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Markus Stocker

Between information technology and environmental science with a flair for economics, the clarinet, and the world of soups and salads.

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I know, it is a topic on which I tend to iterate rather often recently. This is, once more, about the problem of external costs. The use case is based on a recent experience and the question is very simple.

From Finland, to post an A4 letter in a C6 envelope to Switzerland requires a stamp worth 0.80 euro. The same letter to the USA requires a stamp worth 0.80 euro, too.

For the sake of simplicity, I’ll discuss the peculiarity accounting only for one dimension of cost, i.e. the cost to offset carbon emissions caused by the letter traveling from one post office to the other. There are a number of so called CO2 calculators online that give you an estimate for the magnitude. For example, using myclimate and for a person, for a one way trip to the destination post office in Switzerland we would need to offset 0.476 t of CO2. Depending on the plan, myclimate suggests either CHF 18.00 or CHF 53.00.  For the destination post office in the USA (I know, a rather imprecise location yet precise enough for the point I would like to make) a person would need to offset 1.438 t of CO2, CHF 53.00 for the first plan, CHF 160.00 for the second. Of course, a C6 envelope is not a person but I suppose the principle holds. Thus, the same envelope needs to offset more CO2 over the longer distance. On a side note: If you believe the cost to offset CO2 is zero over any distance then the following makes, certainly, no sense.

To summarize, the cost to offset the CO2 for a C6 envelope is positively correlated with the distance, i.e. the more distant the post offices the higher the cost to offset induced CO2 emissions.

However, as we have seen above, as a customer I’m required to pay exactly the same price, i.e. 0.80 euro. Perhaps I’m paying too much to post the letter to Switzerland or maybe too little to post it to the USA. Howsoever, I think it is an example where costs are not fully internalized (at least not at the level of individual post stamps).

I might conclude that, as a customer, I’m not required to offset the damage I’m responsible for posting my letter. Rather, the cost is externalized and will most likely be accounted for somewhen in the future or somewhere on the planet, or a combination.

I think, the problem here is that external costs distort prices and tend to drive consumption. Don’t get me wrong, I’m not saying, we should all stop posting letters over great distances. I’m saying, we need to pay the full cost of the action. Failing to do so is, in my opinion, one of the root causes for an awful lot of what some currently believe are issues, from individual consumption to corporate pollution.

Sure, for a society with an economy that knows consumption as its blood, talking about cost internalization is probably unpopular as it most likely drives up the price of, well, almost everything. I sometimes wonder, regarding falling prices, how much is caused by increased efficiency (e.g. through competition) and how much by externalities. What if the share of the latter is greater than we are willing to admit?