Shaken Not Burned

Highlighting changemakers and solutions

Glossary - Externalities

Externalities is an economic term that refers to the costs of doing business that the company doesn’t have to pay for, factor into operational costs or inlcude in a cost/benefit analysis. Usually it’s where one party (a business) palms costs off of another party (often the state or the taxpayer). That could be the impact of over extraction of water, the health and environmental impacts of plastics pollution or emissions.

It’s one of the things that opponents to net zero or low carbon regulation like to ignore – if you factor in the cost of pollution, ill-health, resource extraction, social inequality to society as a whole, the cost of production tends to look very different. That means ‘the market’ is not doing its job but politicians don’t like making companies pay for such third-party costs, because companies tend to pass on those costs to the consumer, which is a political no-no. 

What’s concerning is the failure to understand that, often, what we’re consuming is priced at a level that bears no relation to the impact of its production, consumption and disposal. And that’s why we’re in the situation we are today.

Busting a myth - sustainability is too expensive

New technologies can often appear more expensive than the standard or status quo, because as they’re initially being developed and deployed they can cost more. 

There are two things to think through though. The first is the falling costs created by scaling up production and learning by doing – we see this in IT tech every year, we’ve seen it in wind and solar, and now we’re seeing it in the battery sector.

The second is perhaps more important in a cost of living and energy crisis. Technologies that change our consumption of power, water and other increasingly scarce (or expensive) resources change how much we have to pay for those resources. Conserving water, reducing waste by reusing or recycling materials and using energy-efficient equipment or alternative energy sources will ultimately reduce operating costs and benefit the bottom line. While it may take some time to see those benefits, once they kick in they are there for the long haul. And that’s for both business and consumer.

What we’ve been reading this week

• IEA calls for 6x increase in storage as battery costs fall 90%

  New energy technologies provide a unique economic growth opportunity. The regulatory-driven deployment of wind and solar saw costs fall 70-90% over a decade, making them far cheaper than fossil fuels. Now the battery and storage industry is following in their footsteps and highlighting the upside of the low carbon transition. The International Energy Agency’s most recent report projects that system electricity costs with storage will fall 50% by 2030 – as it provides new opportunities for business and lower costs for consumers. To achieve those goals, as well as climate and energy security goals, the enabling political and investment environment should ensure that benefits are aligned – from behind the meter services, virtual power plants, EV charging and beyond.

• ESG remains a political challenge but global interest continues to grow

  Morningstar reported that $8.7 billion was pulled from US sustainable investment funds in Q1 2024, as the battle about the politicisation of the risk management lens continues. Yet around the world, stronger commitments are being made towards sustainable investment. Goldman Sachs said it aims to deliver $750 billion in sustainable finance and investment by 2030. The African Development Bank, for example, has recently set a target of raising $25 billion for climate adaptation by next year and $30 billion for food sufficiency by 2030. In the end, the Paris Agreement sets a goal of realigning capital flows to a climate-friendly future, and these feel like steps in the right direction.  

• G7 agrees coal phase out – too little, too late?

  While the phase out of fossil fuels remains key to meeting global climate targets, there have been major pushbacks from a number of nations. The G7 has committed to phasing out coal power by 2035 but in a rather woolly way, saying the deadline will be within a “timeframe consistent with limiting the rise in global temperatures to 1.5 degrees Celsius.” While positive in that it outlines a timeline for commitments at COP28 in Dubai last year, given the growing divergence between emissions reduction targets and actions to reduce those emissions, it remains short of the much hoped-for agreement to decarbonise the power sector.

• EU approves delay to sustainability standard but ISSB steps up

  Member states have approved a two-year delay to the implementation of the Corporate Sustainability Reporting Directive (CSRD). Specifically, the delay is for companies outside the EU, and in relation to sector-specific reporting under the European Sustainability Reporting Standards (ESRS) – more generic non-specific rules are already in place under the ESRS. The Commission has been urged to publish new sector-specific reporting standards asap – so prior to the new 2026 deadline. The ‘Brussels Effect’ where new regulations implemented in Brussels tend to become global best practice is still playing a role however. The ISSB has just published its digital taxonomy for sustainability disclosure, enabling investors to make comparisons between sustainability disclosures. Transparency is accelerating and businesses will ignore the need for action at their own risk.

• Global plastics treaty talks progress slowly

  The UN has been working on a global treaty about plastics waste for almost two years. While the world agreed to complete a global plastics treaty by the end of 2024, the process is facing many obstacles. While the recent talks in Canada saw a proposal of a global cut to production of 40% by 2035 from 2025 levels, they ended with compromise. Unsurprisingly, following a similar pattern to the climate talks, industry lobbyists abounded. The real challenge lies not simply in disagreements about whether supply or demand should be addressed (surely it should be both) but in the critical importance of plastics production to the oil industry. While plastics have their own hideous story of pollution, its important to remind their contribution to the climate crisis too.

  And a little something extra:

  The role of climate concerns in modern politics is becoming ever more apparent. The confusion in Scotland caused by the collapse of the Bute House Agreement was driven by disagreement over climate policies. In the UK at the Innovation Zero event, the Net Zero Secretary Claire Coutinho warned against too much net zero regulation, arguing that uncertainty was better for businesses as it encourages competition. Given that the central challenge to a low carbon transition is the failure to include the costs of pollution, resource extraction and social damage in corporate operational costs, she does seem to be missing the point a little.

  Meanwhile Ed Miliband, the Shadow Secretary of State for Climate and Net Zero committed Labour to overcoming the challenges to net zero growth – including grid and planning delays, supply chain issues and the skills gap. There was a clear focus in his speech at the event that a net zero grid by 2030 will be a core part of Labour’s plans. The direction of travel is clear, it seems the only question is whether or not politicians are able to focus on the medium term needs of the country, rather than their own short term re-election concerns.