Cost internalization is a pear.

Cet article est aussi disponible en français.

Cost internalization could be a solution to the environmental crisis. If corporations internalized all of their costs, we would not find ourselves in the current situation.

Except that we do.

In Spanish, when someone asks for something impossible, we use the proverb “no le pidas peras al olmo”, which means: “don’t ask the elm for pears”. This proverb illustrates, in my opinion, the current situation in which we expect from the system something it cannot provide us with. Asking our current political system to move towards obliging companies to internalize environmental and social costs is like asking an elm for pears.

Photo by David Fartek on Unsplash

Because of the way our political system is structured, the push back against laws to internalize environmental costs is higher than the sum of the efforts lobbying for those laws, and as a result, the laws that would impose companies to pay for their full costs do not pass.

Why is that the case? What are the root causes underlying the resistance to environmental laws? After over 7 years of research, Thwink argues that at the source of the fierce resistance of our political systems to environmental laws lies the incompatibility of companies’ goals with long-term environmental sustainability and well-being.

The goal of most for-profit corporations is to maximize short-term profits to their stakeholders, while the goal of most people is to maximize the quality of life for themselves and their descendants. These goals are mutually exclusive: corporations and people are competing for the same limited resources to achieve their goals, and companies are winning, to the detriment of life.

Let me give an example to illustrate such a bold statement (and let me also tell you that you will not be convinced by it if the paragraph above annoyed you. Do not hesitate to put in touch if you feel like discussing). Our well-being may require that a forest stays a forest, because it protects our cities or homes from floods, because it purifies the air, or simply because we can take a nice walk. With the current “rules of the game”, none of this helps companies to achieve the goal of maximizing profits. For companies to “make money” out of the forest, it has to convert the forest into wood, as it cannot charge a price for flood protection or air quality (being non-rival goods, no one would pay because they would be getting the service anyways. Furthermore, when these ecosystem services are no longer available, a market for air purifiers or anti-flooding mechanisms may open up). This leads to a situation in which companies have the incentive to convert the whole forest to wood, while the ideal situation for optimizing well-being would likely be to chop some trees to have wood but at a rate that allows the forest to stay a forest and thus provide the free services of flood protection, air purification, recreation, and a habitat for other species (as we happen not to be alone on this planet).

While such a combination would likely maximize our well-being, that is not what happens in reality most of the time. We are competing with corporations for the same resources, and corporations have, today, all the conditions to win. The goal of short-term profit maximization is thus the one that gets maximized, in detriment to people’s long-term well-being.

You may argue, however, that this is the case precisely because costs are not internalized, because the rules of the game are not right, because companies dominate the political system, or because we elect politicians that defend vested interests rather than the common good.

All of that may be true, the question is why.

The next article discusses just that.

This article is part of a series, available here.

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