Economics is not just about financial comings and goings within markets: the ‘unpriced’ or non-market services that the natural environment provides us with are equally its concern. The value of protecting wetlands for their biodiversity, flood defense, and pollution treatments is as much an economic value as the cost of production of oil from oilfields. Moreover, it is now strongly believed that an environmental policy that does not address the economic behavior of consumers and firms is likely to get things badly wrong.

Often, economic actors can be induced to take into account the impact of their activities on the environment by getting prices of environmental goods and services right. Economic and environmental systems are closely interlinked. Mrs. Wangari Maathai, the Nobel Peace Laureate, aptly said: “The environment and the economy are really both two sides of the same coin. If we cannot sustain the environment, we cannot sustain ourselves.” People are now increasingly paying attention to the environmental consequences of their economic activities, and to the economic value of the environment. Partly, this is due to the increasing interest of policymakers in understanding the benefits and costs of environmental regulations. But predominantly this is due to the greater public awareness of environmental issues such as climate change or the irreversible loss of natural resources vis-à-vis loss of treasured local landscapes. People have started to understand environmental degradation and the benefits of ecosystem services. Undoubtedly, we have a systematic problem in the way we measure the success or impacts of our economic activities. Sustainable development and green growth have become key concepts with many public policy pronouncements, yet the usefulness of these concepts is unclear, while predictions of impending doom due to world population increases and unpredictable climate change continue to prevail. The economy operates from inside the environmental system, with conditions in the two systems being simultaneously determined in an evolving, dynamic way. By ‘the economic’, we mean all the firms that make up industry; the households (people) that play twin role as consumers and suppliers of labour; governments; the institutions such as markets that govern interaction between these groups; the state of technology; and our produced capital (such as, roads etc.).

Advertisement

By ‘the environment’, we mean all the natural resources found in the biosphere, including land, flora and fauna, resource deposits under land surface, the world’s oceans and atmosphere, natural climate and nutrient cycles. First, the environment provides the economic system with inputs of raw materials and energy resources, including minerals, metals, food, fuels, fibers etc. These materials may either be nonrenewable (such as coal, ores etc.) or renewable (such as fisheries and forests etc.). These inputs are transformed by the economic systems into outputs that consumers demand. Moreover, the economy uses the environment as a waste sink. Waste originates from either production processes, such as CO2 and other pollutants from electricity generation; or from consumption activities, for instance when households put out the garbage for collection and disposal. The environment also provides the economic system with basic lifesupport services. An important feature of the interdependent economic-environmental system is coevolution. This means that the way in which the economic subsystem evolves over time depends on the changing conditions of the environmental subsystems, and vice versa. Economists champion the marketplace as the most useful way to organize economic activity. Markets rise spontaneously because people can create value in trade. Markets are powerful for reasons other than just trade. But markets fail too. Indeed, failure is a reality that we must confront. Sometimes market failure could hardly be avoided.

There are several reasons for market failure. Market failure exists when resources do not attain their highest social value. Economists use taxonomy to help identify and categorize different types of market failures. Externalities are the classic types of market failure for environmental problems. Pollution is an externality when a person or firm does not bear all the costs or receives all the benefits from his or her actions. Hence, an externality can arise when the market price or cost of production excludes its social impacts, cost, or benefit. More precisely, externalities constitute the difference between social effects of an action and the private effects. For example, the private costs of driving a car include the payments the driver makes for fuel, repairs, insurance and the depreciation of the vehicle. Cost external to the driver includes the air pollution generated by exhaust fumes, traffic jams to which the car may contribute, and any special inconvenience caused to other drivers that may be caused by reckless driving etc. The social costs include both the private costs that the driver must bear and the external costs that the market permits him to ignore. If we look around, we can see externalities everywhere. A matter of huge concern is how our actions affect others’ wellbeing, for better or worse, and how we do not pay or receive compensation for the extra costs and benefits. The most important distinction must be made in dealing with externalities. They can be either positive (benefits) or negative (costs). The way we are accounting for the outcomes of our economic activities is systematically neglecting positive and negative externalities.

The most important example is how we have ignored the cost of CO2 emissions from the fossil fuel industry over the last 120 years. We also have a systematic problem in the way we measure the success or the impacts of agricultural economic activities. At present, we are standing at the critical juncture of escalating global challenges ~ lack of availability, accessibility and also affordability of food due to climate crisis; biodiversity loss; economic slowdowns and downturns; worsening poverty, and other overlapping crises. People, businesses and governments do not always know the impact of their decisions on the sustainability of agrifood systems. The agrifood systems undoubtedly generate vital benefits to society, not least because they produce food that nourishes us and provide jobs and livelihoods to over a billion people. Hence, the value of agrifood systems to society is probably well beyond what is measured in GDP terms. On the other hand, market, policy, and institutional failures underpinning agrifood systems contribute to hidden costs, such as climate change, natural resources degradation and the unaffordability of healthy diets. Our endeavor should be to mitigate hidden costs of agrifood systems and enhance their hidden benefits.

In November 2023, FAO released its annual flagship report entitled The State of Food and Agriculture (SOFA). For the first time since the flagship publication was launched in 1947, FAO has tried to create a model to look at externalities, country by country and not just on a global scale. The purpose: how to make our agriculture systems sustainable, how to decrease the negative externalities and how to increase positives. The report acknowledges that 154 nations of the UN have neglected important impacts and associated ‘hidden costs’ of the food systems in their accounting. The ‘hidden costs’ of food systems encompass: (1) environmental hidden costs from greenhouse gas emissions, water use and land-use change; (2) health hidden costs related to dietary patterns, undernourishment; and (3) social hidden costs associated with poverty among agrifood workers and labour productivity.

Globally, the quantified hidden costs are equivalent, on average, to almost 10 per cent of 2020 GDP in PPP terms. Hidden costs of agrifood systems vary substantially in magnitude and composition across country income levels. According to the report, most hidden costs are generated in upper-middle-income countries (39 per cent total quantified hidden costs) and highincome countries (36 per cent of total costs). Lower-middle-income countries account for 22 per cent, while low-income countries make up 3 per cent.

Hidden costs differ not only in their magnitude, but also in their composition by income level. In all country groups apart from low income, productivity losses from dietary patterns that lead to non-communicable diseases (NCD) are the most significant contributor to agrifood system damages, followed by environmental costs. In lower middle-income countries, social hidden costs from poverty and undernourishment are relatively more significant, accounting for an average of 12 per cent of all quantified hidden costs. India’s total hidden costs in agrifood systems are around USD 1.1 trillion, ranking as the third largest globally after China and the USA.

As to the major contributors in India: the burden of disease (productivity losses from dietary patterns that lead to non-communicable diseases) accounted for the largest share (60 per cent) of hidden costs, followed by social costs of poverty (14 per cent) and environmental costs from nitrogen emissions (13 per cent). The commonly asked question is whether addressing the hidden costs of agrifood systems will raise food prices. The basic premise of the report is that it will depend on the hidden cost being addressed and the instruments being used. Hidden costs appear to be a greater burden in low-income countries, while they are estimated to amount, on average, to 27 per cent of GDP, compared with 11 per cent in middle-income countries and 8 per cent in high-income countries.

Our agrifood systems are influenced by policy, business and consumer decisions. We have a global system of accounting that is also heavily influenced by industrial countries. Indeed, True Cost Accounting (TCA) is a systematic and timetested approach to measuring and valuing the environmental, social, health and economic costs and benefits generated by agrifood systems. FAO has integrated TCA into agrifood systems’ assessment in preparing SOFA 2023. In the foreword to the report, Qu Dongyu, FAO Director-General, wrote: “It is my sincere hope that the report will serve as a call to action for all stakeholders ~ from policy makers and private-sectors to researchers and consumers ~ and inspire collective endeavors to transform our agrifood systems for the betterment of all.”

(The writer is a retired IAS officer)