Wednesday, September 20, 2017

Why True Cost Accounting is not a good concept for markets and public policy

The value of ecosystem services associated with farming can be substantial. In 2012,  the estimated value of production from Japanese agriculture was 9.5 trillion Yen (some US$120 billion at 2012’s rate) while the value of the ecosystem services were estimated to 8.2 trillion Yen, i.e. almost as much as the production value.

The external costs of farming can be equally substantial. According to FAO’s report Natural Capital Impacts in Agriculture the external costs of global production of maize, rice, soybean and wheat are 1.7 times higher than the product value.  

Lately, there are several initiatives working with the concept ot True Cost Accounting, e.g. TEEB, The Sustainable Food Trust and the company Eosta

Full and fair payment to farmers for ecosystem services and other public good as well as the inclusion of costs for environmental damage sounds like a good idea. Who could object to that?

I could.  In short; 

-To calculate the real cost of production is not at all simple, and the calculated cost of using one method, say 1 kg of synthetic fertilizer, will differ enormously in different parts of the world, even within the same country.
-All valuation of nature is subjective. In a hugely unequal world it will be the priorities of the wealthy that determines the values.
-It would require an administrative system and controls which would make the current CAP, and organic regulations, look like a kindergarten.
-The major objection to true cost accounting is that it puts even bigger pieces of nature under the rule of the market, a trend that I believe is contrary to the desired development.

A bit longer:

One can question the benefits of valuing ecosystem ser­vices in monetary terms, especially as the most valuable of these services have unlimited value and no known alternative.

As the value of ecosystem services and the external costs together are much higher than the product value, there will be increasing competition between the provision of food and the provision of ecosystem services. It will be the priorities of the wealthy that determines the value. We can today already see that rich people compensate for their carbon emissions by appropriation of poor people’s resources, e.g. by tree planting in Africa. This is done both on a individual level and in intergovernmental agreements.

There is also the question of how we perceive nature. It seems that we increas­ingly confuse ‘value’ and monetary values, and there is a case for us avoiding underwriting this confusion by assigning prices for natural and social capital.

To define the external cost of a certain practice on a specific farm is simply not doable. The cost of the use of 1 kg Nitrogen is probably zero in some parts of the world and very big in others. The report Natural Capital Impacts in Agriculture concludes that external costs of wheat production in Germany is almost nine times higher than the product value, mostly owing to the use of fertilizers. In Canada the external costs of wheat production is “only” 1,3 times higher than the product value. If these external costs were included wheat farming in Europe would totally cease.

In a complex system such as farming, the internalization of all social and environmental costs and compensation for ecosystem services or other public goods would only be possible with very extensive and extremely detailed regulations. Just look at the European Union’s agri-environmental program which is but a small step in this direction. Such a system would probably still be neither fair, nor efficient, and would, in many ways, represent a control of farms more severe than under Soviet rule.Such a system would also be totally alienating for farmers and furhter strengthen the dominance of "experts" in the farm sector.

There are no indications that markets for ecosystem services will be based on any of the scientific calculations that are now made to show the value of these services. The market value will be very differ­ent from the real value or the use value. This can be seen very well in the price for carbon credits, which has no relationship to the cost of climate change. 

Moreover, the payments to farmers for providing public goods will not reflect the value of the public good but the compensation the farmer needs to make the required effort – which may be considerably higher or lower than the value of the services themselves. (The WTO agreement on agriculture explicitly prohibits compensation to farmer for the “real value”, something that most proponents seems to be unaware of).

The commercialisation of farming led to the privatization of land, water, genetic resources and knowledge. A similar development can be expected when ecosystem services are going to be commercialized and external costs can be offset by measures on other places. Payments for ecosystem services leads to markets for ecosystem services which leads to privatization of ecosystems.

“It is a fantasy to believe that we can devise a rigged market sys­tem in which ‘corrected’ prices would tell the whole truth about the opportunity costs of everything in the world, and automatically optimize the scale of the economy relative to the ecosystem, as well as the allocation of resources within the economy” wrote Herman Daly, the creator of the concept of a steady-state economy.

A governmental study on ecosystem services in Sweden concludes that economic valuation and compensation may, in many cases, not be the best way to maintain ecosystem services. It says that monetary valua­tion is not reliable or is completely unsuitable for complex situations that involve numerous ecosystem services, such as soil formation, water regulation and pollination. This, in a nutshell, is farming. 

It seems foolish to rely solely on market-based measures to tackle the biodiversity issues and ecosystem services associated with farming. Instead of fiddling with hundreds of different subsidies or fees that regulate what farmers should or should not do, we need to look at the whole system.

Farming is the most significant human management system of the planet; the future of humans on the planet largely rests upon how we manage our farmscapes. If we accept this then it has profound implica­tions for agricultural policy for it means that ‘managing the planet’ is almost as an important task of the farming system as supplying food. But farmers are not very oriented to being land stewards through the market system. On the contrary, modern day farming has removed much of the land husbandry and stewardship which was previously an integral part of a regenerative farming system. It is not realistic that ‘the market’ will take care of managing the planet. It is also not desir­able, as the Earth is our common home and responsibility and should be managed as such.