In order to discuss effectively the moral problems that arise when businesses interact with the environment, we need to introduce an important concept. And that concept is “externality”. An externality is any cost that a corporation can push onto some other person, group, or entity. If two parties engage in a business transaction, that transaction will have costs, hidden or explicit, that are borne by one party or the other. If, for example, I have a store and you want to come to my store and buy something, there are costs to that transaction. I have to pay the cost of keeping the lights on so we can trade, I have to pay my employees so I don’t have to ring up the sale myself. If you pay with a credit card, I have to pay a fee to the bank to process your sale. Meanwhile you have to pay for the gas you burned driving to my store, and time that you could have been doing something else. Those are all costs that you or I pay that are not the price of the item that you bought. It costs me something to run a business, and it costs you something to shop. That seems fine. You are willing to pay those small costs associated with shopping, and I’m willing to pay those small costs associated with running a store. It’s just “the cost of doing business”, as they say. But there are other costs that are paid by neither you or I. The roads that you drove on to get to my store were paid for by taxpayers (of which you might be one, but you certainly didn’t pay for them alone). The employee that made the actual sale is compensated for her time, of course, but not the people in line behind you. They had to pay (with their time) for your transaction. And what about the education that my employee had to have in order to get the job? I didn’t pay for that and neither did you, but someone did. In fact, everyone did.

I know those are minor, probably trivial costs, especially when they are distributed among many people, like taxpayers. No one thinks much of paying them. So we shouldn’t be surprised when corporations try to get others to pay as much of these costs as possible, since the more costs a corporation can get others to pay, the more money it keeps for itself. The corporation “externalizes” those costs by making them someone else’s problem. The more costs a corporation can push onto other people, the more profitable it becomes.

The ethical problem becomes obvious when businesses leave these costs up to people who don’t benefit from the transaction, or maybe don’t even know hey are paying it, or know about the cost but don’t have any choice but to pay. This is the problem with leaving transaction costs to be paid by the government (and thereby taxpayers), or to be paid by the community. But that’s not the problem that is the topic of this module. For now, we’re more interested in the problem of corporations pushing their costs onto the environment.

Because the environment can’t choose whether it will pay these costs, and since the environment almost never benefits from these transactions, we have to consider whether we think it is morally permissible that corporations externalize some of their costs by leaving them up to the environment. This is why Stakeholder Theory, Corporate Social Responsibility theory, and Triple Bottom Line all include, directly or indirectly, responsibilities toward the environment.

Suppose now that rather than a store, I own a chemical factory. There are lots of costs I have to pay, like the salaries of my employees, the utility bills to keep everything running, and the disposal of any waste products my factory generates. It might be very expensive to dispose of my industrial wastes properly. According to Stakeholder Theory, the environment is a stakeholder, because it has a stake—that is, it can be harmed or benefitted—by my choices regarding the disposal of that waste. On that view, it matters whether my corporation processes the chemical waste to make it safe, or seals it up so it can be stored safely, because if it doesn’t, then the burden of processing that waste will fall on the environment. Of course, the environment has natural processes that break down waste—even industrial chemicals—over time. But should it have to? The environment, as a stakeholder in that chemical factory, will suffer very real harms if the cost of processing the industrial waste is externalized from my corporation, and the environment is left to process the waste itself.

Alternatively, under the Triple Bottom Line view of corporate responsibility, externalizing the cost of waste disposal by dumping waste directly into the environment is simply not sustainable. The environment processes harmful chemicals very slowly, and a chemical factory produces waste relatively quickly. Unless I were to spread out the waste evenly over the whole world, such that there was only a very small amount of waste in any given place (which I suspect would be far more expensive than disposing of it properly, and this would only work if no one else was doing it also), the waste would build up very quickly wherever I’m dumping it and the local environment would not be able to sustain the constant damage.

Finally, under the Corporate Social Responsibility view of good corporate behavior, we have to consider two of the constituent responsibilities, legal and ethical. Obviously my chemical factory has a legal responsibility to obey the environmental regulations established by the law, but I also have an ethical responsibility to act in accordance with the spirit of the law. Suppose the government had issued me pollution vouchers, allowing me to dispose of 10 tons of waste per year, but I only produce 8 tons per year. I could, entirely legally, sell those remaining 2 tons worth of pollution vouchers to another corporation, earning myself a nice profit. But if I recognize that the spirit of the laws are to protect the environment, then I have a responsibility not to facilitate increased pollution by other corporations. Also, I have an ethical responsibility to refrain from needlessly damaging the environment even when there are no applicable laws.