Full-cost Accounting for the Environmental Impacts of Agriculture

Assessing costs and benefits associated with environmental change

In 2003 IISD embarked on a five-year research project with Agriculture and Agri-food Canada to study the issue of full-cost accounting and its application to policy development in agriculture.

Full-cost accounting is the assessment, in dollar terms, of costs or benefits associated with changes in the environment. This is also referred to as environmental valuation, and the costs and benefits in such an analysis are commonly referred to as environmental externalities, meaning those costs or benefits that are not reflected in the prices of goods and services in our regular markets.

The most common examples of externalities are negative. For example, if a factory or a farm pollutes a river that negatively impacts users of the water downstream, but does not pay to clean up the pollution, there is a negative externality. The polluter gains an economic advantage because it can sell its product at a price that does not include the cost of dealing with the pollution; that cost is borne by downstream (or off-site) users.

Some externalities can be quantified directly from our market economy. For example, a change in water quality of a river could impact the magnitude of fish catches; the decline in fish catches could be quantified economically by considering the loss of income from commercial fishing, or by estimating the cost of a food substitute. However, other externalities cannot be directly quantified because they are based on the willingness to pay among those who benefit from a particular ecosystem service, and this is very difficult to ascertain.

The project outputs thus far include:

For more information contact IISD Senior Corporate Advisor and Senior Project Manager, Stephen Barg.