When the ownership rights to humanity’s carbon budget are for sale
Human societies are still not getting energy prices right, according to a recent report by the IMF. Global fossil fuel subsidies amounted to 5.9 trn USD in 2020, of which 8% (~470 n USD) were “explicit“ subsidies (essentially public cash infusions), whereas more than 5.4 trn USD were “implicit subsidies” — i.e. environmental/social costs (externalities) and foregone consumption taxes by which the public indirectly funds fossil fuel business activities. These subsidies are invisible, hiding in plain sight but outside of current accounting and ESG disclosure requirements. Financial markets and businesses, including those who are becoming increasingly focused on their ESG performance, are primarily assessing and managing risks that are “financially material”, i.e. environmental, social and governance factors that have an immediate impact on profits, financial returns and enterprise valuations. This is why “climate risk disclosure standards” usually refer to business risks driven by a changing climate with an emphasis on the physical risks of climate-related disruptions of operations and supply chains. The cascading systemic risk of a climate cataclysm for human societies and the global economy (which has been analysed here, for example) is usually ignored. Unless explicit fossil fuel subsidies are being stopped and unless implicit subsidies are being internalized into fossil fuel market prices, leading to lower profit margins, financial returns and stranded assets, these subsidies are simply not “financially material” for fossil fuel companies.
If an ambitious carbon pricing scheme (ideally in combination with a carbon border adjustment mechanism and a climate income) and/or strong replacement/ phaseout mandates were to be introduced, the scope of financial materiality would substantially expand. Those implicit fossil fuel subsidies would be displaced by long-overdue payments from fossil fuel producers (and consumers through increased prices for fossil fuel-related products). If and when this happens is up to visionary leaders and determined policy makers who are taking the climate science and civil society seriously. ut right now, we are handing out the ownership rights to the most precious “common pool resource” humanity has — the carbon budget (i.e. earth’s atmosphere) at a rate of about ~50 Gt per year. The carbon budget for stabilizing global temperatures at 1.5 degrees C has been estimated to range between 230–670 Gt for a 67%-33% probability of success (440Gt for 50% probability of success). According the the Worldbank’s carbon pricing dashboard human societies are giving away ~80% of the annual carbon budget consumption entirely for free, and ~20% for a ridiculously low average price of about 8.20 USD/ton. In contrast, estimates for the social cost of carbon range from 100 USD/ton to 200 USD/ton. What this means is that we are basically selling out the future of our children and the human race at an unrecoverable loss. Unless, of course, we retroactively start charging the fossil fuel industry for the current and future damages and losses they have caused and continue to cause. An amount of 500 bn USD, which the US democratic party is seeking to collect from fossil fuel companies over the next 10 years, can only be the beginning.