The cheapest T-shirt in Asda costs £1.50. You don't have to be a mathematician to calculate that this figure doesn't add up. Someone, somewhere bought that cotton seed, planted it, irrigated it, pumped it full of pesticides, fertilizers and herbicides, harvested it, sorted it, baled it, shipped it to another country, carded it, spun it, wove it, cut it, sewed it, packaged it, shipped it again, and sold it. For £1.50.

If we're not paying the price of that cotton T-shirt, someone, somewhere is. Lee Holdstock, a textile consultant for the Soil Association, says, "There is no such thing as a cheap product. The consumer may not be paying at point of sale but there are hidden environmental and human costs."

The supermarkets are full of cheap clothes - can they really produce goods at these prices without cutting corners? According to the Environmental Justice Foundation's 2005 and 2007 reports, cotton is hugely damaging to the environment: a single T-shirt will have used 80g of fertilizer and 3g of pesticides.

The EJF maintains cotton is grown so cheaply because child labour is involved, particularly in Uzbekistan. Rob Harrison, the editor of Ethical Consumer magazine and the author of a report on ethical clothing, says that no manufacturers can guarantee their cotton was grown without the involvement of child labour unless it's certified as Fairtrade or organic.

"Certainly every area that can be cut is being cut," says Harrison. "The supermarkets would argue that efficiency and bulk ordering reduces costs and that is true, but in producer countries what we see are reverse auctions. A retailer will advertise for a producer who can make 20,000 copies of a dress and the producers bid in an open tender system. It's a race to the bottom."

Harrison estimates that the person who makes each garment will receive less than 5% of the final price. For those of us who aren't mathematicians, that's 7.5p for every £1.50 spent on that Asda T-shirt.

A report published by War on Want in December 2008 showed that factory workers in Bangladesh who supply Asda, Tesco and Primark are in a worse position than they were two years ago. Harrison says: "The crux of the problem is that factories overseas are getting conflicting messages from clothing buyers in the west. On the one hand companies say we want better human rights, and on the other they say we want lower prices. And factories know in their hearts which one is going to secure the contract."

In his report, Harrison ranked 29 high street retailers according to their ethical practices. They were given an 'ethiscore' out of 20, which included the companies' policies on human rights, use of toxic chemicals, and climate change. Tesco scored 2.5 and Asda zero.

However, the supermarkets are beginning to include some organic and Fairtrade clothes in their fashion ranges. Asda now sells a Fairtrade T-shirt and Tesco is on the brink of signing an agreement with ethical label Izzy Lane. Could the tide be turning?

Izzy Lane was founded by Isobel Davies, who tends a flock of rescued sheep opposite her house in North Yorkshire and uses their wool to create a range of tailored skirts, jackets and coats, as well as knitwear. "Tesco approached us", says Davies, "which shows a willingness to be progressive."

Most wool in this country (80%) is imported from Australia and New Zealand. Davies has singlehandedly revived the supply chain of traditional weavers and spinners in the north of England; what is groundbreaking for a supermarket is that Tesco is committed to using her producers and only using British wool. Izzy Lane's clothes are gorgeous and ethical, but they're not cheap. It takes the wool from an entire sheep to make a single skirt, and it costs £60 a year to keep a sheep even before you start doing anything with its wool.

"The supermarket is realistic that the costs of processing are going to be more than shipping the garments to Asia", says Davies, "but Tesco wants these clothes to be affordable, as do we. We want the animal welfare message in fashion and Tesco will provide a fantastic platform. What is different about these garments is that you can identify which flock the wool came from and who the farmer is, which hasn't been done before."

Unfortunately, Davies has hit a snag, which means that her capsule collection won't hit the shops just yet. Davies' personal code of conduct is that none of the sheep whose wool is used in her clothes should be transported for more than three hours and/or 120 miles and she wants this stated on each garment. The Wool Marketing Board is refusing to endorse this because they believe it could upset other farmers who don't adhere to such a strict ethical position.

An affordable Izzy Lane line would only be a bonus, but are supermarkets - and are we - prepared to pay slightly more for our clothes to ensure that the people who made them are paid fairly?