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.
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).
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.