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.

Towards a regenerative food system.

Almost 40 years ago, in our small farm we were packing bags of vegetables to consumers that wanted good food. After a having spent thirty years with development of the organic sector, the entry of supermarkets and multinational food companies in the organic sector, development of certification systems and  international trade - I am now back in a small farm packing bags of vegetables to consumers who want good food. 

Speech at the European Organic Conference in Talinn 6 September 2017

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Industrial food and farming have been very successful in producing more food, and cheaper food. But it has come at a very high price as you all know. The practices have disturbed and destroyed important biological systems, in particular bio-diversity and the nitrogen and carbon cycles.

While food is abundant, the distribution system, the market, fails to reach almost 1 billion people which are hungry. Even in the rich EU every tenth person can’t afford a proper meal every second day.

More than anything else the global market fuelled by oil and coal and shaped by merciless competition has been the factor that has determined the whole food system, from the prairies to the supermarket shelf, from the production of grain fed chicken to the emergence of fast food chains. The effects on biodiversity, landscape, rural development, and the quality and culture of food of this transformation is immense.

Agricultural policy in the EU as well as in most other countries has by and large supported this trend by a one-sided focus on competitiveness. The result is that 1 out of 4 farms have disappeared in the EU between 2003 and 2013, and almost 5 million full time jobs were lost, one third of all jobs in the agriculture sector. With current trends we will have 2 farms with 150 000 dairy cows each in Sweden at the end of the century.

Productivity in farming has increased quicker than in most other sectors. Farming has become a very capital intensive business where it often cost 1 million euro to create a full time job. The average Danish farm represent a capital investment of 2.5 million Euro, Dutch farms almost as much.

The combination of high capital costs, constant reduction of number of farms and farm workers and low profitability together explains well why so few young people enter the farm sector. As a matter of fact, in the modern economies many more people work in restaurants and cafés than in farming and food industries.

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As a reaction to the development, organic farming, local foods, slow food, fair trade and alike has developed. And they play a very important role, both as agents of innovation and for their actual results.

We have come a long way and should be proud of the accomplishment.

However, these systems are, by and large, still subject to the same market imperatives of competition, profit and constant labour productivity increase. And increasingly so the more successful they are.

This limits their transformational power. Both Thomas Fertl and Nic Lampkin said that organic is more, more than regulations and more than markets, and I think most of you agree. But we have spent most of the sector’s energy in government regulations and conventional markets the last decades. Both are institutions we need to relate to if we want to be relevant and live in the real world. But they don’t carry the soul of organic and they are not fostering innovation. They are reflections of the past and not the image of the future.

A truly regenerative food and farm system will close loops of energy, nutrients and most importantly meaning and culture. It must reconnect people to the land and to farming.

We need to think carefully which are the best paths to reach there.

Let me take an example:The value of the ecosystem services and the external costs of a product can be higher than the commercial value of the product itself.  FAO calculated external costs for the four most important crops and found that they were 1.8 times the farm gate prices for the same crops. Full and fair payment to farmers for ecosystem services and inclusion of costs for environmental damage sounds like a good idea. Who could object to that?

I could. For many reasons.  

To calculate the real cost of production is not at all simple, and the calculated cost of using one method, say a 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 also require an administrative system and controls which would make the current CAP, and organic regulations, look like a kindergarten.

But 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.

So while the ambition is a good one - to reward good stewardship and discourage harmful practices - we need to think carefully about what we are asking for and how it can be realised.  The organic regulation is another example of how a good intention easily can become an obstacle.

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Technology and natural science are great and there is still a lot to do there. We need to understand better the whole micro cosmos of the soil, as well as the linkages between the soil and the health of our bodies.

But, is it lack of knowledge that is the main limitation for farmers to produce sustainably? I believe most farmers do know how to farm sustainably. But there are economic and sometimes regulatory hurdles to the best behaviours. Examples, specialisation and dropping rotations.

Some of the major challenges as well as the possible innovations are found in the political, social and economic arenas. It is encouraging to see that there is a lot of such innovation going on, even if many of them are taking place outside of the “certified organic” straight-jacket.

And perhaps we should not be so bothered about that. After all, certification and regulations are tools for the conventional market and they will not be the relevant tools when we seek to develop new relationships.

Organic, regenerative farming is a very important counter narrative to the eco-modernist narrative of GMOs, lab meats and vertical hydroponic farms, where the ideal is a food production that is land-less, sweat-less and dirt-less. In the end it is also soul-less, culture-less and human-less.

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IFOAM EU propagates for organic on every table and Fair Play – fair pay and it wants to improve, inspire and deliver. And it promotes the transformation of the food system.Cornerstones for such new food systems need to be:

•       Food as a human right rather than a commodity
•       Food as culture rather than the intake of prescribed nutrients
•       Food producing resources – land, water, seeds and breeds – should be seen as common goods rather than assets which can be traded and speculated in
•     New relationships in agriculture and food built on cooperation rather than competition
•    Food and agriculture based on local resources and linkages rather than on international trade and global supply chains 
•    Farming is not only seen as production of food but as much as planetary stewardship

Let us apply the organic principles of health, fairness, ecology and care on the whole food system and not only on the farms. 

(Speech at the European Organic Conference in Talinn 6 September 2017)

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