Prices that wont cost the earth

Lets talk about the ethics of the system that prices the goods and services we buy. The prices consumers pay reflect the costs of making the product (or providing the service) plus a profit margin to the supplier. But the problem with the economic system that prices the goods and services we buy is that only financial costs incurred by the supplier are reflected in the prices paid by consumers. Provision of many products and services results in large environmental and social costs, and these are ignored by the pricing system as these costs are passed onto the general community, rather than being incurred by the supplier. So there is no need for suppliers to recover costs they do not incur.

Consider the electricity that you buy from your energy supplier, and assume that like most consumers in Australia you purchase energy which is generated by burning coal. We know burning coal releases CO2 which contributes to global climate change and air pollution. We know there is a significant cost borne by coal miners and local communities that suffer health problems from the accumulation of coal dust. We also know the risks that miners are exposed to every day on their work sites.

These social and environmental costs are real costs, but because they are not included in prices, consumers choose to purchase what appears to be low cost energy derived from fossil fuels, rather than more expensive (in economic terms) renewable energy such as solar or wind energy. Failing to include social and environmental costs in market prices is equivalent to saying these costs are not important, and this is unethical.

An important ethical principle is that of responsibility; that is, taking responsibility for the impacts of our actions. In modern business we talk about organisations being accountable to their stakeholders, which includes everyone (employees, investors, customers) and everything (the natural environment) affected by the organisations activities.

If consumers are to make informed decisions about which type of energy to purchase, energy prices need to reflect total costs of producing electricity and this includes the environmental and social costs that are caused by electricity production. Now this is the difficult part. How do we include social and environmental costs in market prices?

One method is to levy environmental taxes on companies operating in industries which are environmentally and socially damaging. For example, the environmental tax rate would be higher for industries that are more damaging and lower for industries which cause less damage. Tax revenue collected by the government could be used for environmental rehabilitation, or for relieving the tax burden on low income earners. Environmental taxes are supported on the grounds that it makes sense to tax the bads (pollution and excess consumption of resources) rather than taxing the goods (working hard, employing more staff, purchase of essential goods and services etc).

Environmental taxes are just one possible method for ensuring market prices include an allowance for social and environmental impacts that are felt by local communities. This will enable consumers to make more informed and more ethical choices.

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