Externalities are side effects – like pollution, carbon emissions, and land use change – that are direct byproducts of an activity, but which are generally not considered in the cost of doing that activity.
Take the example of a chemicals company that is dumping their waste into a nearby river. Someone, somewhere, and most likely using your tax dollars, is paying to clean up after the company to keep the river safe. If there is no cost associated with this practice, then the company saves money by destroying the environment. Such a company would also gain a competitive advantage over their competitors that deal with their own waste safely. Without some price for dumping, companies are incentivized to dump in the cheapest way possible – even if the public ends up paying for their frugality later. The same is true of carbon emissions. Emitting Greenhouse Gases causes real, if invisible, damage. The EPA recently estimated that the social cost (the cost that the public pays) for one ton of carbon is $190. These costs come from the increased chance of things like weather emergencies, damage to infrastructure, and supply chain disruptions. If the emitter doesn’t pay for these externalities, someone else will have to.
Measuring and pricing externalities is a huge part of Private Climate Governance. Since the main goal of a company is to maximize profit, the only way to guarantee they consider their climate impacts is to establish a price for externalities. This way, their executives and shareholders will prioritize making the company climate friendly. Public carbon pricing and trading schemes operated by governments currently cover 24% of global emissions. Establishing national carbon pricing can be extremely challenging, though. Hundreds of private companies, including major corporations like Microsoft and Unilever have begun using internal carbon pricing to incorporate climate impacts into financial calculations.
