THE EDITORIAL PAGE — Pricing the environment: pursuing

In the debate on the environment, the concept of full-cost pricing has achieved widespread popularity. The essence of the concept is that prices of goods and services should reflect the full cost of any impact on the natural environment. The greater the impact (considering the level and type of pollutant), the higher the costs to be included in prices, with zero cost implying zero impact on the environment.

In other words, prices are to account for environmental degradation (that is, the use of environmental resources such as air and water) and, in so doing, provide an incentive not to pollute.

Since lower costs will be associated with less pollution, full-cost pricing policies are expected to stimulate new behavioral patterns, products and technologies. They will also avoid burdening future generations with the residual effects of unremediated pollution.

Although the idea commands broad intuitive appeal, rendering it a useful political slogan, there are profound problems with both the implementation of the idea and its underlying assumptions. The risk is that it will become the basis of government policies before its applications and implications are sufficiently understood.

This is not to suggest that public policy in this area should await complete analysis and a consensus on the perfect methodology. However, given the social, competitive, trade and possible environmental consequences that could result, the analytical gaps need to be addressed on a reasonably urgent basis. It is clear that “cradle-to-grave” life cycle analysis is necessary to determine the full environmental impact and costs of a good or service. In this context, it is also clear that different chemicals and products will have different environmental costs and benefits at different stages during their life cycle.

The problems of estimating and comparing different impacts and risks among different products for environmental costing purposes are immense. Yet this would be necessary to ensure fairness in the application of full-cost pricing . . .

Would full-cost pricing apply to all environmental impacts, regardless of the level of risk, the costs or benefits? For example, given that financial resources are limited, should full-cost pricing apply to materials whose impact poses minor risks, is within the absorptive capacity of the environment, or can be managed in alternative and more cost-effective ways? If zero risk is not a practical objective, then what level of risk would be fair and reasonable and applicable to all activities and materials? Without objective criteria and their fair application, a high degree of subjectivity would result, allowing political and economic bias to influence decisions arbitrarily . . .

Attempts are being made to apply the full-cost-pricing concept at the macro-economic level, that is, in the calculation of national accounts where gross national product would be reduced by the costs of environmental damage. It is argued that the depletion of natural resources should also be costed as environmental damage. Indeed, the approaches being considered to date have shown lack of understanding of how mineral resources — their measurement, values and sustainability — could successfully and usefully be reflected in revised national accounts. Again, much work remains before it is applied to national accounts. . . .

Although it is accepted that minimizing environmental damage will involve the pricing of environmental resources, and while some progress has been made in understanding how this may be achieved in an economically efficient manner, ultimately prices in a democratic society must be established in the marketplace.

— From the initial “Newsletter” of the Ottawa-based International Council on Metals and the Environment.