Full-cost Pricing: an Impractical Solution

Over the past several years, we have seen a number of proposals put forward by environmentally active academics and think tanks calling for the implementation of concepts such as environmental policymaking with full-cost pricing, which includes policies and legislation that adjust market prices to reflect the direct costs of goods and services and their impact on so-called "natural capital" and "ecosystem services."

The concept of eliminating all externalities (be they positive or negative) within economic systems is desirable. However, it is not presently practical, and any intermediate system will be subject to substantial errors. The question of how to value the costs of so-called pollution and the benefits from ecosystem services has challenged researchers for some time, and the more work that is conducted, the more questions and uncertainties arise. We are farther from the answers we need than ever, and such is the paradox of science: the more you learn, the more you realize you do not know.

Take climate change, which plays a central role among the full-cost pricing advocates. Despite an apparent consensus in some sectors, there remain valid and significant uncertainties regarding whether anthropogenic climate change is occurring and, if so, to what extent. Leaving that aside, let us assume that anthropogenic climate change is occurring. The American economy is the American economy, and its fiscal policies must be restricted to its economy (albeit within the larger international system with which it interacts). What will be the economic impact in the United States from specific quantities of greenhouse gases being emitted by the USA? Good question. I have not seen any reliable estimates. And since there are local and state economies that must also presumably work under the full-cost pricing umbrella, what will be the economic impact in each specific locality of the USA from specific quantities of greenhouse gases being emitted by that locality over a specific period of time? Another good question. No answers so far. What about externalities forced upon America by other nations? How do we quantify these? More questions.

What about the positive economic impacts of climate change? Full-cost pricing is full-cost pricing. It cannot only be based on negative externalities. Since much of the USA is a northern country, one could imagine many positive economic benefits from a generally warming climate. How do we determine such positive impacts and include them in the full-cost pricing model? Should we consider carbon emission payments to those who emit carbon into the atmosphere which positively influences the economy -- for example -- of Billings, Montana? More questions, and absolutely no foreseeable answers.

What about the significant spatial heterogeneity in both the direction and magnitude of the climate responses to anthropogenic climate change? There is currently very poor predictivity and large uncertainty in global climate models, never mind our even poorer capacity to downscale the global modelling results onto small regions. One small portion of a region may not exhibit any significant climate change, whereas a nearby region may change substantially in one direction, and another nearby region may change substantially in the opposite direction. All this fine detail matters. Industries are not distributed evenly across the USA; instead, they are heterogeneously localized. To produce any type of reliable base upon which to construct a full-cost pricing framework, we would need reliable predictions of future climates for decades/centuries into the future for each and every locality in the USA under all possible emission regimes, and we would need to couple this to fine resolution models of the American economy. This is also currently impossible, and any type of intermediate effort would be effectively equivalent to sticking one's finger up in the air and making fiscal policy by the manner in which the wind is blowing at that instant. Not sensible, and more accurately, it is economically dangerous. Such approaches reek of central planning efforts, and ignore the brilliance of the invisible hand of the market.

What about other forms of pollution besides the relatively simplistic (from a scientific perspective) greenhouse gases? The situation gets worse. Take a common contaminant: mercury. Its toxicity varies by concentration, and speciation, and route of exposure, and... the list goes on. So not all equal masses of mercury are equal from a full-cost pricing perspective. The science is nowhere near being able to answer such fiscal questions as to what the costs are of emitting a single contaminant from a particular location. And location matters. One kilogram of mercury emitted to the atmosphere in North Dakota has a very different fiscal impact than the same kilogram of mercury dumped into the Columbia River near Portland, Oregon, versus the same kilogram of mercury released into the atmosphere of downtown New York City. And what about the synergistic and/or antagonistic aspects of mixtures of contaminants? The science is this area is in its utter infancy, to say the least. Looking at a contaminant in isolation is environmentally incoherent, which would lead to economic incoherence under a simplistic full-cost pricing model erroneously constructed on such simplistic environmental views.

What about water use? What is the economic cost of a user withdrawing 0.31% of an average annual streamflow? Who knows? Again, the answers are highly site- and time-specific: the devil is always in the details for full-cost pricing of environmental degradation or environmental services. Will we ever be able to reliably estimate the true ecological cost absent externalities of a user -- say -- taking 3 cubic meters of water out of the Ohio River at 4:22 am on July 3 of some arbitrary year? Maybe, maybe not. But we are a very long way from that capacity, and -- unfortunately for the full-cost pricing proponents -- that level of detail is needed in order for any fiscal policies to be remotely grounded in reality. We could make a situation disastrous via incomplete full-cost pricing models. The old adage of not doing it unless you plan on doing it right would apply.

We also have to consider all the externalities regarding so-called green technologies. Take solar panels as an example. They will often cover the landscape, and that has a cost. They are made of materials, which all exert environmental costs during production, assembly, distribution, etc. They are often made in other countries, often in countries such as China where the odds of obtaining reliable pollution emissions data for constructing the solar panels approaches zero. And the questions go on, and on, and on ... and they also apply to wind energy, tidal energy, etc. Who knows, perhaps when all the information is at hand we will find that burning carbon for energy (even if it leads to significant climate change) costs us less in terms of full-cost pricing based environmental damage than if we were to obtain an equal amount of energy (or even less) from so-called renewable sources? Everything we do has an impact, and under the full-cost pricing approach, it must all be rigorously quantified or the resulting models will likely suffer from GIGO syndrome (i.e., garbage in-garbage out).

What about international monetary transfers? Pollution knows no boundaries. What about regions of the planet not under the rule of a single nation-state? It all has to be included in the full-cost pricing models. And how do we verify the data from other countries?

Overall, full-cost pricing approaches are unbelievably onerous in practice. An opponent of such approaches could, given the limited information we have at hand today regarding how environmental systems operate and respond to various perturbances, endlessly poke holes in any type of quantitative models. Sure, qualitative discussions have a feel-good sense to them, but until a detailed report appears with full appendices of all calculations and input/output variables, assumptions, etc., this is an area of study that warrants no further serious policy attention. The notion of anyone placing serious merit in a particular price for American carbon emissions is ridiculous, and when we move beyond carbon emissions (which have attracted the most attention and research efforts) to all the other interactions humans have with their environment, the situations get far more nebulous. Anyone that attempts to claim that we have anywhere near the required data to feed into such full-cost pricing models is not accurately assessing the state-of-the-art.

Sierra Rayne holds a Ph.D. in Chemistry and writes regularly on environmental, energy, and national security topics. He can be found on Twitter at @rayne_sierra.