True Cost Accounting (TCA) is a method that helps measure and value the hidden effects of economic activities on the environment, society, and health. TCA is also called full cost accounting (FCA) or "multiple capital accounting (MCA)." This method looks at more than just money to help businesses and governments make better choices. It considers four types of capital: natural, human, social, and produced.
TCA can be used in all areas of the economy. It shows how economic activities affect society, not just the costs that producers and consumers pay directly. These effects, like environmental damage, health issues, or social problems, are not shown in product prices or company profit and loss statements. They are called hidden costs. TCA is especially important for agrifood systems, which include food and other agricultural products. Hidden costs here can be very high. Many of the early developments in TCA focused on food-related issues.
History
True Cost Accounting (TCA) is a newer term, but the idea is not new. It is connected to the concept of externalities, which are costs or benefits that affect people who are not directly involved in an activity. The idea of TCA began with the work of economists Pigou and Marshall in the 1920s. In recent decades, money has been assigned to externalities in situations such as when businesses are punished for harm or when insurance companies calculate costs from industrial accidents. TCA is also seen as a broader version of cost-benefit analysis (CBA). In the 1980s and 1990s, other terms were used to describe similar ideas, such as full cost accounting.
What makes TCA different from earlier methods is that it uses systems thinking and holistic thinking. These approaches recognize that economic systems involve many groups, such as producers, consumers, distributors, and policymakers, and that these systems depend on different types of capital, including natural, social, human, and produced capital. TCA understands that economic systems are complex and connected in many ways. When applying TCA, researchers often use 12 or more indicators to measure and value both positive and negative effects across areas like the environment, health, society, and the economy.
Recent progress in TCA has focused on food and agriculture. The Economics of Ecosystems and Biodiversity (TEEB) initiative, managed by the United Nations Environment Programme, works to include the value of biodiversity and ecosystem services in decision-making. The program has created guidelines and studies on how to use TCA to guide policy changes. In 2018, the TEEB for Food and Agriculture (TEEBAgriFood) project was started by Alexander Müller. Its goal was to examine key questions and debates about how the agrifood industry affects biodiversity, ecosystem services, and human health worldwide.
To study how TCA can help make agrifood systems more sustainable, other organizations and research groups have also conducted studies and reports. Examples include the World Business Council for Sustainable Development, the Global Alliance for the Future of Food, and the Sustainable Food Trust. Additionally, the Global Nature Fund and the Capital Coalition, working with TEEBAgriFood, have created a framework to help businesses include TCA in their accounting practices, making their impacts more visible.
Definitions
The definition of True Cost Accounting is changing, and many different definitions have been suggested.
The United Nations Environmental Programme describes it as "a changing, comprehensive, and system-related method to measure and value the positive and negative environmental, social, health, and economic costs and benefits. This helps people make better decisions about policies, businesses, farming, investments, and consumer choices."
The True Cost Initiative offers a similar definition but uses the word "methodology" instead of "approach." However, TEEBAgrifood explains that True Cost Accounting is a method that includes different tools and ways to analyze problems. The True Cost Initiative’s definition focuses only on externalities, but the Food and Agriculture Organization (FAO) says externalities are only part of hidden costs. Other hidden costs might come from issues like poor or unfair information in markets. Some people use the term "full cost accounting (FCA)" to describe the same idea. For example, IFOAM (Organics International & Sustainable Organic Agriculture Action Network) defines FCA in a way similar to how the United Nations Environmental Programme defines True Cost Accounting.
In some reports, like the TEEBAgriFood Evaluation Framework, the term "multiple capital accounting (MCA)" is used to describe True Cost Accounting. MCA is defined as "a method that uses systems thinking to include natural, human, social, and produced capitals. It helps show the visible and hidden connections between agrifood systems, people, and the environment."
In 2023, the Food and Agriculture Organization defined True Cost Accounting as "a comprehensive and system-related method to measure and value the environmental, social, health, and economic costs and benefits of agrifood systems. This helps policymakers, businesses, farmers, investors, and consumers make better decisions." This definition is similar to the one from the United Nations Environmental Programme. The words "comprehensive and system-related" mean that True Cost Accounting looks at full systems, including all types of capitals and people involved, and how they are connected. This definition also includes both "costs and benefits" and aims to make all impacts visible, whether they are environmental, social, health, or economic.
Capitals
Economic activities rely on and influence natural, human, social, and produced capitals. These capitals support human well-being, economic success, and environmental sustainability. Most capitals are not measured in economic studies, except for produced capital and part of human capital. Because of this, the TCA approach focuses on measuring the hidden costs linked to these capitals.
Economic assessments often include data about produced capital, such as machinery, equipment, infrastructure, and goods. These are measured in the market through things like wages and labor. Human capital, such as labor and wages, is also partially measured in economic studies.
Natural, social, and part of human capital are not measured in economic assessments in a consistent or complete way. Natural capital provides resources like plant growth and fresh water to economic activities. In return, these activities can harm natural capital through pollution and greenhouse gas emissions. Some production methods, such as regenerative agriculture and agroecology, can help restore ecosystems.
Human capital provides skills and labor. Workers receive wages and working conditions that can be good or bad. Social capital supports economic activities by sharing cultural knowledge and shaping how people access resources like land. Economic activities can improve social well-being or cause social issues like poverty and marginalization.
Produced capital supports research and development. In return, it generates income, profits, rent, and taxes.
Results
Most true cost accounting studies aim to show hidden costs connected to food and farming. These studies vary based on the research question, where the study is done, and the hidden effects included. Some hidden effects are hard to measure. For example, environmental effects like greenhouse gas emissions are easy to include because there is a lot of data available. However, effects related to human and social factors may be harder to find. Examples include poor working conditions (human capital) and loss of cultural traditions (social capital).
In 2019, a World Bank study estimated the hidden costs of foodborne diseases (from unsafe food) in low- and middle-income countries. These costs were about 95.2 billion dollars.
Three other studies have tried to estimate the hidden costs of global agrifood systems. FOLU (2019) estimated these costs at 12 trillion dollars, while Hendricks et al. (2023) estimated them at 19 trillion dollars. However, Hendricks et al. noted that this number is uncertain and could range between 7.2 trillion and 51.8 trillion dollars. A third study, from the FAO report in 2023, estimated global hidden costs at 12.7 trillion dollars. This study also noted uncertainty in the estimate. The FAO report states that there is a 95% chance the hidden costs are at least 10.8 trillion dollars and a 5% chance they are at least 16 trillion dollars. Unlike the other studies, the FAO report looked at hidden costs in 154 countries. It says the numbers are consistent and cover major areas like the environment, health, and society. This allows comparisons between countries and between different areas.
A study in the United States found nearly 2 trillion dollars in hidden health and environmental costs. These costs affect communities of color more than others.
In 2018, a TEEBAgriFood study on organic rice production in Thailand measured the hidden costs and benefits of rice farming there. It also suggested ways to encourage long-term sustainable rice production. Another study compared the hidden costs of genetically modified and organic corn production in Minnesota, USA.
Following the 2023 FAO report, the next edition provided details about hidden costs linked to unhealthy eating habits that cause non-communicable diseases in 156 countries. It found that in 2020, global health-related hidden costs totaled 8.1 trillion 2020 PPP dollars, which is 70% of all hidden costs from agrifood systems. Diets low in whole grains were the biggest concern (18% of health-related hidden costs), followed by diets high in sodium and low in fruits (16% each). However, these numbers vary by country.
The 2020 FAO report, "The State of Food Security and Nutrition in the World," estimated hidden costs related to health and climate change based on current eating habits. These estimates used data on food availability and adjusted for food waste. The report assumed an average daily energy intake of 2,300 calories per person. It found that if current eating habits continue until 2030, hidden costs would reach more than 1.3 trillion dollars for health and 1.7 trillion dollars for climate change each year.
A study by Tufts University in the United States looked at the health and economic benefits of medically tailored meals (MTMs) and produce prescription programs. It found that using MTMs in Medicare, Medicaid, and private insurance for patients with diet-related illnesses and limited ability to do daily tasks could prevent about 1.6 million hospitalizations and save about 13.6 billion dollars in healthcare costs during the first year of implementation.