Leverage Point 6: Externalities and Telecoupling
Part of the Levers and Leverage Points blog series.
Purchasing a product rarely involves thinking in-depth about where it originated or how it was made. This ‘out of sight out of mind’ mentality on the social and environmental costs of a product encourages consumers to overlook the impacts of their consumption. Goods purchased are commonly produced in foreign nations, who in turn bear disproportionate impacts of production. Internalizing negative impacts requires corporations and consuming nations to take responsibility for the external costs of production, yet such attempts have thus far remained limited.
To alleviate the pervasive negative impacts of resource extraction and production, businesses and jurisdictions must internalize the negative costs of—and actually fix—the environmental harms from supply chains. This entails globally consistent carbon pricing and mitigating the degradation of ecosystems and their services—where funds raised actually remove pollutants and restore ecosystems. Only such strong actions would eliminate the current global race to the bottom (whereby nations feel compelled to retain weak environmental and social standards or further weaken them to retain industrial investment) and its associated ‘out of sight out of mind’ mentality.
‘Externalities’ are the costs or benefits caused by one party, but incurred by a third unrelated party. The externalities referenced here are negative environmental and social externalities resulting in the ‘cost’ of environmental and social degradation. These negative externalities are not paid for by the producer (i.e., not included in the production cost or sales price of a product) and represent an uncompensated ‘external’ cost, paid for by others. This may present the false pretense that the producer is operating at a more sustainable level. In reality though, the system of production is placing additional pressure on the producing jurisdictions. An example would be the air pollution from a Canadian-owned factory located in another country that causes adverse health effects in surrounding communities.
‘Telecoupling’ refers to connections involving people and natural systems. The term draws attention to the fact that many of these impacts involving people and natural systems are distant, diffuse, and delayed—i.e., far away in both space and time. Thus whereas some schools of economic thought (e.g., Coasean) assume that externalities can be addressed by negotiations between only the affected parties, this is almost never the case with the many externalities that are distant, diffuse, or delayed.
Many of the ecological and social challenges experienced by nations arise from the high demands of the modern consumerism society. This links back to Leverage Point 4, Inequalities, where—in response to higher demand—some businesses look for the inexpensive option and exploit disadvantaged peoples and communities. As a result, the nations least responsible for the current climate crisis often bear the brunt of the impacts, whereas the wealthy nations that historically contributed the most suffer the least.
One way for nations to begin reducing negative externalities is to adopt a carbon pricing approach to address climate change. Carbon pricing often refers to one of two approaches: carbon taxes and cap and trade. Because these systems address only global climate externalities, they might even exacerbate other environmental externalities (e.g., biodiversity and land-use change; see final paragraph). However, given their importance in the fight against the climate crisis, we discuss them thoroughly below.
A cap-and-trade system places limits to greenhouse-gas pollution and writing allowance permits for companies. A company can buy carbon allowances, or sell excess allowances to other companies. If governments decrease the caps over time by buying allowances, cap-and-trade can help nations decrease their emissions. However, cap-and-trade systems are complex and prone to loopholes. The extent to which a cap-and-trade system succeeds largely depends on the stringency of the allowances and they are also vulnerable to influence from lobbyists (see Lobbying, Astroturfing and the Revolving Door). In many cases, companies argue for large initial caps, such that the system cannot reduce emissions without great government expense.
Carbon taxes place a charge on companies and products for every ton of carbon produced. One advantage of this system is that carbon prices are set stably (unlike emissions credits from cap-and-trade), which reduces the risk of fluctuating prices. Since producing less carbon means less taxation, carbon taxes also provide an incentive to reduce carbon below target emissions. The biggest advantage of the carbon taxation system though, is that it is more easily implemented than the cap and trade system and therefore offers faster mitigation. However, carbon taxes are not without challenges of their own. The pushback against additional taxation is strong and can become a rallying point for political opposition. Consequently, carbon taxation systems are also often riddled with exclusions, such as certain exports (‘trade-exposed industries’).
Since natural systems are not bound by human borders, changes in a few progressive nations are not sufficient to halt the climate crisis. This creates a need for nations to incentivize other nations to adopt carbon pricing mechanisms, which may be partly achieved through what is called border-carbon adjustments (BCAs; also called carbon-border adjustments). BCAs are a trade policy that places fees on carbon-intensive imports as a way of accounting for disproportionate carbon pricing across jurisdictions (i.e. exposing imports to domestic carbon pricing). By leveling the playing field of carbon pricing across borders, BCAs can also help reduce what is known as “carbon leakage,” where companies relocate from nations with strict emissions policies to those with more lenient ones.
Beyond carbon and the climate crisis, it will also be important to address negative social and ecological externalities such as through land-use change like deforestation, which causes biodiversity and soil loss, contributing to mudslides and floods. These other externalities can be addressed partly through supply-chain agreements (e.g., Roundtable on Sustainable Palm Oil) combined with jurisdictional certification and national regulations (including over imports). All of these approaches can encourage or require companies to improve their production practices to reduce their negative externalities.