The unpaid social cost of carbon: Introducing a framework to estimate “legal looting” in the fossil fuel industry

This paper aims to examine the complex issue of the social cost of carbon. The authors review the existing literature and the strengths and deficiencies of existing approaches. They introduce a simple methodology that estimates the amount of “legal looting” in the fossil fuel industry as an alternative approach to calculate an unpaid social cost of carbon. The “looting amount” can be defined as society’s failure to charge fossil fuel firms for the damage that their activities cause represents an implied subsidy.

The methodology used in this paper combines decisions in the form of policymakers setting carbon taxes and rational investors investing in carbon emission markets.

The authors show that the unpaid social cost of carbon in the fossil fuel industry was US$12.7tn over 1995-2013, but may be as high as US$115.5tn.

Over the same period, the sum of industry profits, emission trading scheme carbon permit and carbon tax revenue totalled US$7tn, indicating the industry would not be viable if it was made to pay for damages to society.