Many comments are welcome
Unlike the internalized costs covered in the previous chapter of the Seeking Consensus project, there exists a large degree of uncertainty about the magnitude of externalized costs. Everyone is therefore encouraged to contribute what they deem to be reasonable estimates of externalized costs so that we can gather some meaningful statistics from the community. Please follow the simple guidelines at the bottom of this article when commenting.
What is meant by “externalized costs”?
Externalized costs are costs associated with energy consumption which is not reflected in the selling price of the energy. These costs are directly or indirectly paid by other sectors of the economy in forms such as increased healthcare expenditures, losses in property values, increased costs associated with natural disasters, and a reduction in the free services rendered by the biosphere.
Externalized costs of oil
Being the most consumed fossil fuel, oil is a large source of greenhouse gas emissions during extraction, processing and eventual combustion. One barrel of oil emits about 0.43 tons of CO2 when combusted. This places oil almost exactly in between coal and natural gas when it comes to CO2 emissions per unit energy. An estimated 20% of CO2 is added to account for the other lifecycle emissions during extraction and processing (mostly methane).
Oil combustion also leads to the release of local air pollutants such as nitrous and sulphur oxides which can damage the health of local populations. Some people also argue that oil has significant externalized costs in terms of wars fought partly to secure oil resources. This is a challenging topic for oil and good estimates are scarce. Here we will use a local air pollution external cost of $10/barrel which is a bit higher than that reported in a recent IMF working paper.
As discussed in the internalized costs of oil article, oil consumption is about 59% transport, 35% heat and 6% electricity. These three uses of oil will be discussed separately below.
To estimate the climate change externality, we need to estimate the average global CO2 cost. According to the outline in the previous article ($53/ton for developed nations and $24/ton for developing nations), this amounts to $34/ton given that the projected buildout of new oil-fired capacity is 35/65 in developed/developing economies according to the latest IEA prediction. Given an average plant efficiency of 40% and an oil energy content of 6.1 GJ/barrel, the CO2 externality can be calculated as $26/MWh.
For the short-term local externality of $10/barrel, we apply a weighting factor of 0 for developing nations and 1 for developed nations. As discussed in the previous article, this accounts for the estimation that internalization of this short-term local externality will have no meaningful impact on economic development in developed nations, but will come at a cost greater than the externalized cost in developing nations by hampering the development of local communities. This calculation yields another $5/MWh of external costs to give a total of $31/MWh.
The external cost of oil electricity using different CO2 costs and other external costs is given in graphic form below. All calculations reported here can be downloaded in Excel format here.
For perspective, the internalized cost of oil-fired electricity amounted to $107/MWh.
Using the same assumptions as outlined for electricity above, an externalized cost of $3.5/GJ can be calculated. The sensitivity of this number to different values of CO2 cost and other external costs is shown below.
The internalized cost of oil heating was found to be $6.9/GJ for comparison.
Full lifecycle CO2 emissions from oil-derived final fuel is about 0.5 ton/barrel as shown below.
New car sales are currently distributed about 53/47 between developed and developing nations, giving a CO2 cost of about $39/ton. Under these assumptions, climate change costs amount to $19/barrel.
Regarding short-term local externalities, the growth factor is again set to zero for developing nations since oil is a key driver of economic development. For developed nations, the factor is set to 0.5 to reflect some sensitivity of economic growth rates to the price of the primary transport fuel. As illustrated in the previous article, developed world growth is sensitive to the oil price. This yields an additional externality cost of $3/barrel, bringing the total to $22/barrel of final fuel ($0.14/litre or $0.5/gallon).
To illustrate the externalized costs of oil-derived transportation fuel under different assumptions, the graph below is given.
For perspective, the internalized cost was found to be $0.22/litre.
In order to assist in finding the consensus view on this topic, please follow these simple commenting guidelines:
Three types of comments are welcome, each introduced by a keyword:
- DATA: Please provide your estimate of the externalized cost of oil with a brief explanation. Each DATA comment will be weighted by the number of “likes” when the data is ultimately processed.
- REBUTTAL: If you strongly disagree with an existing DATA comment, please write a short rebuttal. The “likes” received by a REBUTTAL comment will subtract from the “likes” of the DATA comment. A REBUTTAL comment can once again be rebutted to reduce its weighting.
- CORRECTION: If you see a clear error in the numbers presented in the above analysis, please correct me so that I can correct the article.
Many comments are welcome. More data = greater accuracy.