A Positive For Every Negative

Towards a Solution for Climate Catastrophe

This post was written by Christopher Howell, a first year student in PPE and co-editor of this blog. For this new wave of the blog we’re eager to spread big ideas and critical thinking. If you’ve got a contribution related to politics, philosophy and economics, please don’t hesitate to message us at ltuppeblog@gmail.com.


Climate change, pollution, habitat destruction, the loss of natural beauty, all these processes, which we’ll call Ecological Cost for convenience, are a negative externality: a cost that is not priced into the transaction [1]. The miner extracts coal, the utilities company generates electricity, the end consumer turns on their TV. At no point does anyone pay for the negative impact. Yet the consensus is there’s a grave cost down the road, compounded by the day, and when the reckoning arrives it’ll be too late.

The correct impulse is to impose this cost on the economy, to press for more sustainable practices, internalise the externality. Yet the mechanism isn’t immediately obvious, and attempts to date have been flawed [2].

This essay is a humble attempt to invent a scheme for tying negative externalities to positive processes, to raise the cost of bad practice and directing funds towards sustainability.


The Ecological Cost Declaration

First of all, we need a map of ecological cost in the economy.

We begin by asking the very people doing the damage: what is the damage? Who but the polluters themselves can be expected to know pollution in anything approaching detail? Write up a bill and declare that every business, initially those large enough to afford consultants, should make publicly available an Ecological Cost Declaration (ECD).

An ECD will list the firm’s practices and their ecological cost, measured in a multiple of a standard unit, perhaps equivalent to emitting a tonne of carbon, or felling an old growth tree.

It is of course expected that firms will prefer to lie and cheat to maximise profits, and no scheme can perfectly circumvent this. The key will be to make compliance less risky than malpractice.

To begin with, the scheme is set up to mature over a transitional grace period, say 5 years [3], at the end of which legislators are empowered to make changes to ECDs. This incentivises firms to anticipate these changes and be proactive in realistically addressing Ecological Cost, seeing that if legislators don’t have a robust understanding of the realities of their business they’re likely to make unrealistic demands and bring ruin to the industry.

Further, the fine for malpractice should be constrained in the early stage, so that firms only pay an arbitrarily small percentage of the fine, with the risk rising incrementally over time. The full sum is stated to underline consequences in future. This allows the legislators and firms to learn together and criticise without fear. Firms can opt to pay the fine for non-compliance in protest, meaning the scheme will not begin to effect the workings of the economy until it is coherent enough to do so constructively.

When the scheme is fully implemented, the final fine should be set large enough to make insurance necessary to avoid financial ruin. This empowers insurance companies as the uniting force of economic interests, moving much of the burden of auditing on to insurers, who will seek to reduce risk and make a profit. The insurers will also be able to provide generic ECDs to smaller firms, increasing the scope of the scheme.

The final mechanism to push compliance is a principle of consistency. Within an industry the ECDs should be roughly the same, and deviation the main signal used by auditors when deciding who to investigate. In the case of a company trying to understate their ecological cost, they will incur a fine. Where a firm is being more accurate, doing the right thing, the industry as a whole will be compelled to adjust.

This also has the advantage of protecting more environmentally conscious companies from being pushed out of the market by higher costs. Consumers will opt for cheaper products of the same quality, so ECD consistency removes market pressure against conscientiousness.


Ecological Cost Credits and Mitigators

Next, we need to fix the damage already done.

To pay for this, let a unit of Ecological Cost in a firm’s ECD be a debt in a special pseudo-currency, the Ecological Cost Credit (ECC). ECCs represents environmental assets and shares in ecological cost mitigation schemes, and are created by new firms addressing Ecological Cost. We’ll call these firms Mitigators. ECCs are exchanged for regular currency, funding the mitigation scheme.

Mitigators are not regulated up front, instead their ECCs are subject to retroactive reevaluation by the auditing agency. This greatly reduces the initial overhead of starting a firm to address ecological cost, and puts the burden of preventing fraud and getting value for money onto the polluters. With minimal hassle, communities would be able to put together modest funds for local projects.

ECCs are given scarcity by limits to the net value of ECCs issued in a category, adjusted by legislators. This creates diminishing returns, where inflation makes each ECC worth less the more are created. The least efficient Mitigators are priced out.

One positive side effect is that Mitigator firms act as means of wealth redistribution. In effect, profits from large corporations are channelled to smaller mitigator firms which generate employment, flattening the wealth curve. Further, private individuals now have a way to confidently set their money towards helping the environment. Leveraging powerful business interests, the consumer will enjoy outsized protection against fraud.


Auditors

Auditors should be part of a new government agency, overseen by a panel of experts with some industry representation, tasked with auditing ECDs and ECCs, as well as conducting empirical studies of real world outcomes to inform legislators.

The auditing agency is kept small, with the lowered risk of audit counterbalanced by outsized consequences. This is necessary, firstly to prevent bureaucratic bloat and self-interest, and open to serious public and legislative scrutiny. Secondly, this makes the auditors alike to a supreme court. In this metaphor the insurance companies, empowered by firms pooling together their risk, act as lower courts. In order to function, there will be need to be a strong understanding between the auditors and insurers.

Auditors must also be mindful of firms being out-priced by foreign firms that don’t price in their externalities. If tariffs [4] are not raised to defend domestic goods, much of the economy will close down and the end result will be consumers buying goods shipped from polluting nations via polluting cargo ships.


The Role of the Legislator

At the end of the grace period, legislators will be empowered to find the balance between ecological and economic cost that the voting public find appropriate. It is natural that firms will have biased their ECDs in their own favour, so legislators will have to determine how best to compensate. With the landscape roughly mapped out by polluters, and mitigation already underway, there is hope that a way forward will emerge.

It will be incumbent on legislators to be mindful of adverse effects in their electorates, and advocate for changes in parameters where they find the effect unacceptable. As an example, if it is most cost effective for farmers to turn their land over to nature where the land is still within the margin needed to feed the population, the reward for reforestation, or the Ecological Cost of farming, must be reduced.


Conclusion

Managed effectively, the economic cost will be asymmetrical, effecting non-vital elements that society can afford to economise, rather than what it cannot. The ecological benefit would be limited only by our imagination. Trees could line every street.

I hope this scheme has the seed of something possible. If you have any thoughts, suggestions, improvements, I’d very much like to hear from you. Thank you for your time.


This post was written by Christopher Howell, a first year student in PPE and co-editor of this blog. For this new wave of the blog we’re eager to spread big ideas and critical thinking. If you’ve got a contribution related to politics, philosophy and economics, please don’t hesitate to message us at ltuppeblog@gmail.com. You can find the old blog here. Please subscribe for regular thoughts and insights from La Trobe’s PPE Society.


Notes

[1] Investopedia’s definition of externality.

[2] For example, information on the failure of the 2011 Carbon tax can be found here and in the attached bibliography. The carbon tax is a contentious issue for many, so I’ve chosen to avoid addressing it in this essay.

[3] While it’s true that we need to address climate change as quickly as possible, we also need to be mindful of the time businesses take to change their practices. R&D, retraining, building infrastructure, all need to take time.

[4] All the problems with tariffs apply in this case. See this report by the Council on Foreign Relations for more detail.