Solution Cluster 1.4.4
Address True Costs through a Global Partnership on the True Price of Food
Ensuring sustainable food systems requires vastly reducing the environmental and health costs of the food system, while making food affordable to all. One of the central problems is that these costs are externalised: they are not reflected in prices. At the same time, the benefits of healthful foods are not appreciated. A two-pronged strategy is necessary to internalise externalities: (1) redefine the value of food by measuring externalities through True Cost Accounting (TCA); and (2) use TCA to integrate externalities in prices: true pricing. The field TCA is more mature and requires accelerated action, whereas true pricing would benefit from a global partnership to realise scale.
About this Solution Cluster
Due to externalities, sustainable and healthy food is often less affordable to consumers and more profitable for businesses than unsustainable and/or unhealthy food. Externalities and other market failures lead to unintended consequences for present and future generations, destroying nature and perpetuating social injustices such as underpayment of workers, food insecurity, illness, premature death, and other harms. We urgently need to address the fundamental causes of these problems. The current externalities were estimated to be more than double (19.8 trillion USD) the current total global food expenditure (9 trillion USD). These externalities accrue from seven trillion USD (range 4-11) in environmental costs, 11 trillion USD (range 3-39) in costs to human life, and one trillion USD (range 0.2-1.7) in economic costs. By providing perverse incentives, externalities form a barrier to realising the SDGs. As long as sustainable and healthy food is more expensive and less profitable than unsustainable and unhealthy food, efforts to realise sustainable food systems are unlikely to succeed. True pricing could be an enabler for initiatives coming out of the UNFSS, such as increasing access to food, changing food demand patterns, promoting agroecology, ensuring worker and indigenous rights, and reducing food loss.
The optimal (first best) true pricing solution is for governments to tax external costs, regulate restoration of environmental and social damages, and subsidise healthy and sustainable food. This resolves the perverse incentives, makes healthy food affordable, and respects human rights and planetary boundaries. There is a consensus amongst economists that pricing externalities is an efficient way to internalise externalities (Laffont, 2017). There is also empirical evidence that shows environmental taxes to be effective (OECD, 2014) and that revenue recycling could lead to majority support for environmental taxation (McGrath et al., 2019). True pricing addresses externalities and is an essential complement to other public policies needed to remedy other market failures.
In the short term, governments can pursue pragmatic (second best) true pricing policies, such as a carbon tax combined with a simple subsidy on healthy food. A meta-study found that on average a 10% decrease in price increases consumption of healthful food by 13% (Afhsin et al., 2017). Also, businesses can employ true pricing (with or without government action) by providing transparency to consumers and voluntarily internalising externalities, thereby catering to preferences from consumers and investors for more sustainable food. Modern research shows that the majority of people care about others (Fehr & Fischbacher, 2003) and are interested in sustainability, but price plays a foundational consideration in consumption choices (White et al., 2020; PwC, 2020).
The first step to correct for these ‘hidden costs’ is to redefine the value of food through TCA to address externalities and other market failures.
- Governments can integrate TCA into national or regional policy and budgeting (TEEB, 2020).
- Businesses can use TCA to integrate information on externalities in assessments and reporting through impact-weighted accounts and statements (Baker et al., 2020, Capitals Coalition, 2020; HBS., 2020). Consequently, they can use this information to minimise negative impacts and enhance positive benefits across value chains (Serafeim et al., 2019; WBCSD, 2021a).
- Financial institutions can use TCA for reporting, impact investment, and risk assessment (WBCSD, 2021; Impact Institute, 2020; Schramade, 2020).
- Farmers can use TCA as a means to account for the costs and benefits of their agricultural practices (Jones, 2020) and can be stewards of biocultural landscapes (Baker et al., 2020).
The second corrective step is true pricing: incorporating externalities in prices to align market incentives with social values. For true pricing implementation, a number of pathways exist:
Many initiatives work on TCA (TEEB, 2021; WBCSD’s 2021; Capitals Coalition, 2021), various of which organised in TCA Accelerator (GAFF, 2021). Hence, TCA has to be harmonised and accelerated. In terms of true pricing, as a result of scientific and technological progress, cases of true pricing by market players have emerged in the past years. Various food producers, traders, and farmers have used it to make their production more sustainable and involve their customers in the price implications (Eosta 2017; Tony’s Chocolonely, 2018; True Price 2020). A small number of retailers have used it to provide transparency (Penny’s, 2020) about the true price or even charge it (Time, 2021; True Price, 2021). A certifier uses true pricing to improve its value chain (Fairtrade International, 2019). Governments are starting to use it; for example, the Dutch Competition Authority allows true pricing as criterion to justify sustainability collaborations (ACM, 2020).
Various true pricing initiatives are growing the field (True Price, 2020; WUR, 2020). However, to transform food systems, a coordinated global effort is required. Hence, there is a need for a multistakeholder global partnership on the true price of food, leveraging the above efforts. This cluster will socialise the concept of true pricing and disseminate the results of work done by the Scientific Group. The cluster will seek to establish a coalition of supporters willing to experiment with and advance the concept of true pricing. Such a partnership could focus on (i) enabling transparency through a global true pricing standard and database; (ii) providing governments with tools to implement true pricing policies; (iii) fostering inclusive technologies to enable SMEs and farmers to engage in true pricing; and (iv) supporting private-sector initiatives with measurable targets towards the SDGs.