True pricing: effects on competition

Sarah writes*

Although Trump has once again pulled the U.S. out of the Paris Climate Agreement, American firms still face consequences in EU markets. Numerous countries are still committed to non-legally binding climate targets, but the EU demands full adherence to its Green Deal policies. Non-compliance could bring legal and financial repercussions. Thus, businesses within the EU must evolve their models to align with environmental and social regulations. If national authorities fail to guide them through the transition, many may crash. Yet, many member states are lagging behind, requiring grassroots approaches to drive faster change.

One of those grassroot initiatives is the True Price Institute, a Public Benefit Organisation, that promotes the reflection of negative externalities in price mechanisms (True Price, n.d.). From April to June in 2023, they held an experiment at three different Albert Heijn (AH) supermarkets spread throughout the Netherlands (True Price & AH To Go, 2023). Customers received the following two options: to pay the price of coffee that they were used to, or a few cents extra. By increasing the price, the institute included the social and environmental costs of milk and coffee, which are both linked to exhaustive production processes. But did it really work? And how did customers respond?

Based on online survey responses and data analysis from the experiment, we might observe a gap between words and actions. While 36% of respondents expressed willingness to pay a few extra cents, only 15% of actual customers did pay more (True Price & AH To Go, 2023). Although the drop may reflect the difference between survey respondents and actual shoppers, the result also makes logical sense. The Dutch are known for being “gierig” (frugal). Plus, even when made aware of negative externalities, it may still be difficult for individuals to grasp the impact of their personal choices.

Although the report is optimistic about these results, it is clear that consumer choice alone will not drive sufficient change. Implementing a true pricing mechanism requires top-down support. To create strong incentives for sustainable transformation, companies must shift their perspectives. If they do not comply with the EU Green Deal, they will eventually be forced to internalize social and environmental costs at a much higher price. Instead, businesses should facilitate a smoother transition now to prevent economic shocks later. And that assumes we have more time — which we don’t.

For example, large companies will be required to report on non-financial directives starting in 2024 under the CSRD regulation (European Commission, n.d.). Previously, companies only had to report on their financial activities. However, to monitor alignment with social and environmental directives, the EU is demanding early accountability. (“Early” means relative to 2050 rather than in terms of climate action.)

True Price et al., 2014 have modeled how market shares might change as firms internalize those external costs:

According to their report, true pricing will strengthen innovation, reputation, and risk management — all of which offer comparative advantages on firms.

Once the EU has built its labor force for the sustainable transition, where will the U.S. stand? If the EU becomes more expensive, will it gradually reduce trade with the U.S. to improve its own market efficiency? And what if other major economies, such as China, follow suit?

Bottom line: Time will tell, but one thing’s for sure: Pay now or pay more later.

* Please help my Applied microeconomics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice 🙂