It is fairly well understood by now that releasing carbon dioxide and other greenhouse gases into the atmosphere imposes an economic cost, in the form of climate change impacts. In most cases, however, those responsible for carbon emissions are not required to pay that cost. Instead, it’s borne mainly by the world’s poor and low-lying countries, and of course by future generations, as many of the worst impacts of climate change will emerge years after the emissions that drive them.
People sometimes refer to the unpaid cost of carbon pollution as a subsidy, or an “implicit subsidy,” to polluting businesses. The IMF recently issued a report saying that total worldwide subsidies to energy, mainly fossil fuel energy, amounted to $5.2 trillion a year. The reason that number is so high is that the IMF includes implicit subsidies — the social costs imposed by businesses (including climate damages) that they don’t have to pay for.
Vox’s Brad Plumer raised some questions about whether that’s a misleading use of the term “subsidy.” Whatever you call it, though, it makes for an unsustainable situation, literally. It can’t go on.
As climate change gets worse and the chance to avoid harsh impacts dwindles, governments are getting serious about putting some sort of price on carbon emissions, whether explicit (a tax) or implicit (regulations). By next year, a quarter of the world’s carbon emissions will be priced in some way. Businesses that now emit carbon pollution for free (or cheap) will soon see their costs rise.
In other words, carbon pollution is a business risk. It’s a bubble that’s going to pop, probably soon. The Carbon Tracker Initiative has popularized a term for this looming liability: “unburnable carbon.”
With proper accounting, the fossil fuel business doesn’t look like such a moneymaker
There’s been a lot of work recently trying to quantify carbon risk. A new contribution to that conversation was just released by Chris Hope and colleagues at the University of Cambridge Judge Business School: “Quantifying the implicit climate subsidy received by leading fossil fuel companies.” It attempts to put a number on the carbon risk facing the world’s top 20 fossil fuel companies, the ones most directly vulnerable to a price on carbon. The results suggest that those companies are in a perilous situation.
Hope took a fairly simple approach: He multiplied the carbon emissions embedded in the companies’ products by the “social cost of carbon,” i.e., the net economic, health, and environmental cost of a ton of carbon dioxide. He ran the calculation for data from 2008 to 2012 and took the results as a rough proxy for the level of carbon risk facing each company. (See the technical addendum below for more details on this calculation.)
The results are pretty startling. To wit: “For all companies and all years, the economic cost to society of their CO2 emissions was greater than their after‐tax profit, with the single exception of Exxon Mobil in 2008” (my emphasis). In other words, if these fossil fuel companies had to pay the full cost of the carbon emissions produced by their products, none of them would be profitable.
It’s even worse for pure coal companies, for which “the economic cost to society exceeds total revenue in all years, with this cost varying between nearly $2 and nearly $9 per $1 of revenue.” Total revenue, Hope and colleagues note, represents “employment, taxes, supply purchases, and indirect employment” — everything that coal companies contribute to the economy. It turns out the costs they impose through carbon emissions are larger than all those contributions combined. (For oil and gas companies, carbon costs generally range from 10 to 50 percent of total revenue.)
This is a somewhat idealized exercise, obviously. Fossil fuel companies are unlikely to bear the entire cost of carbon, if and when it is imposed. The cost of carbon itself is highly uncertain (see technical addendum) and theoretically varies based on geography and income.
Nonetheless, this kind of calculation is helpful in indicating the comparative level of risk among fossil fuel companies (see the paper for a ranking) and the materiality of that risk. It shows that the carbon bubble is very large indeed.
It’s also a good reminder that we are, in carbon terms, eating the seed corn, using up resources that only appear cheap because we’re shifting the costs to poor and future people, who don’t have the political power to stop us. It is grossly irresponsible.
Press link for more: David Roberts | vox.com