moving from negative externalities to mutual empowerment
The environment is everything that surrounds us, everything that exists within us and feeds us and which we, and our activities, feed into. Negative externalities are economic impacts on third parties not contractually involved in a negotiation. They are called external, because they occur outside the context of the economic relationship in question. Those people impacted by other parties’ dealings have a stake in the outcome of those dealings.
A shift to thinking about the impact on stakeholders allows for a more honest economic and environmental analysis of the merits of a given project, energy source, legislative framework or technology. Conventional economics has long drawn a distinction between economics and the environment, so the externalization of costs is not just an accidental product of incomplete analysis; it is often pursued as a deliberate strategy to increase efficiency with respect to the hard numbers that measure the activity internal to a narrowly defined economic relationship. So, integrated stakeholder analysis remains a new frontier. Stakeholders are far more numerous than most investors or managers are comfortable admitting, partly because their stake in any given project is often far too complicated and subtle to work out in hard numbers.
That conventional separation between economic activity and the environment is ill-conceived for a number of reasons:
- it fails to consider real economic values for little reason other than that they are difficult or inconvenient to calculate;
- by ignoring those values, it allows for a gross miscalculation of real costs and misstates the underlying benefits of specific activities;
- and by simply avoiding such questions, it drives the generation of negative externalities on sometimes astonishing scales.
Negative externalities can also be described as unnecessary costs that rapidly escalate. Because negative externalities refer specifically to cases where the negatively affected party does not have a role in the economic activity in question, the affected party is often unable to deal with the costs in question or to combat the source of their hardship in any cost-effective or timely fashion. So negative impacts mount, and the overall costs of addressing the underlying problem escalate.
It is this compound impact that makes negative externalities such a controversial and such an interesting subject: controversial, because some investors who consider themselves particularly shrewd view this compounding of negative impacts on external stakeholders as a convenient way to defer costs or reduce them to zero in the scope of the business activity in question; interesting, because addressing them effectively can prevent major crises and help forge a more just, more humane future.
Just as allowing for, or even courting, negative externalities has long been a convenient way for cynical planners to defer costs by never facing them head on, literally assigning real costs of doing business to outsiders with nothing to gain from a deal, they are also an opportunity to take a convenient shortcut to fixing economic and environmental problems of seemingly intractable complexity.
If we shift to a stakeholder model and aim to reduce negative externalities to zero, we can build a responsible marketplace where investments really are efficient and private interest really does serve the greater good of human civilization, without eroding the basic liberties of individuals, families and communities.
That sounds idealistic, but it is more precisely a statement of the optimum achievable impact of economic activity as it is imagined by each stakeholder, from his or her perspective. We don’t aim to create businesses, large or small, or to establish government projects, large or small, with the idea of undermining the general welfare of the economic landscape in which we participate.
Depending on negative externalities as a way to distance ourselves from costs inherent in our economic activity is an embrace of dishonesty. We often think of justice more as a moral category than as anything else, but justice is a measure of how closely we adhere to the truth of things. When we have truth on our side, we are just; when we deviate from truth, slip into distortions and untruth, we become unjust. To ignore the very real facts of life that deliver the impact of externalized costs to stakeholders whose role we do not recognize is to slip into injustice, to require a measure of injustice to finance our activities.
We tend to see stakeholders as others, as people unlike ourselves, or in terms of development planning and corporate investment, people whose interests constitute a brake on swift action or rapid, efficient change. It can be a struggle, intellectually, and morally, to understand that we are stakeholders, equal to those others whose interests we so often treat as alien.
A useful thought experiment for reframing our mental model might be to consider: Where is the dividing line between inside and outside? Where is the wall of impregnable separation that proves a closed system can exist?
A very potent reminder of how connected all systems are is what oceanographers have dubbed ‘the Great Pacific Garbage Patch’, also called the ‘Pacific Trash Vortex’: an expanse of mostly plastic waste covering up to twice the area of the continental United States. According to Jennifer Ackerman, writing in Scientific American, “[P]lastic debris floating in the ocean acts as a magnet and sponge for toxic substances, such as DDT, dioxins and PCBs, absorbing concentrations 100 to a million times that of surrounding seawater.”
That waste is the direct result of human dumping, all over the world. With concentrations of plastic micro-debris up to seven times higher than zooplankton, the entire marine food web and any organism interacting with marine life are directly impacted. We all contribute to the plastification of the Pacific, yet we tend not to notice our role or how it affects us.
We tend to bias our view of the needs of others by distinguishing almost reflexively between their needs and our needs, their vulnerabilities versus our strengths. It is psychologically uncomfortable to admit that so much of what we life and what drives the circumstance around us is, in fact, external to our will and that we, therefore, are so often stakeholders suffering the impact of externalized costs.
The Center for Research on Environmental Decisions (CRED), at Columbia University in New York, cites a 2007 national survey, conducted jointly by Yale University, Gallup and the ClearVision Institute, which found that:
respondents believed that climate change was a “very serious threat” for “plants and animals” (52%), “people in other countries” (40%) and “people elsewhere in the United States” (30%). However, far fewer saw it as a “very serious threat” to “you and your family” (19%) and “your community” (18%)
The closer to home, the less willing people were to admit that there could be a direct vulnerability related to an environmental phenomenon, the causes of which appear either difficult to perceive or too widespread to be within their realm of deliberate control.
There are many ways to analyze this result, but there are two key choices for responding directly to its meaning:
The first would be to say climate change is global; it affects us all equally, by virtue of what it is, and that respondents are being willfully ignorant, blinding themselves to the truth of the science and undermining their own future wellbeing. And that may be the case…
But an alternative response would be to accept that there is something true in the perception of greater vulnerability at a remove from the local. It is true that coastal floodplains where half the population of Bangladesh lives will be more vulnerable to sea level rise than the Great Plains of the United States.
Science shows that hurricanes will be more numerous and more severe as temperatures warm, but that does not mean residents of Montana have to worry about a rash of tropical storms. So, people perceive their stake in the matter to be somehow less or more remote than those who live in regions that will be directly impacted by specific side effects of a warmer global climate.
But does that mean they should infer from their geographical remove —relative to extreme weather or pronounced changes in sea level— or their less direct physical vulnerability, that they in fact have no stake in the matter? The question is not whether we have a stake in the state of the global environment; the question is how will it relate to us, and do we have a voice to represent our stake?
Ecological economist Lester Brown, president of the Earth Policy Institute, has just published a report about the impending global food crisis, in the Jan. 10th edition of Foreign Policy. He writes:
As the new year begins, the price of wheat is setting an all-time high in the United Kingdom. Food riots are spreading across Algeria. Russia is importing grain to sustain its cattle herds until spring grazing begins. India is wrestling with an 18-percent annual food inflation rate, sparking protests. China is looking abroad for potentially massive quantities of wheat and corn. The Mexican government is buying corn futures to avoid unmanageable tortilla price rises. And on January 5, the U.N. Food and Agricultural organization announced that its food price index for December hit an all-time high.
Food price spikes prompt street violence and migration, and they can destabilize governments, borders, and regional economies. All of these impacts put a further strain on prices, and on supplies. Responding to, or preparing for, chaos is more costly than negotiating in a stable market environment. Insurers are less able to plan efficiently; economic support structures fail, and suffering that began in a particular region spreads.
Political instability in India affects its neighbors: Bangladesh, China, Sri Lanka, Pakistan, Afghanistan. Kashmir, a territory disputed by two nuclear powers, is already at risk of descending into factional fighting, almost at any time. Multiple Indian states are facing chronic drought conditions, the collapse of their river-fed irrigation systems, and rising hostility over chronic endemic poverty.
Separatist groups in multiple regions of southern and western China may see calamitous increases in food costs as the last straw. Political instability erodes economic sustainability. The collapse of the food supply over a region that encompasses half the world’s population is very much our business: it will increase the number and variety of security threats, and wreak havoc on our domestic food markets.
Brown goes on to explain that:
In the United States, which harvested 416 million tons of grain in 2009, 119 million tons went to ethanol distilleries to produce fuel for cars. That’s enough to feed 350 million people for a year. The massive U.S. investment in ethanol distilleries sets the stage for direct competition between cars and people for the world grain harvest.
If 119 million tons of grain are enough to feed 350 million people a year, and that’s 14% more than the entire population of the United States, what is the effect on the US food supply —both in quality and in terms of affordability— if well more than our entire annual demand for grain is erased from the world food supply by use as fuel?
The answer: supply is depleted, the variety and resiliency of the supply is diminished, the cost of what is available escalates, and negotiations with allies and enemies alike are strained. Human beings seeking sustenance are now competing on world markets with cars for the right to consume grain. It is easy to say that people in poorer, hungrier parts of the world will be more directly impacted, but that’s not the whole story, and it’s not enough information to deal intelligently with the complexity of our world.
We have a stake, even if none of these effects happens on our soil, on our watch. Extreme pressure on our allies is added risk for us. Extreme pressure on our enemies is still more added risk.
Getting back to that thought experiment: Where is the barrier, the line, the absolute threshold between self and other? Can we demonstrate that the body, the self, and the mind, are closed systems, shut off to outside influence? Can we prove that we are not continuous with our environment?
We start by talking about the economic stake we have in climate impacts abroad, because we have the economic muscle to guard against some of the worst physical impacts, at home. But when food is more scarce, and population is booming —expected to surpass 7 billion this year—, and prices are rising, with 1 in 7 Americans living in poverty, doesn’t this economic situation reduce the real nutrition available to each of us?
The ultimate impact is not just economic (abstract) or environmental (around us), it is a physical degradation of our own access to easy nutrition and health maintenance. One of the direct impacts of higher food prices is the comparative “value” of cheaper, highly processed foods, some of which are extremely detrimental to our long-term health.
Climate, agriculture, fuel and food, together with population trends, comprise just one facet of the complex fabric of what unites people, countries and cultures, in our global society. Natural ecosystems depend upon a bewildering degree of complexity to remain dynamic, adaptable, resilient. The degree of elasticity in an ecosystem —its ability to absorb harmful interactions or infusions of matter or energy— determines its “fitness” for survival in the wilds of geological changes over time.
Resilience in the face of complex pressures requires deep and pervasive complexity, at the root and at the growth point, in any system, a diverse spectrum of tools and relations, and a corresponding talent for adaptation, instead of the all-or-nothing, hit-or-miss romantic balladry of monoculture, of uniform essence, of limited relatability.
Resilience requires the ability to perceive and adapt to challenges that come from beyond the one-versus-other, either/or, bipolar mentality that informs phenomena like the Cold War, religious fundamentalism, military rule or master-slave systems. Resilience, in human terms, requires that we begin to think about what stake we have in each other’s humanity.
We live in a world built on the perceived value of externalizing costs, as a way to simplify calculations that shouldn’t be simple, oil the economic machinery of the human landscape, and enrich those able to control such decisions. But if we cannot clearly draw the line that divides internal from external, how can we successfully distribute those costs without repercussion? What we can do is to shift to a more evolved, more sustainable mindset, so that the value stakeholders place in specific methods or outcomes is seen not as an impediment to progress by planners, developers and investors, but rather as meaningful information we all require in order to build a more just, more resilient, more intelligent and democratic world.
So, how do we build a world that puts stakeholder interest ahead of the perceived expediency of externalizing costs? We, first of all, must learn to listen to those we do not think of as identical to ourselves…
 It could be noted here that externalized costs, like any other cost or benefit, filter out through the broader economy, and over time, the cumulative effect of borrowing against those externalizations can become prohibitive; in other words, the costs to the entire economic landscape can become so severe that the cost-benefit efficiency structure internal to the activity in question can collapse.
 Here, hardship refers to increased-but-uncompensated economic pressure.
 Brown’s essay also includes the following: “In Europe, where much of the auto fleet runs on diesel fuel, there is growing demand for plant-based diesel oil, principally from rapeseed and palm oil. This demand for oil-bearing crops is not only reducing the land available to produce food crops in Europe, it is also driving the clearing of rainforests in Indonesia and Malaysia for palm oil plantations.”
 Ecosystem resilience is relevant to the wider environmental theme of this essay, but the concept of ecosystem arose specifically to deal with the fact that natural systems are never closed, but must always interact with other systems.