Stranded Assets v. the Social Cost of Carbon: The Tortured Economics of Climate Change

Summary: If there is one thing the fossil fuel industry, the government, and climate change activists might agree on it is this: in the end it all comes down to money. Oil, gas and coal companies, and their investors, are terrified of leaving fossil fuels in the ground. As to issue of climate change as a whole, the industry is providing a product utilized by everyone, and companies like Exxon posit that they, and their investors, will be paying the full burden when all comes to bear. However, it is vital that when the carbon checkbook is finally balanced, the social cost of carbon is not forgotten.

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By Max Krieger

           If there is one thing the fossil fuel industry, the government, and climate change activists might agree on it is this: in the end it all comes down to money. Fighting climate change takes cold hard cash, spent on everything from mitigating the carbon already in the atmosphere, to transitioning to alternative fuel sources, to treating the symptoms and externalities we are already seeing. The dividing line is drawn when someone actually tries to divvy up cost.

Oil, gas and coal companies, and their investors, are terrified of leaving fossil fuels in the ground. “The world’s fossil fuel companies hold at least three times more proven reserves of oil, gas, and coal than can be burned if we are to achieve the international goal of limiting global warming to below 2˚C…”[1] These companies have invested billions of dollars on infrastructure necessary to find, extract, refine, transport, and sell their products to the public. However, if laws and regulations are promulgated that limit the amount of carbon that can be burned, these companies will have to abandon reserves and may not recuperate their investments.

People like Al Gore and David Blood are labeling this the “Carbon Asset Bubble”.[2] What they mean is that much like the housing crisis, where investment firms purposefully overlooked the poor quality of their investments which lead to collapse, fossil fuel based industry is purposefully overlooking the need to reduce carbon emissions. In fact, ExxonMobile is currently under investigation for fraudulent misrepresentation to its investors about the risks of climate change, the impending limits on fossil fuel use and its knowledge thereof.[3]

While it may be easy to blame the fossil fuel industry for this misrepresentation, and the issue of climate change as a whole, the industry is providing a product utilized by everyone, including climate activists. Without fossil fuels, most modern industry would not exist. Thus, companies like Exxon posit that they, and their investors, will be paying the full burden when all comes to bear.

Under this line of reasoning, one may even feel pity for the fossil fuel industry; however this economic model is fatally flawed. The citizens of the world have already been paying the price for carbon emissions since the advent of fossil fuels. This theory is called the “Social Cost of Carbon” or SCC.[4] The EPA defines the SCC as an estimate of the economic damages associated with an increase in carbon emissions caused by impacts on human health, infrastructure changes, sea level rise and several other factors.[5] Today, an additional one ton of carbon emissions is estimated to cost around $37.00.[6]

            Ultimately, climate change presents economists with a daunting challenge. They cannot ignore the potential disaster that a bursting carbon asset bubble might cause. However, it is vital that when the carbon checkbook is finally balanced, the social cost of carbon is not forgotten.