Economic explanations for environmental problems

Summary
The purpose of this report is to describe the economic explanations behind mass consumption
within the fashion industry, focusing mainly on fast fashion. It aims to propose suitable economic
tools and instruments, such as certificate schemes and tax incentives, to rectify the environmental
problems related to fast fashion, along with impartial scientific criticisms to these instruments. This
report studies how environmental and behavioural economics targeted towards business models can
change the attitude and behaviour of both individuals and fashion companies while maintaining
economics of scale.

Over the last 30 years, the fashion industry has moved away from 4 collections a year based on
seasons and entered a new era of 50 collections per year (Anguelov, 2018). This is due to
digitalisation and the demand for trendy, quick, and inexpensive fashion (Crewe, 2017). As a
result, global supply chains and online retailers have shifted their focus towards a new business
model. The fast fashion business model relies on massive natural resource consumption and low-
wage workers to produce cheap and disposable clothes (Brydges, 2021). And in the process emits
large amounts of carbon emissions, pollutes lakes and water supplies with toxic chemicals and
microplastics, and creates massive amounts of unnecessary waste.

The lack of information, regulations and mandates in the fashion industry has allowed their
excessive pollutant habits to exist for too long. As we now move into the mindset of a sustainable
future, governments, fashion companies, and individuals have a role to play in ensuring a more
circular fashion economy.

Introduction
The fast fashion industry uses large amounts of energy and water during textile production and
creates a large carbon footprint. As well as in the supply chain as production normally takes place
in different parts of the world, hence, garments travel vast lengths to reach their destination
(Becker-Leifhold and Heuer, 2018). On top of this, roughly 61.3% of global production use
synthetic fibers (Muthu, 2020), to lower the cost of garments. However, these fabrics use hazardous
chemicals and are of low quality (Becker-Leifhold and Heuer, 2018), resulting in water pollution
and throw-away culture.

Cotton accounts for nearly 31.2% of the material for clothing (Muthu, 2020), and is the most water-
intensive and pesticide dependent crop (Becker-Leifhold and Heuer, 2018). While the textile
industry in the US and Australia have improved efficiency in their water use, fast fashion
companies rely on cheap textile factories in developing countries with limited to no environmental
regulations. Increasing their freshwater usage to about 1.5 billion m3 each year (Pensupa et al.,
2017). Synthetic fibers as mentioned previously are factory made and uses hazardous chemicals,
endangering both factory workers and the environment (Becker-Leifhold and Heuer, 2018). Both
fabric preparation for dyeing as well as applying dyes to synthetic fabrics require water (Pensupa et
al., 2017). After the dyeing process, the water used is returned to the ecosystem without any
additional effluent treatment, polluting groundwater and threatening the health of communities
relying on it. It was presumed that “200 tons of water are virtually poisoned in the manufacturing
on 1 ton of fabric” (Greer et al., 2013). Further maintenance of fast fashion garments, such as the

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washing of clothes, results in microplastics entering oceans and water supplies (Becker-Leifhold
and Heuer, 2018).

Fast fashion retailers are also successful in communicating a sense of urgency, immediacy, and
exclusivity (Barnes and Lea‐Greenwood, 2010). Through strategic signage and displays to convey
that fast fashion makes trendy and luxury look-alike clothes more accessible, but only for a limited
time to increase consumption. Examples include, “get it before it goes” and “as seen in Glamour”.
This concept leads to mass consumption and unnecessary waste. It is estimated that an average
American throws away 30 kilograms of clothing a year (Becker-Leifhold and Heuer, 2018). Most
fast fashion garments are non-biodegradable (Muthu, 2020) as they are made from synthetic
materials. However, natural materials produce methane when decomposing, contributing to global
warming. Clothes that do get recycled could be shredded and reused, however, only 1% of recycled
clothes are made into new clothing as shredding diminishes the quality of the material
(Rathinamoorthy, 2018). Most are made into stuffing, insulation, or cleaning cloths. Clothes are
often donated to developing countries but because of the low quality, most end up in unmaintained
landfills. Hence, the environmental impacts of the fast fashion industry is a global concern.

Economic explanations
Fast fashion originated in the United Kingdom when retailers wanted shorter manufacturing times
and quicker responses to the market (Hines and Bruce, 2001). Thus, the fast fashion business model
shifted from outsourcing merchandise to just-in-time and computer integrated manufacturing
practices which reduced their inventory and allowed for fast changes to meet new trends and
demands of the market (Bruce, Daly and Towers, 2004). Many fast fashion companies also rely
heavily on low-paid workers and cheap materials to create low prices. While the economy of most
developed countries has significantly benefitted, the fast fashion industry has created large negative
externalities due to a lack of environmental regulations and transparent information.

Lack of environmental regulations, especially in developing countries where most fast fashion
industries place their factories, result in negative externalities such as environmental pollution and
health impacts. This is because neither buyers nor sellers pay for the damages created by their
economic choices (Ribaudo, Kuchler and Mancino, 2008). This encourages companies to continue
polluting as the consequences of their actions do not reflect in societal costs. Furthermore,
inaccurate cost of production leads to inefficient allocation of resources.

Lack of transparent information is a market failure because consumers are unaware of the
conditions in which these garments were produced and the negative impacts that arise from it.
Consumers like low prices but are uninformed that behind the reason of low costs and demand
more fast fashion goods, leading to increased supply and employment. However, to maintain the
low prices without having a shortage in supply, companies will look for other ways to reduce the
cost of production. This could be lowering wages, improper maintenance of worker environment or
even cheaper and harmful materials.

Environmental curves
The Daly curve best describes the relationship between GDP and the fast fashion industry. As GDP
increases so do environmental degradation. This is because, as mentioned previously, the fast
fashion industry depends on low-paid workers and cheap materials to produce inexpensive clothes.
This is because, as mentioned previously, the fast fashion industry depends on low-paid workers
and cheap materials to produce inexpensive clothes. This means production increases at low costs

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and consumer spending is high. However, by-products and pollution also simultaneously increase
(Stern, Common and Barbier, 1996). The fast fashion business model to achieving economic
growth, threatens the planetary boundaries because as demand increases, more resources are
exhausted to reach this demand.

The fashion industry is a significant driver of global GDP as it has rapidly grown from 2012 to
2020, meaning the average global consumer is buying more apparel each year compared to the
previous year (Sharama, 2020). The industry is worth 1.3 trillion US dollars and employs close to
300 million people globally (Gazzola et al., 2020). Fast fashion has a big influence on the economy
mainly due to the rapid growth of textile industries to meet the needs of increasing customer
demands (Sharama, 2020). This diverse industry also employs various workers including but not
limited to, retailers, fashion designers, manufacturers, accountants, and textile machine operators
(Sharama, 2020). However, the economy only grows when customers are willing to continuously
purchase goods. Hence, the fast fashion industry is constantly creating new, trendy clothes from
raw materials, increasing production, and degrading the environment in the process.

Economic instruments
The two main market failures in the fashion industry are negative externalities from production and
lack of information. To solve these problems, it is essential to transform the fast fashion business
model into a circular fashion business model, focusing on changing production and supply chains
rather than just rectifying waste management (Brydges, 2021). Businesses should apply existing or
upcycled textiles into new designs and be more transparent to consumers about environmental
problems. In addition, businesses should promote circularity and encourage consumers to invest in
good quality clothes, rather than stick to the current mindset of trendy and disposable goods. As
well as provide more detailed information on garment care tags to change consumer behaviour
(Brydges, 2021).

Governments should intervene by introducing tax incentives and negative incentives to encourage a
circular fashion economy. As suggested by (PACE, 2021), tax incentives can be given to
companies that (1) use safe and/or recycled textiles. This ensures that production does not pose
health risks for workers or the environment throughout use. (2) Strive to create durable apparel to
minimise waste. (3) Design recyclable textiles that are easy to disassemble and can be effectively
upcycled. Tax incentives could also be to promote rental, second hand, and repair stores. Shifting
away from mass production/consumption and towards an industry motivated by quality (Fashion
for Good, 2019).

Negative incentives could be put in place, targeting fast fashion companies to perform better
environmentally. For example, tax on virgin plastics and synthetic textiles, carbon emissions,
and/or chemicals. As suggested by (Svensk Handel, 2020), companies should be taxed when using
certain chemicals and for the amount used, excluding VAT. However, this can only be applied if
the size of the externality is known, and the correction cost is less than the negative impact.
Additionally, environmental price should reflect in the product price.

Lastly, certificate schemes could be set in motion to change the current legal and economic
framework of the fashion industry, ensuring greater social and environmental quality standards.
Certificates provide a specific criterion that goods or services must meet in order to enter and be
sold in a country (Mori Junior, Franks and Ali, 2016). Since fashion is a global industry, often
being designed, manufactured, and sold in three separate countries, the certificate scheme should

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establish real change. Especially because meeting these criteria standards is economically more
beneficial than operating multiple factories to guarantee low production costs in countries without
such schemes.

Scientific criticism
While the aim of the proposed economic instruments is to achieve a circular fashion economy,
there are few restrictions and scientific criticisms against them. The main challenge is effective
recycling. Low quality garments produced in the fast fashion industry are unsuitable for recycling
due to chemical additives and fiber blends. Chemical additives endanger the quality and safety of
recycled materials and fiber blends are energy intensive and costly to mechanically separate
(PACE, 2021).

The second biggest challenge is that while there has been an increase in environmental awareness,
price continues to be the main purchasing decision driver (PACE, 2021). Sustainable and circular
business models cannot compete with fast fashion prices, even with tax incentives; hence
businesses need to incorporate additional values to attract consumers (Link, 2006). Additionally,
tax incentives could unintentionally create windfalls that result in inequities between companies
and often undermine public accountability (Link, 2006). It is also important to keep an eye on tax
incentives and ensure that there is not a repetition of the fast fashion industry. Especially if
employees are motivated by these incentives to increase sales of unnecessary goods and products to
customers leading to mass consumption. Other disadvantages include increasing sales and
productivity and neglecting quality, as well as resenting coworkers or competing companies as
incentives are often seen as unfair (Link, 2006).

As for chemical taxation, it is often hard to know or reliably estimate the external effects of
chemicals. There is a lack of knowledge on the relationship between the level of chemicals
involved in textile production and how to measure environmental and health costs. And if these
taxes are too high this could result in underproduction of apparel, risking nearly 900 jobs, and/or
consumers or workers may have to burden these additional costs (Svensk Handel, 2020). Negative
incentives pose the same threat of loss of jobs, increased resentment and conflict in the workplace,
increasing productivity to compete with subsidised companies, and above all these incentives may
be quite costly, especially for small businesses (Link, 2006).

Finally, certificate schemes are time consuming as new regulations and formalities must be met
during production. But even more concerning is companies’ ability to find loopholes through vague
language to avoid certain procedures. These certificates can also be used to greenwash stakeholders
and investors. And most of these certificates rely on data and accountability from the company,
which may sometimes be unreliable or detailed without enough quality (Mori Junior, Franks and
Ali, 2016).

Conclusion
Personally, I prefer the certificate schemes as I feel that this government intervention is applicable
on a global level ensuring all textile industries change their habits and become more
environmentally conscious as well as improving working conditions in these factories. While
negative incentives such as chemical tax may reduce chemical pollution, it is more likely that
workers will get paid less to absorb the tax. Instead, these certificates schemes should require
appropriate income and regulations to minimise chemical waste rather than give companies the

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option to pay for such privileges. However, the fast fashion industry has managed to get away with
modern slavery for over 30 years now and may manage to escape or find ways around certain
requirements for these certifications. Hence, this environmental problem will not be solved with a
shift in consumer habits, it requires a system change.

The environmental impacts of mass consumption in the fashion industry are relatively new and lack
sufficient research. And achieving a circular fashion economy will be hard, as we lack the
technology, so the main aim should be to minimise environmental degradation and inform
consumers about these environmental costs. However, the government should still incentivise
research and innovation, and provide capital for technological solutions within the production and
reuse/recycling of textiles, as this would greatly benefit the economy in the long run. The fashion
industry employs many people of different backgrounds and clothes are essentials. Hence, it is in
the global economy’s best interest to properly develop this industry paying attention to factory
working conditions, income, and environmental impact.

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