The cost of externals: An accumulating debt

Steel, concrete, and climate change: the cost of zero-priced externals

New Scientist (November 16-22, 2019) has published an article showing the high carbon cost of making steel and cement, the two raw materials that make our techno-civilisation possible.

The article reports several projects to reduce the carbon cost. One is to use hydrogen instead of coal in blast furnaces. “If the economics work out”, that is. All these projects are priced at the actual costs of development and deployment. This makes them look expensive compared to traditional methods of making steel and cement. (1)

Steel and concrete are a prime example of how traditional economics has misstated the costs of our life style. Neo-liberal (Chicago school) economics prices externals at zero. Thus steel and cement have seemed to be cheap materials for making the things we want. In fact externals do have a price. We just haven’t bothered to work out good methods for pricing them, still less for paying them. (2)

As a species, we have evolved to use our environment as a freely available resource for making what we want, eg, spears. The cost of making these tools was the labour of making them. The cost to the ecosystems was ignored. Our ancestors didn’t notice or care that the tree they destroyed to make sticks for poking game animals to death meant that the ecosystem had to make another tree. As long as humans were a small component of the ecosystems, the long-term effects of our use of natural resources were minimal. (3)

However, the costs of externals accumulate. If we don’t pay them, they become a debt. Mother Nature always collects her debts. We either spend our resources now to mitigate and if possible reverse climate change, or we will pay with the loss of property and life.

(1) Concrete is made by using cement to bind the sand and gravel particles together. This process requires CO2, so some of the CO2 used to make cement is recovered from the air.

(2) Zero-priced externals mean that the goods are under-priced. The market works efficiently if and only if prices express costs accurately relative to each other. Mispriced goods distort the market, which leads to market failure.

(3) Human effects were actually not balanced by ecosystem recovery: archeologists have found evidence that agriculture began the climate warming cycle at least 7,000 years ago. Also, many local or regional extinctions of animals were caused by humans.