Hidden costs of fossil fuels
WHAT is cost? We associate it with the price we pay or the cash we hand over in order to consume a product or service. In most cases the selling price is often directly related to the cost of producing a product. What if while consuming or producing the product, extra costs are unleashed on society, which the consumer has not paid for? Who bears this extra cost and what is the value of such a cost?
A common misconception is that the real cost of fossil fuels in Malaysia is the selling price plus whatever subsidies are provided by the government. Although this might be true for products that do not exhibit other social costs, the use of fossil fuels is not that simple. When fossil fuels are burned, either for power generation or to run your car, there are by- products which can harm people or lead to pollution.
What is the cost of such damage? In the case of petrol used in a car, economists at the International Monetary Fund ( IMF) estimates that for Malaysia, this damage amounts to RM2.20 per litre of petrol. The figure is the estimated cost to deal with the harm that the use of petrol will cause. The damage is primarily linked to long- term health costs, environmental damage, traffic congestion and accidents.
These social costs – termed as “negative externalities” in economics – are costs or harm that are imposed on a party which did not willingly consent to it. For exam- ple, motor vehicle drivers are imposing externalities by making people breathe in toxic exhaust fumes without them consenting to it. The haze is another example: while Indonesia is clearing land with the slash and burn method, it unleashes the haze upon itself and its neighbours. It may be “cheap” to clear land by burning but it imposes vastly higher costs through damage to tourism, public health and businesses.
To put things into perspective: One litre of RON95 petrol is RM2.05 ( price in October) but even if petrol became free, you are still imposing a cost of RM2.20 to society for every litre of petrol burnt. Thus, the true price of petrol should be what you pay at the pump plus government subsidies, plus a corrective tax to compensate for the damage you impose on society. The calculation: RM2.05 + 0 subsidy ( for this month) + RM2.20 = RM4.25. This means the cost to fill up a 40- litre family car should be RM170 instead of RM82 – a 107% increase.
Research has shown that in the severe haze event of 1997/ 1998, the damage to Indonesia was estimated at RM35bil. The haze- induced loss to Malaysia during the three months from August to October 1997 was estimated at RM800mil, mainly from loss in productivity and decline in tourism. This may seem like a large number but how does this compare to the pollution damage caused by the use of energy in Malaysia?
An IMF study from 2013 showed that the annual cost to Malaysian society from domestic fossil fuel use is RM88bil, which makes the RM800mil cost in severe haze years look miniscule in comparison. A breakdown of the fossil fuel costs reveals that the bulk of the external costs were derived from petroleum products – from us driving around in our diesel and petrol cars. In 2011, the total societal cost of petroleum was RM63bil or 5.12% of GDP, which is comparable to the government expenditure for education.
Our use of coal is another major contributor to hidden energy costs. An IMF study this year ( How Large Are Global Energy Subsidies) which examined the externalities caused by fossil fuel consumption spurred on by subsidies, estimated that global energy subsidies ( all fossil fuel subsidies) make up US$ 333bil ( RM1.47tril) or 0.4% of global GDP. However, the total cost including negative externalities from the use of fossil fuels, are US$ 5.3tril ( RM23.44tril), or 6.5% of global GDP.
For coal alone, the IMF estimated that the cost to society – primarily health costs due to pollution – is at 3.9% of global GDP. This makes up more than half of the US$ 5.3tril.
Coal is by far the most intensive polluter compared to natural gas or other fossil fuels. China is a major user of coal. A recent study from researchers at the University of California- Berkeley showed that every year in China, 1.6 million people die from health complications linked to the country’s polluted air. That is 4,400 deaths every day.
The IMF study also found that about half of the US$ 5.3tril negative externalities of fossil fuels is in the form of local pollution and damage to local public health. Only about 25% is cost associated with worsening global climate change. Given that half of the externalities adversely affect the local living environment, there are good concrete economic reasons for taking action locally. Acting on climate change by reducing fossil fuel energy use has significant local benefits.
The haze is a visible nuisance and causes widespread damage for a few months during the year. However, the problem is temporary and acute. The damage from the use of fossil fuels may be less visible but is ever- present, and evidence points to long- term costs which are many times greater than that caused by the haze.
The message is clear, that there is no such thing as cheap fossil fuels. The use of fossil fuels is inherently expensive, due to the external costs adversely affecting our health and causing environmental damage, yet this is not reflected in the price. A culture of sustainability incorporating the “polluter pays” principle is urgently needed.
Some countries, like Denmark, are already heavily taxing fossil fuels and are spearheading a global initiative to reform and reduce fossil fuel subsidies. The cost of inaction is significant – and growing – and we are the first generation which cannot say “we did not know”. In the face of solid evidence, future generations will blame us for sitting idly by while letting the world slip into economic and environmental peril. In other words, it is expensive and immoral not to go green.
Gregers reimann is managing director of IEN Consultants, a green building consultancy.