Tag: environmental externalities

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The economics of fast fashion

For many goods and services, economists argue that relatively unregulated markets often do a pretty good job in delivering desirable outcomes from society’s view point.

However, for these desirable outcomes to occur, certain conditions need to be present. One of these is that all the benefits and costs of consuming and producing the good/service must be experienced/incurred by the buyers and sellers directly involved in the transaction: i.e. there are no externalities. The market can still work effectively if people outside of the transaction are affected (i.e. third parties) but the impact occurs through the price mechanism.

The fast fashion industry

Fast fashion refers to designs and trends that rapidly pass from catwalks and designers to retailers. The clothes sell for low prices and in high quantities. The business model relies on regular purchases and impulse buying. It is particularly popular in the UK where annual clothing consumption per capita is significantly greater than in other European countries – 26.7kg vs 16.7kg in Germany and 14.5kg in Italy. On average, people in the UK have 115 items of clothing. Unsurprisingly, 30 per cent of these garments have not been worn for at least 12 months.

Externalities in fast fashion

There is lots of evidence that the fast fashion market fails to meet the condition of no externalities. Instead, it generates lots of external costs across its whole supply chain that do not affect third parties through the price mechanism. For example:

  • Growing cotton requires large amounts of water. Some estimates suggest that on average it takes 10 000 litres of water to cultivate just one kilogram of cotton. As water is a common resource (rival and non-excludable), its use in cotton production can exceed socially desirable levels. This can have serious consequences for both the quantity of drinking and ground water and can lead to previously fertile land being transformed into arid regions that are too dry to support vegetation.
  • Growing cotton also uses large amounts of pesticide. Some estimates suggest that 6 per cent of global pesticide production is applied to cotton crops. Extended contact with these chemicals can cause illness and infertility. It also has a negative impact on the long-term productivity of the soil. For example, the chemicals destroy microorganisms, plants and insects and so decrease biodiversity.
  • The manufacture of synthetic fibres such as polyester has a smaller negative impact on the use of water and land than the cultivation of a natural fibre such as cotton. However, because it is derived from oil, its manufacture generates more CO2 emissions. One study compared the CO2 emissions from producing the same shirt using polyester and cotton. The former generated 5.5kg whereas the latter produced 2.1kg.
  • The waste water from the use of solvents, bleaches and synthetic dyes in the manufacture of textiles/garments often flows untreated into local rivers and water systems. This is especially the case in developing countries. Estimates suggest that this is responsible for between 17 and 20 per cent of industrial global water pollution.
  • There are excessive levels of textile waste. This can be split into producer waste and consumer waste. Producer waste consists of 10–15 per cent of the fabric used in the manufacture of garments that ends up on the cutting room floor. It also includes deadstock – unsold and returned garments. For example, Burberry admitted that in 2017 it incinerated £28.6 million of unsold stock. In the same year, UK consumers disposed of 530 000 tonnes of unwanted clothing, shoes, bags and belts. This all went for landfill and incineration.
  • Textiles are one of the major sources of microplastic pollution and contribute 35 per cent (190 000 tonnes) of microplastic pollution in the oceans. A 6kg domestic wash can release as many as 700 000 synthetic fibres.

Addressing the externalities

The House of Commons Environmental Audit Committee published a report on the fashion industry in February 2019. One of its key recommendations was that the tax system should be reformed so that it rewards fashion companies that design products with lower environmental impacts.

The UK government has tended to focus on the use of plastic rather than textiles. For example, it introduced a charge for single use carrier bags as well as banning the use of microbeads in rinse-off personal products and plastic straws/stirrers.

In April 2022, a new tax is being introduced in the UK on the plastic packaging of finished goods that is either manufactured in the UK or imported from abroad. The rate, set at £200 per metric tonne, will apply to packaging that contains less than 30 per cent of recycled plastic.

One specific proposal made by the Environmental Audit Committee was for the government to consider extending this new tax to textiles that contain less than 50 per cent recycled polyester. A recent study found that just under 50 per cent of clothes for sale on leading online websites were made entirely from new plastics.

The committee also called for the introduction of an extended producer responsibility scheme. This would make textile businesses responsible for the environmental impact of their products: i.e. they would have to contribute towards the cost of collecting, moving, recycling and disposing of their garments. It could involve the payment of an up-front fee, the size of which would depend on the environmental impact of the product.

In its Waste Prevention Programme for England published in March 2021, the government announced plans to consult with stakeholders about the possibility of introducing an ‘extended producer responsibility scheme’ in the textile industry. The House of Commons Environmental Audit Committee is also carrying out a follow-up inquiry to its 2019 report.

Articles

Government and Parliament documents and reports

Questions

  1. Using the concepts of rivalry and excludability, define the concept of a common resource.
  2. Explain the ‘tragedy of the commons’ and how it might apply to the use of water in the cultivation of cotton.
  3. Draw a diagram to illustrate how negative externalities in consumption and production lead to inefficient levels of output in an unregulated competitive market.
  4. Using a diagram, explain how imposing a tax on producers of textile products that contain less than 50 per cent recycled polyester could reduce economic inefficiency.
  5. Explain the potential limitations of using taxation/regulation to address the pollution issues created by the fast fashion sector.
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UK–Australia trade deal: benefits and costs

The UK and Australia are set to sign a free-trade deal at the G7 summit in Cornwall on 11–13 June. This will eventually give tariff-free access to each other’s markets, with existing tariffs being phased out over a 15-year period. It is the first trade deal not based on an existing EU template. The government hopes that it will be followed by trade deals with other countries, including New Zealand, Canada and, crucially, the USA.

But what are the benefits and costs of such a deal?

Trade and comparative advantage

The classic economic argument is that free trade allows countries to benefit from the law of comparative advantage. According to the law, provided opportunity costs of various goods differ in two countries, both of them can gain from mutual trade if they specialise in producing (and exporting) those goods that have relatively low opportunity costs compared with the other country. In the case of the UK and Australia, the UK has a comparative advantage in products such as financial services and high-tech and specialist manufactured products. Australia has a comparative advantage in agricultural products, such as lamb, beef and wheat and in various ores and minerals. By increasing trade in these products, there can be a net efficiency gain to both sides and hence a higher GDP than before.

There is clearly a benefit to consumers in both countries from cheaper products, but the gains are likely to be very small. The most optimistic estimate is that the gain in UK GDP will be around 0.01% to 0.02%. Part of the reason is the physical distance between the two countries. For products such as meat, grain and raw materials, shipping costs could be relatively high. This might result in no cost advantage over imports from much nearer countries, such as EU member states.

But modern trade deals are less about tariffs, which, with various WTO trade rounds, are much lower than in the past. Many imports from Australia are already tariff free, with meat currently having a tariff of 12%. Modern trade deals are more about reducing or eliminating non-tariff barriers, such as differing standards and regulations. This is the area where there is a high degree of concern in the UK. Import-competing sectors, such as farming, fear that their products will be undercut by Australian imports produced to lower standards.

Costs of a trade deal

In a perfectly competitive world, with no externalities, labour mobile between sectors and no concerns about income distribution, eliminating tariffs would indeed provide an efficiency gain. But these conditions do not hold. Small farmers are often unable to compete with food producers with considerable market power. The danger is that by driving out such small farmers, food production and supply might not result in lower long-run prices. Much would depend on the countervailing power of supermarkets to continue bearing down on food costs.

But the question of price is probably the least worrying issue. Meat and grain is generally produced at lower standards in Australia than in the UK, with various pesticides, fertilisers and antibiotics being used that are not permitted in the UK (and the EU). Unless the trade deal can involve UK standards being enforced on products produced in Australia for export to the UK, UK farmers could be undercut by such imports. The question then would be whether labelling of imported food products could alert consumers to the different standards. And even if they did, would consumers simply prefer to buy the cheaper products? If so, this could be seen as a market failure with consumers not taking into account all the relevant health and welfare costs. Better quality food could be seen as a merit good.

Then there are the broader social issues of the protection of rural industries and societies. Labour is relatively immobile from farming and there could be a rise in rural unemployment, which could have local multiplier effects, leading to the decline of rural economies. Rural ways of life could be seriously affected, which imposes costs on local inhabitants and visitors.

Trade itself imposes environmental costs. Even if it were privately efficient to transport products half way around the world, the costs of carbon emissions and other pollution may outweigh any private gains. At a time when the world is becoming increasingly concerned about climate change, and with the upcoming COP26 conference in Glasgow in November, it is difficult to align such a trade deal with a greater commitment to cutting carbon emissions.

Articles

Questions

  1. Why might the UK government be very keen to sign a trade deal with Australia?
  2. Does the law of comparative advantage prove that freer trade is more efficient than less free trade? Explain.
  3. What externalities are involved in the UK trading with Australia? Are they similar to those from trading with the USA?
  4. If a trade deal resulted in lower food prices but a decline in rural communities, how would you establish whether this would be a ‘price worth paying’?
  5. If some people gain from a trade deal and others lose and if it were established that the benefits to the gainers were larger than the costs to the losers, would this prove that the deal should go ahead?
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The environment: a missing market in plain sight

We rely on the natural environment as a source of food and raw materials, for recreation and health and as a dump for waste. Yet, too often, little or no monetary value is placed on the environment. GDP, the standard measure of economic success, is based on market values; and the market undervalues the environment. The prices of the goods we buy bear little relationship with the environmental costs of their production. And yet we all bear the costs (some more than others) as the planet warms, as rain forests are cut down, as seas become polluted and as biodiversity is destroyed.

A major study commissioned by the UK government has just been published. The Economics of Biodiversity: The Dasgupta Review looks at how we need to rethink the value we attach to nature and embed that within economic decisions. As the Review begins by saying, ‘We are part of Nature, not separate from it’. Nature is an asset on which we all depend and yet is is hugely undervalued. The Amazon rainforest is seen by developers as valuable only for clearance for cattle, soy or mining. In these terms, Amazon the company, valued at over US$1 trillion, is worth more than the Amazon rainforest. As page 2 of the Headline Messages states:

Nature’s worth to society – the true value of the various goods and services it provides – is not reflected in market prices because much of it is open to all at no monetary charge. These pricing distortions have led us to invest relatively more in other assets, such as produced capital, and underinvest in our natural assets.
 
Moreover, aspects of Nature are mobile; some are invisible, such as in the soils; and many are silent. These features mean that the effects of many of our actions on ourselves and others – including our descendants – are hard to trace and go unaccounted for, giving rise to widespread ‘externalities’ and making it hard for markets to function well.
 
But this is not simply a market failure: it is a broader institutional failure too. Many of our institutions have proved unfit to manage the externalities. Governments almost everywhere exacerbate the problem by paying people more to exploit Nature than to protect it, and to prioritise unsustainable economic activities. A conservative estimate of the total cost globally of subsidies that damage Nature is around US$4 to 6 trillion per year. And we lack the institutional arrangements needed to protect global public goods, such as the ocean or the world’s rainforests.

The Review urges a complete rethinking of environmental value. We need to recognise that we are embedded in Nature and that biodiversity has intrinsic worth – perhaps even moral worth. Only this way can correct economic decisions be made.

To detach Nature from economic reasoning is to imply that we consider ourselves to be external to Nature. The fault is not in economics; it lies in the way we have chosen to practise it.

Policy recommendations

The Review highlights some specific policies that can be adopted to attach value to the environment. It makes three major recommendations.

  • Ensure that our demands on Nature do not exceed its supply, and that we increase Nature’s supply relative to its current level. This involves countries and their citizens accepting that they are stewards of the land, seas and atmosphere. This means making conservation central to decision making in areas such a food production, raw material extraction, energy generation and recycling. A range of policy instruments can be used, including taxes and subsidies, laws and regulations, public investment and provision of services.
     
  • Change our measures of economic success to guide us on a more sustainable path. This would involve amending measures, such as GDP, to include environmental degradation (-ve) and improvement (+ve) and national wealth to include all natural assets, such as biodiversity and land, air, sea and water quality. This would involve ‘natural capital accounting’. This, in turn, would be helped by global standardised presentation of data and modelling approaches, and the provision of data on the environment by statistical agencies.
     
  • Transform our institutions and systems – in particular our finance and education systems – to enable these changes and sustain them for future generations. Institutional arrangements should be put into place that allow the pooling of environmental information at local, national and global levels. Then there will need to be international subsidies to countries with environments that should be protected for the global good (e.g. rainforests) and international charges for the use of global common resources, such as oceans and the atmosphere. ‘What is ultimately required is a set of global standards underpinned by credible, decision-grade data, which businesses and financial institutions can use to fully integrate Nature-related considerations into their decision-making, and assess and disclose their use of, and impact on, Nature.’ But this must also be backed up by education so as to encourage people to be more conservationist in their behaviour and attitudes.

It is hoped that the Review will be a major focus of two upcoming United Nations conferences: on Biological Diversity (COP15) in Kunming, China in May 2021 and on Climate Change (COP26) in Glasgow in November 2021. The authors of the Review hope that these conferences will set new environmental commitments and establish the necessary institutional arrangements to ensure such commitments are met. This will involve changing the approach to economic decision making at all levels in society.

As Sir David Attenborough states in his foreword to the Review,

Economics is a discipline that shapes decisions of the utmost consequence, and so matters to us all. The Dasgupta Review at last puts biodiversity at its core and provides the compass that we urgently need. In doing so, it shows us how, by bringing economics and ecology together, we can help save the natural world at what may be the last minute – and in doing so, save ourselves.

Articles

The Dasgupta Review

Questions

  1. To what extent is the Dasgupta Review an updated version of the Stern Review of 2006?
  2. Draw a diagram to illustrate how the existence of negative externalities will lead to production levels above the social optimum.
  3. To what extent is Nature a public good?
  4. What is meant by the ‘tragedy of the commons’? How is it relevant to the exploitation of Nature?
  5. How could market incentives be changed by governments so as to halt the loss of biodiversity?
  6. Following an international agreement to protect the natural environment, what sanctions could be imposed on countries or companies which violate the agreement? How effective would they be?
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Food sustainability

Each week, BBC Radio 4 broadcasts readings from a book serialised in five 15-minute episodes. In the week beginning 18 January 2021, the readings were from English Pastoral: An Inheritance by James Rebanks, a farmer from the Cumbrian fells. His farm is relatively small, covering 185 acres.

He has attempted to make it much more sustainable and less intensive, reintroducing traditional Herdwick sheep, having a mixture of cows and sheep rather than just sheep, a greater sub-division of fields, and more natural scrubland, peatbogs and trees. As a result, soil quality has improved and there has been an explosion of biodiversity, with an abundance of wild flowers and insects.

Apart from being an autobiography of his time as a farmer and his attempt to move towards more traditional methods, the book examines broader issues of agricultural sustainability. It looks at the pressures of consumers wanting cheap food, the market power of supermarkets and wholesalers, the cost pressures on farmers pushing them towards monoculture to achieve economies of scale, and the role of the agrichemicals industry promoting fertilisers, feeds and pesticides which bring short-term financial gains to farmers, but which cause longer-term damage to the land and to biodiversity.

Rebanks has gained quite a lot of media attention after the publication of his first book, The Shepherd’s Life, including being one of the guests on Desert Island Discs and the subject of an episode of The Food Programme.

Listen to the Food Programme podcast and try answering the questions, which are all based on the podcast in the order of the points made in the interview.

Podcast

Reviews

Questions

  1. What are the incentives of an unregulated market for food that result in monoculture and a loss of biodiversity?
  2. To what extent are consumers responsible for changes in farming methods?
  3. Have the changes helped the urban poor?
  4. How is the monopsony power of supermarkets and food wholesalers impacting on food production and the pattern of agriculture?
  5. There are various (private) economies of scale in food production, but these often involve substantial external costs and long-term private costs too. How does this impact on land use?
  6. What are some of the limits of technology in increasing crop, meat and dairy yields?
  7. Will more recent changes in the pattern of food consumption help to increase mixed farming and biodiversity?
  8. Is it ‘rational’ for many farmers to continue with intensive farming with high levels of artificial fertilisers and pesticides?
  9. Is diversity in farming across farms within a local area a public good? If so, how could such diversity be achieved?
  10. How can farmers be encouraged to think and act holistically?
  11. Is there a trade-off between food output and biodiversity?
  12. What are the dangers in the UK reaching an agricultural trade deal with the USA?
  13. What are the benefits and costs of encouraging local food markets?
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Biden’s green agenda

Back in November, when Joe Biden had just been elected, we considered some of his proposed policies to tackle climate change (see A new era for climate change policy?). On 20th January, the day of his inauguration, he signed 17 executive orders overturning a range of policies of the Trump presidency. Further executive orders followed. Some of these related directly to climate change.

The first was to cancel the Keystone XL oil pipeline project. If it had gone ahead, it would have transported 830 000 barrels of oil per day from the Alberta tar sands in Canada to refineries on the Gulf Coast of Texas. It would have involved building a new pipeline from Alberta to Nebraska, where it would have linked to an existing pipeline to Texas. Extracting oil from tar sands is a particularly dirty process, involves cutting down large areas of forest (a carbon sink) and total emissions are around 20% greater per barrel than from conventional crude.

The pipeline would have cut across First Nations land and any spills would have been highly toxic to the local environment. In terms of profitability, returns on tar sands oil extraction and transportation are very low. This is likely to remain the case as oil prices are likely to remain low, with greater global energy efficiency and the switch to renewables.

Critics of Biden’s decision argue that the pipeline project would have created some 5000 to 6000 temporary jobs in the USA during the two-year construction phase. Also they claim that it would have contributed to greater energy security for the USA.

The second executive order was to rejoin the Paris Climate Agreement, a process that will take 30 days. Rejoining will involve commitments to cut greenhouse gas emissions and the adoption of various measures to bring this about. During the election campaign, Biden pledged to achieve economy-wide net-zero emissions no later than 2050. As we saw in the previous blog, under Biden the USA will play a leading role in the November 2021 UN COP26 climate change conference in Glasgow.

At present, the Paris agreement is for countries to aim to reach a peak of greenhouse gas emissions as soon as possible to achieve a climate neutral world by mid-century. Many countries have have made commitments about when they aim to achieve carbon neutrality, although concrete action is much more limited. It is hoped that the COP26 conference will lead to stronger commitments and actions and that the USA under Biden will play a leading part in driving this forward.

In addition, to cancelling the Keystone XL pipeline and rejoining the Paris Agreement, the executive orders reversed more than 100 other decisions with negative environmental effects taken by the Trump administration – many overturning environmental measures introduced by previous administrations, especially the Obama administration.

These orders included reversing the easing of vehicle emissions standards; stopping reductions in the area of two major national monuments (parks) in Utah; enforcing a temporary moratorium on oil and natural gas leases in Alaska’s Arctic National Wildlife Refuge; and re-establishing a working group on the social costs of greenhouse gasses.

Then there will be new measures, such as adopting strict fuel economy standards and investment in clean public transport. But it remains to be seen how far and fast the Biden administration can move to green the US economy. With the desire for bipartisanship and seeking an end to the divisive policies of Trump, there may be limits to what the new President can achieve in terms of new legislation, especially with a Senate divided 50:50 and only the casting vote of the chair (Kamala Harris as Vice-President) being in Democrat hands.

The articles below consider the various green policies and how likely they are to succeed in their objectives.

Articles

Questions

  1. Find out what other environmental policies are being pursued by President Biden and assess their likely effectiveness in achieving their environmental objectives.
  2. Would policies to reduce carbon emissions necessarily be desirable? How would you assess their desirability?
  3. When is it best to use the ‘precautionary principle’ when devising environmental policies?
  4. To what extent is game theory relevant in understanding the difficulties and opportunities of developing internationally agreed policies on carbon reduction?
  5. If the objective is to tackle global warming, is it better to seek international agreement on limiting the extent of global warming or international agreement on carbon reduction? Explain.