The general idea behind lifecycle pricing is that, for the market for any product to work effectively, all costs (and benefits) need to be incorporated into the price. The easiest example of this is to ensure the cost of carbon is priced into the market for energy. Doing so would raise the price of fossil fuels and, as a result, make alternative energies (that use less or no carbon) more competitive. It makes the market more transparent and allows for a more realistic comparison among competing products.
In order to price fossil fuels effectively, however, there is another side to the story. That is, in addition to society not forcing the cost of carbon to be accounted for in the price at which fossil fuels are sold, the companies that extract and refine these polluting products are given massive subsidies by the state. These gifts, which artificially support this industry, are politically motivated and do much to ensure the vast majority of current fuel sources continue to cause damage – the cost of which is being externalized to future generations. The article in the url below reports the most recent effort by the IMF to calculate the value of these subsidies:
"Fossil fuel companies receive a significant quantity of what we might think of as conventional subsidies — government funding to reduce the retail price of fuel. The IMF describes these as 'pre-tax' subsidies, and they amount to roughly $500 billion a year."
What is fascinating, however, is that the IMF also estimates the value to the industry of both regular subsidies and externalized costs:
"The International Monetary Fund periodically assesses global subsidies for fossil fuels as part of its work on climate, and it found in a recent working paper that the fossil fuel industry got a whopping $5.2 trillion in subsidies in 2017. This amounts to 6.4 percent of the global gross domestic product."
That is trillion, with a t! Perhaps not surprisingly:
"… the vast majority of the IMF's subsidy tally comes from failing to price greenhouse gas emissions, a.k.a. 'post-tax subsidies.' In essence, the world's carbon polluters are dumping their waste into the atmosphere for free. About 87 percent of greenhouse gas emissions don't face any kind of carbon price at all."
Moreover, many of the subsidies are not only tax breaks, but also things like price caps for citizens, which artificially increases demand, with the difference in price paid by the government to the energy producers. Either way, the extent to which these subsidies are significant and growing is evident in one of the graphs presented in the article:
One example of the costs that get externalized from the companies onto society as a whole is the security needed to protect the supply chains of fossil fuels:
"A huge chunk of foreign policy and military strategy for many countries involves protecting shipping lines for fossil fuels. The US military spends at least $81 billion a year protecting oil supplies. Meanwhile, there are no carrier groups defending wind turbine supply chains or a strategic silicon reserve for solar panels."
In addition to these security costs, there are costs associated with transportation, health-related consequences, tax credits and R&D write-offs, as well, of course, as the pollution associated with consuming these energy products. The IMF calculations attempt to account for all of these costs as subsidies that support industries and companies that otherwise would likely be unprofitable. In the process, of course, they cause significant environmental damage for which they never have to pay:
"We as a society pay these costs. Economists have come up with dollar values for how much carbon dioxide harms the world per unit of emission, a value known as the social cost of carbon. But such costs usually aren't built into the price tag of gasoline, coal-fired electricity, and natural gas heating. As a result, the people most responsible don't pay directly for their pollution. It also leaves few incentives to limit greenhouse gas emissions, so problems like climate change go unabated."
The article argues, as do all sensible economists, that pricing carbon accurately is essential to correct these market inefficiencies and, more importantly, combat climate change. The size of all existing subsidies, however, gives an idea of the overwhelming inertia that needs to be broken:
"Clearly, pricing the negative consequences of fossil fuels, especially carbon dioxide, is critical. 'If fuel prices had been set at fully efficient levels in 2015, estimated global CO2 emissions would have been 28 percent lower, fossil fuel air pollution deaths 46 percent lower, tax revenues higher by 3.8 percent of global GDP, and net economic benefits (environmental benefits less economic costs) would have amounted to 1.7 percent of global GDP,' according to the IMF report. In other words, even without new technologies, restrictions on fossil fuel supplies, and changes in consumption patterns, simply pricing fossil fuels in line with their damage to society would take a massive bite out of global greenhouse gas emissions."
The key word, however, is "accurately." A cost of carbon that is too low will not have the intended/desired effect. This is where we stray out of economics and into politics, which is the reason why we have the subsidies for this industry in the first place. It is also why we have yet to establish an accurate cost of carbon, anywhere in the world:
"… so far, no country has achieved what … economists would consider an optimal price on fossil fuels. The emissions that are priced are often given a value far below their impact on the world."
Take care
David
David Chandler
© Sage Publications, 2020
Fossil fuels are underpriced by a whopping $5.2 trillion
By Umair Irfan
May 17, 2019
Vox
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