Skip to main content

True Cost of Products

  • Published on November 29, 2021

What would a kilo of beef cost if nitrogen and greenhouse gas emissions along the value chain were included? Consumers pay for their food twice: once at the counter and a second time hidden and in an indirect way, the environmental, economic, and social costs. These true costs of products are not currently on the price tag.

4% price premium on conventional apples, 30% on organic mozzarella and 173% on conventionally produced meat. These prices were calculated by the universities of Augsburg and Greifswald on behalf of the German discounter Penny as part of an experiment. The aim: to find out how much food would really have to cost if one also included the environmental follow-up costs that arise during production and the entire supply chain. Such considerations are currently being made in many places.

Currently the costs of the environmental and social impact damage during the production of a food product – the external costs – are not reflected in the price but are borne by society. For example, the Boston Consulting Group estimates that the environmental cost attributed to Germany’s agriculture industry was about 100 billion Euro in 2018.

Source

These costs are considered when calculating the true costs of products. Studies show that all food would then have to be significantly more expensive. However, there are differences between plant and animal foods and between organic and conventional foods.

 

The calculation of the true costs of a product – True Cost Accounting – is the balancing of all costs and consequential costs that arise in connection with the production of a product. For example, the production of a food product has external effects on nature (e.g., by polluting the soil, polluting water or reducing biodiversity) and on the people involved in the production (e.g., mental and physical stress, occupational diseases, among others). How negative these impacts are depends on the production system.

 

Think your steak is expensive? 

The topic is complex, but an example should make it easier to understand: Let's take a conventionally produced kilo of beef. Several drivers are not included in the current market price: Nitrogen discharges from fertilising the grown feed, greenhouse gas emissions like methane from livestock rearing and the energy used, among others. In the calculation of the true costs, these drivers are included through the value chain to the sale of the meat. Since they are climate-relevant substances, they could be the basis for fairly distributed CO2 taxes and straighten out the price distortion.

As a result of the study where several products from PENNY’s conventional and organic production where compared, PENNY’s customers see that the price tag for 250g organic minced meat includes the true cost of 5.09 euros in addition to the retail price of 2.25 euros. Even if the customer only pays the normal price in the end, initiatives like these are an important first step to raise awareness around sustainability and to visualise for consumers the consequential costs of their consumption so that they can make a conscious purchase decision.

 

Why calculate true costs?

Calculating the true costs of a product makes it transparent to what extent a company is operating sustainably. Prices should speak environmental and social truth.

To calculate the true cost of food, four external cost factors were considered in a study by the Universities of Augsburg and Greifswald:  The costs of offsetting nitrogen removal, land use changes, greenhouse gas emissions and energy provision during production.

The results of the study are clear: plant-based foods perform significantly better than animal-based products and the current market prices of conventional foods are clearly too low. The prices for conventional animal products should be almost three times higher than they currently are if external costs are included. Therefore, initiatives displaying the true cost of products can play an important role in encouraging necessary shifts in consumption patterns and a transition towards more sustainable diets in the future.

Although organic meat would also have to become significantly more expensive (plus 107%), the price difference between organic and conventional meat would be significantly reduced. The study is to be expanded in the future and, among other things, also consider the costs of possible antibiotic resistance or the use of chemical-synthetic pesticides. This should further reduce the true price difference between organic and conventional products – if not turn in favour for organic products.

In the future, accounting for true costs will play an increasingly important role for companies and society. The Farm-to-Fork strategy, the European Green Deal and, finally, more and more private initiatives are working towards a more sustainable food system but it will also require significant changes in food consumption, like dietary changes, consumer education on nutrition labelling and the environmental, economic and social aspects of food production, namely how it is grown, distributed, and sold. In the financial sector, a rethinking is also taking place that takes sustainability aspects into account in company valuations. The principle that companies have a competitive advantage despite high external costs is ultimately to the detriment of all involved.

More on this

You might also be Interested in