Sustainable Cost Accounting

5
787

Richard Murphy is musing upon his idea of sustainable cost accounting again. In which he makes one of those usual errors – simply not grasping, because he’s never bothered to find out about it, the basic point at issue – that plague all his theories.

What SCA does is recognise that the full cost of a company’s activity has not been accounted for to date and now it has to be, and it does so by estimating the cost of eliminating that externality.

Nope.

The art is to estimate the costs of the externality, not the costs of the elimination of it. Because what is needed for the decision making process is the information about whether it is worth eliminating the externality.

So, we’ve a litre of petrol to be used. I use it to go buy fresh bread for my lunch. This has external costs, that externality, of 11 pence (derived from the Stern Review’s social cost of carbon of $80 tonne CO2-e).

OK.

An ambulance, instead, uses that litre of petrol to take the pre-eclampsic mother to hospital for a shot of magnesium. Thereby saving two lives.

It will be cheaper to eliminate the 11 p of damages of my bread run – walk Worstall, bloody well walk – that it will be to eliminate the damages inherent in having a vast van capable of speeding through junctions at 90 mph.

It isn’t the cost of eliminating the damages which is the point therefore, is it? To reduce climate change while maximising human welfare we wish to make me walk and the soon to be dead mother and baby to burn that fuel right now.

Thus what we want is the costs of the externality – here by intent set up to be equal – to be compared with the benefits of allowing it. In which case the ambulance carries on and Worstall is on Shanks’ Pony. Super.

If we concentrate on the costs of eliminating the externality, which we now put into balance sheets, as sustainable cost accounting is insisting we should, then the ambulance appears as a very much greater problem than the lunchtime sandwich. One that must be dealt with first. And so using Murphy’s vision we get dead babies because no ambulances while Worstall continues to drive for his sliced loaf.

As ever, Murphy’s simple ignorance of the basic work that tens of thousands of other rather clever people have done leads him into that topsy turvey world where we end up doing the opposite of what is needed.

We do not measure externalities by the costs of eliminating them. We measure them by the costs of the damages they do. Which is the only way we get the useful information of which we try to eliminate, those which have higher costs than benefits.

5
Leave a Reply

avatar
3 Comment threads
2 Thread replies
4 Followers
 
Most reacted comment
Hottest comment thread
4 Comment authors
Quentin VoleSpikePhoenix44jgh Recent comment authors
  Subscribe  
newest oldest most voted
Notify of
jgh
Guest
jgh

There was a bizaire report on the steam wireless this morning about persuading people to use 15-hour long-distance trains for 400 quid a throw instead 40 quid for a 3-hour ‘plane flight “for the environment”. “Let’s all force people to do this thing that will make the poorer, both fiscally and in utility! Yay!” The report ended with the comment: most of the people opting for the overnight trains are environmentalists. Yeah. People with time and money to burn, quite literally. I have no objection to people spending their utility as they want, I have a hankering to go to… Read more »

Quentin Vole
Guest
Quentin Vole

I’m a fan of long-distance rail travel – what’s largely killed the sleepers (the subject of the radio piece this morning) isn’t budget air travel, it’s high-speed rail. You can get from London (the edge of the high-speed rail network) to most places in Europe in a day and no longer need to take a sleeper (except for the romance of travel).

Re the Trans-Siberian – I’ve heard it described as “a week of watching birch trees go by 10 feet from your carriage window”. Take plenty of vodka.

Phoenix44
Guest
Phoenix44

Ah, but your way might not come up with the right answer. That is the point of all this nonsense, coming up with the right answer, the one already decided upon.

Spike
Guest
Spike

Quite so! the essence of “externalities,” notably as espoused by Econ Major Alexandria Ocasio-Cortez, is a monetary penalty for not living as I tell you to live.

Spike
Guest
Spike

The cost of the unsustainability of petrol will be paid as the planetary supply of crude oil starts to wane (in the year 2400 or so) by an imperceptibly gradual increase in its price, which will make it attractive to invent other fuels or other ways of producing petrol. The externality of adding CO2 to the atmosphere is a whim, as we have no evidence it is causing scary weather, have plenty of evidence it is helping crops, do not know what year to use as a CO2 baseline, and do not know what the “right” level of CO2 is.… Read more »