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.
Government and Parliament documents and reports
- Using the concepts of rivalry and excludability, define the concept of a common resource.
- Explain the ‘tragedy of the commons’ and how it might apply to the use of water in the cultivation of cotton.
- Draw a diagram to illustrate how negative externalities in consumption and production lead to inefficient levels of output in an unregulated competitive market.
- 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.
- Explain the potential limitations of using taxation/regulation to address the pollution issues created by the fast fashion sector.
The UN’s Intergovernmental Panel on Climate Change (IPCC) has just published the first part of its latest seven-yearly Assessment Report (AR6) on global warming and its consequences (see video summary). The report was prepared by 234 scientists from 66 countries and endorsed by 195 governments. Its forecasts are stark. World temperatures, already 1.1C above pre-industrial levels, will continue to rise. This will bring further rises in sea levels and more extreme weather conditions with more droughts, floods, wildfires, hurricanes and glacial melting.
The IPCC looked at a number of scenarios with different levels of greenhouse gas emissions. Even in the most optimistic scenarios, where significant steps are taken to cut emissions, global warming is set to reach 1.5C by 2040. If few or no cuts are made, global warming is predicted to reach 4.4C by 2080, the effects of which would be catastrophic.
The articles below go into considerable detail on the different scenarios and their consequences. Here we focus on the economic causes of the crisis and the policies that need to be pursued.
Global success in reducing emissions, although partly dependent on technological developments and their impact on costs, will depend largely on the will of individuals, firms and governments to take action. These actions will be influenced by incentives, economic, social and political.
Economic causes of the climate emergency
The allocation of resources across the world is through a mixture of the market and government intervention, with the mix varying from country to country. But both market and government allocation suffer from a failure to meet social and environmental objectives – and such objectives change over time with the preferences of citizens and with the development of scientific knowledge.
The market fails to achieve a socially efficient use of the environment because large parts of the environment are a common resource (such as the air and the oceans), because production or consumption often generates environmental externalities, because of ignorance of the environmental effects of our actions, and because of a lack of concern for future generations.
Governments fail because of the dominance of short-term objectives, such as winning the next election or appeasing a population which itself has short-term objectives related to the volume of current consumption. Governments are often reluctant to ask people to make sacrifices today for the future – a future when there will be a different government. What is more, government action on the environment which involves sacrifices from their own population, often primarily benefit people in other countries and/or future generations. This makes it harder for governments to get popular backing for such policies.
Economic systems are sub-optimal when there are perverse incentives, such as advertising persuading people to consume more despite its effects on the environment, or subsidies for industries producing negative environmental externalities. But if people can see the effects of global warming affecting their lives today, though fires, floods, droughts, hurricanes, rising sea levels, etc., they are more likely to be willing to take action today or for their governments to do so, even if it involves various sacrifices. Scientists, teachers, journalists and politicians can help to drive changes in public opinion through education and appealing to people’s concern for others and for future generations, including their own descendants.
Policy implications of the IPCC report
At the COP26 meeting in Glasgow in November, countries will gather to make commitments to tackle climate change. The IPCC report is clear: although we are on course for a 1.5C rise in global temperatures by 2040, it is not too late to take action to prevent rises going much higher: to avoid the attendant damage to the planet and changes to weather systems, and the accompanying costs to lives and livelihoods. Carbon neutrality must be reached as soon as possible and this requires strong action now. It is not enough for government to set dates for achieving carbon neutrality, they must adopt policies that immediately begin reducing emissions.
The articles look at various policies that governments can adopt. They also look at actions that can be taken by people and businesses, actions that can be stimulated by government incentives and by social pressures. Examples include:
- A rapid phasing out of fossil fuel power stations. This may require legislation and/or the use of taxes on fossil fuel generation and subsidies for green energy.
- A rapid move to green transport, with investment in charging infrastructure for electric cars, subsidies for electric cars, a ban on new petrol and diesel vehicles in the near future, investment in hydrogen fuel cell technology for lorries and hydrogen production and infrastructure, cycle lanes and various incentives to cycle.
- A rapid shift away from gas for cooking and heating homes and workplaces and a move to ground source heating, solar panels and efficient electric heating combined with battery storage using electricity during the night. These again may require a mix of investment, legislation, taxes and subsidies.
- Improvements in energy efficiency, with better insulation of homes and workplaces.
- Education, public information and discussion in the media and with friends on ways in which people can reduce their carbon emissions. Things we can do include walking and cycling more, getting an electric car and reducing flying, eating less meat and dairy, reducing food waste, stopping using peat as compost, reducing heating in the home and putting on more clothes, installing better insulation and draught proofing, buying more second-hand products, repairing products where possible rather than replacing them, and so on.
- Governments requiring businesses to conduct and publish green audits and providing a range of incentives and regulations for businesses to reduce carbon emissions.
It is easy for governments to produce plans and to make long-term commitments that will fall on future governments to deliver. What is important is that radical measures are taken now. The problem is that governments are likely to face resistance from their supporters and from members of the public and various business who resist facing higher costs now. It is thus important that the pressures on governments to make radical and speedy reductions in emissions are greater than the pressures to do little or nothing and that governments are held to account for their actions and that their actions match their rhetoric.
- Some climate changes now irreversible, says stark UN report
Channel 4 News, Alex Thomson (9/8/21)
- Climate change: IPCC report is ‘code red for humanity’
BBC News, Matt McGrath (10/8/21)
- Climate change: Five things we have learned from the IPCC report
BBC News, Matt McGrath (10/8/21)
- Climate Scientists Reach ‘Unequivocal’ Consensus on Human-Made Warming in Landmark Report
Bloomberg Green, Eric Roston and Akshat Rathi (9/8/21)
- Climate change: Seven key takeaways from the IPCC climate change report
Sky News, Philip Whiteside (10/8/21)
- IPCC report: global emissions must peak by 2025 to keep warming at 1.5°C – we need deeds not words
The Conversation, Keith Baker (9/8/21)
- This is the most sobering report card yet on climate change and Earth’s future. Here’s what you need to know
The Conversation, Pep Canadell, Joelle Gergis, Malte Meinshausen, Mark Hemer and Michael Grose (9/8/21)
- IPCC report: how to make global emissions peak and fall – and what’s stopping us
The Conversation, Matthew Paterson (9/8/21)
- World’s 1.5C goal slipping beyond reach without urgent action, warns landmark IPCC climate report
Independent, Daisy Dunne and Louise Boyle (9/8/21)
- IPCC report: 14 ways to fight the climate crisis after publication of ‘Code Red’ warning
Independent, Harry Cockburn (10/8/21)
- Major climate changes inevitable and irreversible – IPCC’s starkest warning yet
The Guardian, Fiona Harvey (9/8/21)
- Climate scientists have done their bit. Now the pressure is on leaders for COP26.
CNN, Ivana Kottasová and Angela Dewan (10/8/21)
- 21 For 21: The Climate Change Actions Scotland Needs Now
Common Weal, Common Weal Energy Policy Group (9/8/21)
- How to build support for ambitious climate action in 4 steps
The Conversation, Sarah Sharma and Matthew Hoffmann (4/3/21)
- Scientists have finally added world politics to their climate models
Quartz, Michael J Coren (9/8/21)
- Summarise the effects of different levels of global warming as predicted by the IPCC report.
- To what extent is global warming an example of the ‘tragedy of the commons’?
- How could prices be affected by government policy so as to provide an incentive to reduce carbon emissions?
- What incentives could be put in place to encourage people to cut their own individual carbon footprint?
- To what extent is game theory relevant to understanding the difficulties of achieving international action on reducing carbon emissions?
- Identify four different measures that a government could adopt to reduce carbon emissions and assess the likely effectiveness of these measures.
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.
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.
The Dasgupta Review
- To what extent is the Dasgupta Review an updated version of the Stern Review of 2006?
- Draw a diagram to illustrate how the existence of negative externalities will lead to production levels above the social optimum.
- To what extent is Nature a public good?
- What is meant by the ‘tragedy of the commons’? How is it relevant to the exploitation of Nature?
- How could market incentives be changed by governments so as to halt the loss of biodiversity?
- 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?
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.
- What are the incentives of an unregulated market for food that result in monoculture and a loss of biodiversity?
- To what extent are consumers responsible for changes in farming methods?
- Have the changes helped the urban poor?
- How is the monopsony power of supermarkets and food wholesalers impacting on food production and the pattern of agriculture?
- 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?
- What are some of the limits of technology in increasing crop, meat and dairy yields?
- Will more recent changes in the pattern of food consumption help to increase mixed farming and biodiversity?
- Is it ‘rational’ for many farmers to continue with intensive farming with high levels of artificial fertilisers and pesticides?
- Is diversity in farming across farms within a local area a public good? If so, how could such diversity be achieved?
- How can farmers be encouraged to think and act holistically?
- Is there a trade-off between food output and biodiversity?
- What are the dangers in the UK reaching an agricultural trade deal with the USA?
- What are the benefits and costs of encouraging local food markets?
At the annual World Economic Forum (WEF) in Davos, Switzerland, world political and business leaders are meeting to discuss pressing economic issues of the day. This year, one of the key themes is climate change and “how to save the planet”.
The approaches of leaders to the climate crisis, however, differ enormously. At the one extreme there are those who deny that emissions have caused climate change, or who reluctantly acknowledge climate change but think that governments need to do nothing and that technological advances in green energy and transport will be sufficient to curb global warming. This has been the approach of President Trump, President Bolsonaro of Brazil and Prime Minister Scott Morrison of Australia. They may claim to support the general goals of reducing greenhouse gases, but are keen to protect their coal and oil industries and, in the case of Brazil, to continue cutting down the Amazon rain forest to support mining, ranching and the growing of crops.
At his speech at the WEF, President Trump said that he supported the initiative to plant one trillion trees worldwide to act as a carbon sink. However, he gave no details of just what the nature of the support would be. Would there be subsidies or tax breaks, for example, for landowners to plant trees? In the meantime, his administration has relaxed regulations to curb air and water pollution. And he has withdrawn the USA from the Paris climate agreement.
Other leaders, urged on by activists, such as Greta Thunberg, have talked about tougher action to tackle emissions. Countries such as Canada, Norway and the EU countries have adopted a number of initiatives. Policies range from taxing emissions, capping/regulating emissions with penalities for those breaching the limits, tradable permits, subsidising green alternatives, setting local emissions targets with incentives for meeting them, investing in green infrastructure such as roadside charging points for electric vehicles, making environmental education part of a national curriculum, investing in public transport, and so on. But, say, activists, only large-scale measures that truly recognise the scale of the climate emergency will be sufficient.
The year starts with climate being addressed at Davos; it ends with the annual Conference of the Parties (COP26) to the United Nations Framework Convention on Climate Change (UNFCCC). This year it will be in Glasgow. There is much hope pinned on this conference, given the growing realisation of the effects of climate change, from bush fires in Australia, to floods in Indonesia and other parts of southeast Asia, to more extreme hurricanes/typhoons, to rapidly melting glaciers and retreating sea ice, to rising sea levels, to crop failures and the displacement of humans and the destruction of wildlife and habitat.
COP25 in Madrid made little progress; it is hoped that COP26 will be much more successful. Sir David Attenborough has warned that the world faces a ‘climate crisis moment’. He hopes that the world will be ready to take much stronger action at COP26.
But there remains the fundamental economic problem of the tragedy of the commons. As long as the atmosphere and other parts of the environment are free to ‘use’ to pollute, and as long as the costs of doing so are borne largely by people other than the direct polluters, the market will fail to provide a solution. Australia’s bush fires can be directly attributed to climate change and climate change is exacerbated by coal-fired power stations. But Australia’s use of coal as a power source is only a tiny contributor to global climate change. Presumably, the Australian government would rather get a ‘free ride’ off other countries’ policies to cut emissions rather than bearing the economic cost of reducing coal-fired generation itself for little gain in terms of reduced global emissions.
However, people are not entirely selfish. Many are willing to make personal sacrifices to lead a more environmentally sustainable life. Many people, for example, are choosing electricity tariffs that are slightly higher but where the electricity is generated with zero carbon emissions. Firms have shown a readiness to respond to demands from their consumers for more sustainable products.
- Five essential steps to take right now to tackle climate change
World Economic Forum, Robin Pomeroy (17/1/20)
- Davos: Trump decries climate ‘prophets of doom’ with Thunberg in audience
BBC News (21/1/20)
- Greta Thunberg clashes with US treasury secretary in Davos
The Guardian, Graeme Wearden (23/1/20)
- Australia, your country is burning – dangerous climate change is here with you now
The Conversation, Michael E Mann (10/1/20)
- Climate change: What different countries are doing around the globe to tackle the crisis
Independent, Zoe Tidman (20/9/19)
- How we can combat climate change
Washington Post (2/1/19)
- Sir David Attenborough warns of climate ‘crisis moment’
BBC News, David Shukman (16/1/20)
- Climate change: Where we are in seven charts and what you can do to help
BBC News (14/1/20)
- Ten facts about the economics of climate change and climate policy
Brookings, Ryan Nunn, Jimmy O’Donnell, Jay Shambaugh, Lawrence H. Goulder, Charles D Kolstad and Xianling Long (23/10/19)
- The Federal Reserve Considers the Economics of Climate Change in 2020
Lawfare, Rachel Westrate (16/1/20)
- Bernie Sanders’ economic adviser says Australia’s bushfires are a climate change ‘wake-up call’
The Guardian, Ben Butler (7/1/20)
- Carbon pricing: What the research says
Journalist’s Resource, Harvard Kennedy School’s Shorenstein Center, Clark Merrefield (17/1/20)
- European Parliament backs Green Deal
Resource Media, Imogen Benson (17/1/20)
- Tackling climate change
Committee on Climate change
- Tragedy of the Commons: A Drama That Our Planet Is Not Enjoying
Felix, Xiuchen Xu (9/12/19)
- Draw a diagram to show how the external costs of carbon emissions cause a more than socially optimal output of products emitting CO2.
- What is meant by the ‘tragedy of the commons’? Give some environmental examples.
- Discuss possible solutions to the tragedy of the commons.
- Why was COP25 generally regarded as a failure?
- Identify four possible policies that governments could adopt to reduce carbon emissions and discuss their relative advantages and disadvantages.
- Are meetings such as the annual World Economic Forum meetings at Davos of any benefit other than to the politicians attending? Explain.