellison, Jib and Ridgeway, Rick. 2011. "The Sustainable Economy." Harvard Business Review. Accessed November 02, 2021. https://hbr.org/2011/10/the-sustainable-economy.
Climate. 2021. "Atmospheric Carbon Dioxide (1960-2021)". NOAA. Accessed October 25, 2021. https://www.climate.gov/media/13611.
Greenstone, Michael and B. Kelsey, Jack. 2015. "Envirodevonomics: A Research Agenda for an Emerging Field." Journal of Economic Literature, 53(1): 5-42
Riley, Tess. 2017. "Just 100 Companies Responsible for 71% of Global Emissions, Study Says." The Guardian. Accessed November 02, 2021. https://www.theguardian.com/sustainable-business/2017/jul/10/100-fossil-fuel-companies-investors-responsible-71-global-emissions-cdp-study-climate-change.
World Bank. 2021. "Final Consumption Expenditure (current US$)." Accessed October 25, 2021. https://data.worldbank.org/indicator/NE.CON.TOTL.CD.