Signal: Beyond externalities – IMF, fossil fuels and subsidies

20 May 2015

In economics, an externality is the cost or benefit that affects a party who did not choose to incur that cost or benefit.

At StratEDGY, we talk a lot about the societal transition we are currently undergoing. We talk even more about what will characterise the new economic, social and cultural arrangements that are emerging. There isn’t a widely shared name for the new era that is emerging, so we call it Life 3.0 as a quick shorthand.

One characteristic of Life 3.0 that we talk about is the move ‘beyond externalities‘ to a world where everything is transparent and nothing can be written off the balance sheet; a world where all actions are seen in a whole-of-system context. A recent report from the International Monetary Fund is a signal that we have moved another a step along the path to a world beyond externalities.

The report ‘How Large Are Global Energy Subsidies?‘ makes transparent the $5.3 trillion subsidy ( 6½ percent of global GDP) given to fossil fuels in 2015 alone.

As Benedict Clements and Vitor Gaspar comment in the blog post accompanying the report, this the largest negative externality ever estimated.

The “true costs” of energy consumption include its supply costs and the damage that energy consumption inflicts on people and the environment. These damages, in turn, come from carbon emissions and hence global warming; the health effects of air pollution; and the effects on traffic congestion, traffic accidents, and road damage.

Most of these externalities are borne by local populations – a cost few, if any, might choose to incur willingly, given the opportunity to make that choice.

The ability to estimate externalities more accurately stems in part from the availability of more refined country-level evidence on the damaging effects of energy consumption on air quality and health. This availability stems, in turn, from the convergence of rapidly developing sensor technology and ever more sophisticated and powerful data analytics. Combined, these shifts mean that, for the first time since the onset of industrialisation, there is far greater transparency about what the externalities are and who pays the real price for them.

Transparent information such as that provided by the IMF in this report contributes to public capability to make informed choices. In a world of greater transparency, when everyone can see that fossil fuel energy subsidies exceed the estimated public health spending for the entire globe, how much longer will such externalities be tolerated?

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