‘FAO acknowledges that it neglected costs of food systems in its accounting’

In November 2023, the Food and Agriculture Organization (FAO) released its annual flagship report, “The State of Food and Agriculture” (SOFA), covering 154 nations. The report introduces the concept of the “hidden cost” of food systems, which includes environmental costs from greenhouse gas emissions, water use, landuse change; health hidden costs from losses in productivity due to unhealthy dietary patterns; and social hidden costs due to poverty and labour productivity. The report proposes true cost accounting (TCA) approach to assess the hidden costs. Shagun speaks to Alexander Muller, former FAO assistant director-general who was in the panel of external experts involved with the report and currently the managing director and co-owner of Germany-based TMG–Think Tank for Sustainability. The company developed the Economics of Ecosystems and Biodiversity (TEEB) agrifood framework, which FAO has used to make the SOFA report. Excerpts:

The report is a first such attempt of a national-level assessment. Can you elaborate on its importance?

We have a systematic problem in the way we measure the success or the impacts of our economic activities, including agriculture. All of our economic activities have externalities—unintended and uncompensated (negative or positive) effects of economic activities on others. The way we are accounting for the outcomes of our economic activities is systematically neglecting positive and negative externalities. The most important example is how we have ignored the cost of carbon dioxide emissions from the fossil fuel industry over the last 150 years. We did not account for them but now we see the high costs. The SOFA 2023 report is the first authoritative publication of an international organisation being responsible for food and agriculture, looking at all costs of our agriculture systems. The report acknowledges that the 193 members of the UN have neglected important impacts and associated costs of the food systems in their accounting. This is the first time FAO has tried to create a model to look at the externalities country by country, and not just at a global scale. This is the start of an intensive debate on how to make our agriculture systems sustainable, how to decrease the negative externalities and how to increase positive externalities.

What were organisations like FAO doing wrong till now?

FAO was following the standard reporting schemes of economic success. However, our economic activities and their additional effects are not accounted for in an appropriate way. These are not included in the cost of agricultural production and malnutrition. We are ignoring the impacts and cost of natural capital and the cost of social affairs, and we are wrongly accounting health-related cost. For example, currently what is accounted for is the cost we pay for food in the supermarket. That is for example, the cost of labour, machinery, petrol and energy. But what is not accounted for is the damage done to nature (natural capital), such as the costs of the degraded land that has to be restored, the cost of climate change and our health bill due to air pollution. Therefore, we are paying through four different wallets but accounting only wallet number 1—the price we are paying at supermarkets. From the other wallets we are paying for degradation of the environment, for bad human health coming from malnutrition and we are destroying social cohesion in rural areas.

Now the UN, with a global community of researchers, including TMG, has developed TEEB agrifood framework over the last years, where we try to capture in a comprehensive way all negative and positive externalities which are real but not captured by the current economic system. This framework is the basis of SOFA 2023.

The report shows that China, US and India were the top three contributors to hidden costs, and that unhealthy dietary patterns form the largest share among these costs. How prominent is the trend in health-related costs globally?

It is not a surprise that China, India and the US have the highest costs because they are accounting for a huge population. What we can see is that cheap food is very often very expensive because of its high negative costs. We see a trend that we are trying to make food even cheaper but it is increasing the health costs. Highly processed industrialised food at supermarkets is cheap but the hidden cost is very high due to rising healthcare costs, for example for the treatment of diabetes type 2. Therefore, we need TCA.

Consumption of these highly-processed foods is also increasing in periurban and rural areas. How significant is this for a middle or low-income country where the hidden costs can lead to high disease burden and low labour productivity?

I would like to put the costs of unsustainable food systems in relation to gross domestic product (GDP). At the global level, that cost is about 10 per cent of global GDP. In least developed countries, it accounts for up to 27 per cent of the countries’ GDP. So, you can see that least developed countries pay, relatively, a higher price for seemingly cheap food and carry the highest costs, mainly in the form of poverty and productivity losses from undernourishment. Therefore, providing unhealthy food is a barrier to development.

How can governments influence production and consumption choices? There is a whole chain that goes from producers to retailers to consumers.

First of all, we have to recognise that the way we are measuring success of our economic activities is incomplete. It is not reflecting the true cost of our activities. We know that GDP is the most important figure in the world. Every government says that it has increased its GDP. But we are measuring it in the wrong way. GDP is a social construct and we have to change the way we measure success.

We also have to change the way big companies do standard reporting and accounting because they are measuring business impacts in an incomplete way and damaging the environment in the process. They are presenting the results of their economic activities in a way which is not reflecting reality. This is a political debate which goes beyond agriculture and is true for all economic sectors. Of course, for many developing countries, agriculture is the most important economic activity. So, let us start with measuring what is the true value at the government level (macro level), but also introduce it into the standard accounting of the private sector (micro level). It is also in best interests of these companies to look at their negative externalities. If an agricultural producer is degrading land on a large scale, then it is undermining the ability to continue the business. Maybe in 20 or 30 years this company will have to pay a lot for restoration. There is a need to change accounting in companies as a tool for risk management since it allows the companies to know the hidden costs and how much will these hidden costs affect their ability to continue to produce in the future.

Again, the fossil fuel industry is a good example. Emissions do not have any cost in the accounting system, but they have costs in reality. And now we find that cheap fossil fuels are incredibly expensive. People have to pay for it for mitigating climate change and adapt to a changing climate. Future generations have to pay for it. Therefore, the first and most important thing is a change of mindset and how we measure success. When we look at agriculture, we find that the costs of providing unhealthy food to poor people have to be covered somewhere: either by less economic activity because people are sick or by the health system. Therefore, we were building up a debt for the future with people with type 2 diabetes and malnourished population. This report now provides instruments for changing the way we are deciding food systems.

In terms of accounting, how challenging is it to integrate these hidden environmental costs into policy making and where should governments begin?

We have a global system of accounting that is heavily influenced by industrialised countries. Therefore, all countries of the world have to change their accounting. This is a long and winding road, but this is, from my perspective, the only answer to avoiding the situation where multinational companies from industrialised countries will earn the profits and developing countries will have to pay the health bill. So, changing the accounting is also a question of equity. This is a big political debate. Every country can start with doing shadow reporting. The countries will have to do the standard accounting for international purposes, but they can start with shadow accounting and say that they are looking in a different way to manage our natural resources. Why should developing countries produce cheap commodities, paying a high price for natural capital, and export the commodities at low prices to other countries? In such a situation, the profits will be in developed countries and developing countries will pay for depletion of natural resources.

What can be the methodological approach?

With the current report and the TEEB agrifood framework, the statistical offices in all countries have new homework to do. They have to track what they are ignoring and how can they translate it into statistical evidence. The first homework the politicians can give to statistical offices is to do TCA for their country. It is also a task for the private sector. My company has developed a handbook where the private sector could start looking at externalities. We have tested it with 20 different products from food companies. This handbook is available for free. Companies can use it and check how high are their negative impacts and how high are positive externalities. The next report of FAO in 2024 will deal with case studies looking, from different perspectives, at the true cost of our food systems, to move from a highly scientific and theoretical level to the real life.

This was first published in the 1-15 February, 2024 print edition of Down To Earth

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