Towards Sustainable Foodstuff Pricing – Internalizing External Costs of Agricultural Production

With the UN’s Sustainable Development Goals in mind the severe environmental degradation caused by today’s industrial agriculture must be reduced drastically. Transforming the consumers’ behaviour towards sustainable dietary choices is one auspicious approach. Consumers are currently misled towards demand of inadequately priced, environmentally damaging foodstuff by an insufficient or absent internalization of external environmental costs and thereby distorted market prices. Therefore, we design a transdisciplinary framework that translates ecological damage into economic impact following the polluter-pays-principle: we calculate market-price surcharges for different food categories which account for their external effects and also distinguish between different agricultural production systems. Life cycle assessment (LCA) from cradle to farmgate is used to adjust producer prices regarding foods’ negative impact caused by the key indicators greenhouse gas emissions, energy use and nitrogen surpluses. Emission data for 11 relevant food groups of plant and animal origin is therefore identified. We then conduct a meta-analysis based on 40 primary sources referring to the environmental difference between organic and conventional farming practices regarding the key impact indicators to differentiate emissions of food categories even further. After evaluating reasonable damage cost factors these are then weighted with the previously quantified emission data for each food category. Lastly, the calculated external costs are put into relation with the foods’ current market prices resulting in necessary surcharge of each examined product. Using this framework for the case study of Germany, results show significant differences between the food categories: while organic produce should be an average of 42% more expensive, effects of conventional production resulted in an average surcharge of 129%. Plant based organic food appears to be the currently most reasonably priced group with a calculated average surcharge of only 6%, whereas animal based conventional foods should be on average 94% (milk) to 196% (ruminants) more expensive. Generally, it is apparent that market prices for animal originated foods are significantly more distorted than those of plant-based foods with meats being the least adequately priced products on the market. Overall, these results display the vastly varying gaps between current market prices and the true costs of different food categories supporting the notion of a severely distorted current market situation. When environmental damage arising from food production is internalized into the market price by using our framework the consequential undistorted market design will – following prevailing economic theories – lead consumers towards demand of reasonably priced, environmentally beneficial foodstuff building more sustainable consumption patterns. Supply will adapt to the changed demand, eventually reducing agricultural resource use and environmental pollution and designing a much more sustainable production landscape. Therefore, the economic activity of correcting market prices with adequate and category-specific external costs can pose a real chance to achieving the SDGs and likewise increasing overall welfare. As the free market develops within the boundaries of economic policies our approach can also be of use for policy makers to develop an internalisation of environmental damage costs to not only follow international legislative standards but also integrate reasonable environmental perspectives.