Externalities can last a very long time
Britain’s post-industrial landscape is pock-marked with derelict factories, diverted rivers and areas of seemingly prime land that lie unused. In many of our towns and cities, land that should host homes, shops, offices or parks instead lies deserted. When people talk about building on brownfield land, this is often the land they have in mind. But there’s a reason much of it hasn’t been built on already: the land is often contaminated, poisoned by industrial activities that have long disappeared.
Heavy industry can damage the land in various ways, from slag heaps of waste materials to chemicals that poison the soil and the ground water. Sometimes the industrial buildings themselves are too dangerous or expensive to demolish and have to stay behind, empty and unused.
Clearing up contaminated land, so that it is safe to live on again, can be ruinously expensive. UK government guidance suggests the costs can sometimes be above £1 million per hectare — and that’s in 2015 prices, and before considering demolition. In prosperous city centres with buoyant property prices, developers of new buildings can often justify these costs. In Bristol, where I live, many former industrial buildings have been converted into magnificent buildings for modern use. But in the many places that have had a less happy recovery from de-industrialisation, land values are lower and remediating the land is not viable without considerable state support. In too many towns, the industries that put them on the map now help to choke off any prospect of recovery.
And contaminated land is not only a historic problem: businesses today still leave behind problems for others to clean up. The legacies of closed or downsizing steelworks in places like Redcar, Port Talbot and Scunthorpe will colour those places for decades to come.
When businesses close down — as they almost always do eventually — it is hard to get them to pay for what they leave behind, whether that is debt or environmental damage. Debts are at least owned by people who knew there was a risk, but the environmental damage is owned by no one. My former colleagues at the Environment Agency describe the various obstructions and deformities in rivers left by long-departed industries as “orphaned” assets. They become the problem of local people (and wildlife), and the only person likely to take them on is the state.
This long-term environmental damage is a type of externality, just like carbon emissions, noise or air pollution — a cost that is borne by other people, not the person creating it. And it highlights an important point: externalities can last a very long time. If you are trying to internalise externalities — to make the polluter pay — you can’t just focus on the present day.
The most obvious solutions — and the ones generally used by regulators — are to first limit environmental damage as much as possible now, and to second make polluting companies pay towards the cost of future environmental clean ups. This does often happen; for example, the Environment Agency collects funds from waste companies today to cover the cost of dealing with landfill sites (where our rubbish is buried in the ground) in the long term. There are various ways of doing this — building a remediation fund in advance, buying insurance against future costs — but the logic is the same: pay now to cover future costs.
But this approach is harder to implement than it sounds. Raising costs for compliant businesses today increases the risk that they get undercut, either by illegal business at home or more lightly regulated businesses abroad. England has a surprisingly serious problem with waste crime — businesses disposing of waste without following the regulations — which hurts legitimate waste businesses. If regulators turn up the heat on businesses now — either through tighter regulation or higher contributions towards future costs — the risk of them going bust or turning away from following the rules increases, which makes it more likely the state will have to clear up the problem anyway.
This problem has an echo of the implicit subsidy that financial services often get from governments. If banks believe they are “too big to fail” — that is, governments will be forced to bail them out if they get into financial trouble — they have an incentive to take extra risks, believing that the public will cover the cost of failure. Industries that can dump the future costs of the damage they cause on to everyone else might seem profitable in the short term, but almost always cost society in the long term.
Of course, not all externalities produced by businesses are bad. In fact, a large chunk of economic growth is caused by externalities, in the form of spillovers of knowledge, technology, know-how from one company to others. The Georgian and Victorian eras in Britain — where businesses built canals and railways in a burst of optimism, before many went bust — were full of examples of businesses leaving behind good as well as bad legacies. Encouraging investment and innovation is always a good thing — but it is a false economy to do so at the cost of lasting environmental or social harm.
The problem of long term externalities is especially acute in the context of nuclear power. Nuclear plants have among the biggest local environmental footprint of any industry, even if their carbon emissions are zero. This issue — along with the wider issue of nuclear safety — can be dealt with via effective regulation, but at the cost of making nuclear power more expensive.
We can debate whether the UK’s approach to nuclear regulation is too burdensome, but we should not elide the problems regulation is trying to solve. You can see the costs imposed by previous nuclear power plants on today’s taxpayers by looking at the energy department’s budget, below. The cost of nuclear decommissioning looms large.
When people — including AI companies looking to nuclear to quench their growing energy demands — say regulation needs to be slashed, they need at the very least to explain how they plan to account for the long term costs of handling nuclear waste (alongside immediate concerns like safety). Businesses should pay for the full, long-term costs they create, not just the ones that they bear today.
What can governments do to tackle these long-term externalities?
First, back their regulators and make companies contribute today towards the costs of future damage. This may be unpopular, but costs are costs whether they accrue today or in several decades’ time.
Second, put more effort into preventing legitimate businesses being undercut by those who break the rules. That means investing more in enforcement efforts at home, to dissuade businesses that do not follow the rules. It also means enforcing regulatory standards on imports, to ensure that domestic firms are not undercut by those following lower environmental standards. We should not keep consumer prices low by degrading the environments of other countries.
Third, the government should spend more tackling historic environmental damage, where it is too late to make someone pay. In cities like Liverpool, Manchester and Glasgow, the state has helped to revitalise parts of city centres by remediating land and either replacing or reusing their industrial heritage. This has generally coincided with economic recoveries in their city centres. But these efforts are generally confined to central areas, and haven’t spread widely enough to turn around their whole city regions, let alone more distant towns. Whether land is reused for homes, offices or parks, putting more of it back into use is a good use of public money.
Looking after the environment is a long game, but it is one we should play. The way we run our economy today can affect places for centuries, and not just through its impact on the climate. Just because we can’t see an externality right now, it doesn’t mean we shouldn’t deal with it.
