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Fossil fuel costs must include externalities

The contribution of the Covid-19 pandemic in bringing down carbon emissions is unparalleled. In doing so, the pandemic and the lockdown also helped quantify the environmental harms of burning fossil fuels. These harms are often not fully understood because they are not included in the total costs of using fossil fuels.

GOVIND SINGH AND ARMIN ROSENCRANZ | New Delhi |

The increasing cost of petrol and diesel has raised eyebrows and tempers across India. The Government has attributed the increase in price to the monopoly of the international oil companies. The oil producing countries are believed to have reduced the production and supply of crude oil, resulting in rises in demand and correspondingly in the prices of fossil fuels.

Opposition parties in India have been quick to point out flaws in this explanation. The cost of petrol and diesel is relatively cheaper in neighbouring countries. The Finance Minister’s advice for the Centre and respective states to negotiate and bring down fuel prices is further suggestive of taxes and surcharges behind this rise.

Last year, the major oil producing countries of the world cut oil production due to Covid-19. The pandemic- induced lockdown had reduced global consumption of oil and thereby its demand. Decline in transportation activity, including air transport, led to a global drop in carbon emissions. By mid-2020, NASA and other global monitoring agencies had begun publishing the environmental impacts of the economic slowdown due to Covid-19. The Earth Observatory of NASA and European Space Agency detected a significant decrease in airborne nitrogen dioxide pollutant over China in February 2020. A thirty per cent drop in air pollution was recorded by NASA over the US east coast in March 2020. Global greenhouse gas (GHG) emissions had dropped anywhere between 7 to 17 per cent by April 2020.

The contribution of the Covid-19 pandemic in bringing down carbon emissions is unparalleled. In doing so, the pandemic and the lockdown also helped quantify the environmental harms of burning fossil fuels. These harms are often not fully understood because they are not included in the total costs of using fossil fuels. The environmental harms associated with producing and consuming fossil fuel therefore constitute what is known as a negative externality.

An externality exists when the actions of one person or company affect the existence or well-being of another person or company, even when these two are not involved in a market transaction. Air pollution in town A can be borne by the winds and deposited on town B, creating an externality. Avoiding externalities over a long period can result in market failure since the true cost of the product in question is not being reflected.

The fossil fuel market has long ignored the negative externalities associated with extraction and burning of coal and petroleum. The first consequence of this has been the much reduced price of petrol and diesel, especially when compared to renewable energy. Such a reduced price has given an unfair advantage to fossil fuels and has been a steady impediment in the development and use of renewable energy. High cost continues to be a key barrier in the adoption and implementation of solar and wind energy as alternatives to fossil fuels.

The externalities linked with the use of fossil fuels originate with the extraction or mining of these fuels. Large-scale destruction of forests or marine areas, air and water pollution and annihilation of biodiversity from such sites are some initial externalities that are impacting both the present and future generations.

Burning fossil fuels for the last two centuries has added large amounts of GHGs in the atmosphere. This anthropogenic addition of GHGs has resulted in global climate change. As a result, polar ice caps and glaciers are melting at a much faster rate and sea-level rise is threatening millions of people who live along the coasts. Island nations are already facing the heat; Indonesia has already planned to shift its capital city away from the coast by 2024.

The impacts of fossil fuel use on the climate have been known for almost four decades. The quantification of these damages has also been carried out during this time, a period which saw the emergence of the field of ecological economics. Yet there has been a consistent reluctance in accepting the true cost of fossil fuels in global negotiations on mitigating climate change.

In 2015, the International Monetary Fund calculated the full price of the environmental damages caused by fossil fuels. They found that by not accounting for these damages, all the nations are collectively discounting $5.3 trillion each year as “fossil fuel subsidies”. This means we are subsidizing pollution, biodiversity loss and the destruction of our own civilization.

Economics is logically a subset of ecology and must be seen as embedded in an ecological life-support system. A shift in approach from conventional economics to ecological economics, beginning with the inclusion of social and environmental externalities, is the need of the hour for preventing runaway climate change.

The writers are, respectively, Associate Professor and Dean at Jindal School of Environment & Sustainability, O.P. Jindal Global University, Haryana.