Internalising the external costs of fossil fuels

There seems to be big differences between the priorities today and the ones that we had a couple of decades ago. Back then, economic development, extensive use of fossil fuels and subsidising fossil fuels had different trade-offs than the motivation to pursue efforts for sustainability today. 

What is, however, worthwhile to mention is that there is still a lack of synchronisation among policy choices and actions. For instance, the world is in a triple whammy on the fossil fuels front –evidently, fossil fuels are significantly contributing in warming the planet, they are killing people and they are the ones that receive whooping subsidy which, if quantified, is more than what the rich countries are committed to channel to the green climate fund (GCF). Yet, we are, to some extent, enmeshed in fossil fuels. 

Notably, the policy discourse surrounding the gradual reduction of fossil fuel usage and the phase out of coal often fails to encapsulate all the pros and cons. More often than not, this discourse becomes a one-dimensional climate change centric affair, i.e., how bad is coal for climate change and/or why it is essential to phase out coal for the future of our next generations. 

Contrary to that, the external cost of burning fossil fuels that the present generation is paying for is mostly not being put onto the discussion table. This external cost, which includes the cost of air pollution induced by fossil fuel combustion - ranging from medical cost to treat air pollution related diseases to work-hour loss from the diseases and the mortality resulting from air pollution - is a hefty amount incurred on the society. 

A recent scholarly study, collaborated by the scientists of several UK universities and published by the Elsevier, has shared quite astonishing figures on the casualties that are linked to fossil fuel combustion. While different scientists, for years, have conducted research on the same facade, the new study certainly raises a wake-up call to the policy makers to respond. 

The study has concluded some jaw-dropping facts, including that fossil fuels were responsible for 8.7 million deaths in 2018 while India and China were burdened with more than half of the casualties. And one-third of the pollution related deaths in Bangladesh are attributable to the burning of different fossil fuels. 

Using improved methodologies, the authors have better quantified the impacts of outdoor fossil fuel combustion and documented the results that are scarier than those of other previous scientific studies. The death toll from exposure to the air pollution, connected to fossil fuels, is only comparable to the number of annual deaths stemmed from tobacco usage. Air pollution, therefore, can be fairly considered as a pandemic. 

An earlier study, conducted by the International Renewable Energy Agency (IRENA) in 2016, deduced that simply doubling the share of renewable energies to the global energy mix have the potential to reduce damages from air pollution, related to fossil fuel burning, in the order of $3.2 trillion by 2030 compared to the business-as-usual (BAU) case. The study further estimated that the saving ranges from 4 to 15 times with respect to the investment required to double the share of renewable energies. Reducing the contribution of fossil fuels to the global energy system, therefore, has economic sense.  

Some analysts or experts would argue that ditching out fossil fuels would leave millions of people in the world jobless. The argument is, however, untenable. IRENA data confirm that millions of people are already working in the renewable energy sector. The sector would provide incremental job opportunities in the future. 

On the other side of the coin, with the scale of investment that is being channelled to the renewable energy sector, we can imagine the further boom of wind and solar coupled with batteries and electric vehicles (EVs) in the foreseeable future. And despite the logic of the promoters of the fossil fuel industry, the landscape is never going to be the same for fossil fuels again. 

It's also true that fossil fuels aren't going away now. Yet, the young graduates and the to-be-graduates from technical and business disciplines, fascinated to work in the energy sector, would certainly be more interested in the renewable energy sector and in the EV industry.

Moreover, as some countries have already declared the ambitions for carbon neutrality and some other countries are likely to take the same path, their responses shall include reducing dependence on fossil fuels. 

Taking into account the global burden of diseases and mortality caused by fossil fuel usage, we need a more immediate response. We would also need to be more cautious as part of the economic rebuilding process triggered by Covid-19 and can't just do the BAU things that would lead to more deaths on the fossil fuel front. 

It is, furthermore, mentionable that one of the caveats of the energy markets till date is their failure to adequately internalise the external costs of pollution. These costs are not borne by the ones who incur them, causing market imperfections and the resulting inefficient allocation of resources. Energy and environmental policies, therefore, shall be redesigned to correct these externalities. 

If these external costs are included in energy pricing, fossil fuels would automatically become much more expensive than what we need to pay for renewable energies. On top of this, renewable energies are already cheaper than fossil fuels at market prices. All these provide the governments across the world with leverage to intervene their energy policies and energy markets to minimise the externalities and amend the wrong footing in the present context. 

In doing so, the governments may consider a range of policy options – carbon pricing and improved regulations for emission and efficiency. Carbon pricing, as a market-based instrument, may encourage polluting entities to choose cleaner alternatives and ensure that those responsible for the external costs also pay for the same. Regulations, such as, emission standards and fuel efficiency standards, would also have quite significant impacts. 

In all sincerity, the discourse on climate and energy policies, as analysed in the preceding section, shall ensure coordination of different facets, for instance, all the externalities of fossil fuels, rather than thinly focusing on climate change. As the number of deaths from externalities produced by fossil fuels has already reached the level of a pandemic, responses from policy makers shall be immediate.  

Shafiqul Alam is a Humboldt Scholar and an environmental economist.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.