As founder of the social enterprise „Impact Institute“ the Dutch-Mexican economist Adrian de Groot Ruiz looks at the hidden social and environmental costs in production chains.
Adrian, could you elaborate: What is a „true price“?
To explain that, you have to know „external costs“ exist. For us, they are the root problem of sustainabilty. Basically they are the unpaid social or environmental costs of production. If for example hazards to public safety, soil depletion or child labor are involved, these bare real costs for society. Altough they are an old concept, they have only started to reach public consciousness about ten years ago.
How does this change anything?
Only when you put these externalities into the equation you will obtain the „true costs“ of a product. These normally are not included in the market or retail price – they are seen as a collateral damage of our markets. Luckily, if „true costs“ are the problem, „true prices“ can be the answer in the search for a sustainable economy.
Who is interested in this concept in reality?
At True Price we work with different partners like not-for-profit-organizations, large industrial companies, retailers or labor unions to determine, in a very scientific manner, which true costs a product or a certain policy decision might entail for society and the environment. In doing that we don’t aim to make things more expensive.
But it happens?
Of course this happens, because a producer can’t internalize all the external costs through efficiency increases, especially when it comes to social benefits. But our focus is to lower the „true costs“ dramatically by avoiding external costs. Since it can’t be the goal to keep doing what we are doing by just paying a higher price.
Could you give an example of what you are looking at exactly?
For the Dutch based NGO Hivos we looked at rose production in Kenya and tried to find out, which external costs should be lowered first. Such farms have very limited budgets for improvement measures, so we have to be selective to see where we should invest and were the impact is highest. When roses are transported by ship rather than by airfreight this makes a big difference for the climate change impact, for example.
Where else does it make sense to know the true price?
In Mexico we looked at coffee: We found that organic farmers can increase their yields to similar levels as conventional farming without polluting the soil and water while increasing income to farmers through climate smart agriculture (CSA) techniques. This can bring the true costs down by more than 80%. Suddenly his „true price“ is not so far away from the current market price and it all seems more manageable. Yes, there will be some higher prices, but frankly, at the moment food is simply very cheap.
Still, the problem remains: Conventional methods are applicable and profitable, how could you choose true prices in our economy and not loose?
One way are certificates like fairtrade or the organic standard who help producers in setting a fair price for their voluntary efforts. From a consumer perspective labels might not be perfect, but our calculations show that they can have a relatively large positive effect on the true costs.
One problem that remains, is that markets often are not efficient – and altough the consumer would be willing to pay a higher price, this wilingness is lost along the production chain. As it is the case with roses: They are normally sold in large-scale auctions where there is hardly a distinction between different kind of production methods.
There was some talk at the European Organic Congress about wether there should be more social standards included in the EU organic regulation. How do you feel about that?
From the consumer perspective of course it would be valuable to know that the organic banana you bought wasn’t harvested by children or underpaid workers. Social problems like these have not been at the core of the organic movement until now. But I also understand why it might be better to keep the standards simple and rather cooperate on some of these issues with others. Many products already feature an organic as well as a fairtrade label, and I think this is also a good option.
You said before, labels aren’t perfect. What about your results, how do you guarantee your impartiality as an organization when „true prices“ create such value to your customers?
That is an important point. We try to stay as independent as possible by working with a variety of different partners, from governmental clients to the private sector. Also we offer third party auditing if needed.
If societies as a whole are paying the true price of child labor or pollution, why isn’t there more interest by governments to have a „true price“-economy?
Of course it would be great if governments were regulating that more. We see for example that UN treaties on human rights or corporate accountability do set certain standards. Especially for the environmental side these conventions could be stronger. I’d say we can’t wait for policy makers to get active, because these processes take too long. Instead, we have to find incentives for producers to calculate their true price anyway.
If an organic retailer came to you and asked for an evaluation. Where would you look for hidden social oder environmental costs?
I think the biggest impact retailers have is by what they offer on the shelves. Yes, it is important how a retailer treats his employees or how energy-efficient the building is. But with his product range, where and how his produce was made, he takes the most important decisions. I think organic retailers have one big advantage there: They have a great argument for eliminating some of the products a conventional retailer would just have to offer to their clients.
You say, the organic community should have a love affair with true prices. What is the incentive for them, since they already do a lot?
The organic market is growing, there are a lot of players involved and more and more brands claim to do better. It is very hard in this kind of noise to differentiate yourself from others. True prices help with that, because they give your customer a clear value proposition.
Will there be some unpleasant surprises too?
Of course there will be some inconvenient truths in finding out the the full costs, also for the organic community – when it comes to their yields, for example. But I am convinced that conventional producers will be confronted with a lot more inconvenient truths. Transparency in the market allows producers with a truly better impact to credibly differentiate themselves.