On a global level, environmental issues include damage to the ozone layer, the increase of atmospheric carbon dioxide because of fossil fuel use and forest destruction.  On a national level unsustainable land use causes soil erosion, air and water pollution, etc. Production and consumption of commodities generate ‘social costs’ and ‘social benefits’.  Part of the total cost is private and internal to the producers of the commodity, while others such as pollution are external to them but impact on others.  External costs for NR production are, for example, rubber factory effluents and dust generation.  Even continuous low prices of rubber can be a further potential for environmental damage, as the steady fall in income may encourage some commodity exporting countries to increase their production to maintain revenue, and hence cause further environmental damage.

The United Nations Conference on Trade and Development (UNCTAD) and other international bodies have realized the importance of ‘internalization’ of environmental costs and of the use of the economic and other measures in the pursuit of sustainable development.  The objective of internalization is the incorporation of these costs and benefits into the decision making of economic agents in order to alter their behaviour towards socially optimal production and consumption.  Without it, only part of the total costs and benefits to society are taken into account and therefore producers and consumers do not receive correct signals about the scarcity of resources. Too many resources are allocated to activities that generate external costs, and too few resources are allocated to activities that generate external benefits.

There is a need for a trade-off between more NR production and avoiding resource degradation. The aim is to arrive at a full cost price for NR.  In general, environmental resources are underpriced and the initial impact of internalisation means increasing costs, using various instruments such as mutually agreed import taxes, mutually agreed quotas, export taxes and investment subsidies.  The next step is to make international commodity prices reflect internalised environmental costs and to pass this on to the consumer.  One way to do this is by way of production differentiation, e.g., eco-labelling.  There is a problem, however, particularly if applied unilaterally by an individual producing country, because of stiff competition among producers, government subsidies and the existence of substitutes.

Both the price of NR and SR could reflect environmental costs.  By not taking into account all costs, the move from agriculture to manufacturing has been increasing too rapidly. The incorporation of external costs and benefits may not only help the world to derive a socially optimal production and consumption mix, but may also benefit the NR-producing countries.  It is quite likely that NR stands to gain from internalisation if carried out in the entire rubber industry.  Both supply and demand for NR is price inelastic, and most is produced by Thailand, Indonesia and Malaysia and the export earnings of NR are quite small compared to the total exports of these countries.  This means unilateral action by passing on the environmental costs to increase world market prices to consumers is feasible.  Of course, co-operation among the three producers and also with SR producers would be desirable.  It is important to get the co-operation of SR manufacturers as well as it being likely that SR generates a more negative environmental impact than NR, and may have externalised (subsidised) cost components.  Internalisation of costs for both NR and SR would make price increases possible, particularly for SR, for example, through a tax on energy consumption. NR is a more environmentally friendly product than SR, hence if costs are internalised the international price will be increased in the latter relative to the former.  However, SR is produced mainly for domestic consumption and quite often involves backward and forward integrated firms – hence the extent to which the extra costs can be passed to consumers is limited.