What Would The Impact To GDP Be If The Social Cost Of Carbon Was Included?

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Recently I pointed out that with Canada’s current social cost of carbon, the impacts of our oil, gas, and coal industries, about $250 billion CAD annually, are $85 billion CAD more than the annual revenues of those industries. We seem to be subsidizing climate destruction quite a bit. I also pointed out that Australia had a very odd theory that it was going to radically expand its energy exports instead of having them plummet, when it currently exports four times as much primary energy as its society consumes in the form of coal, gas, and oil.

A couple of people pointed out that I was calculating not the percentage of GDP of coal, oil, and gas, but inaccurately using the ratio of revenue to GDP, for which I was grateful, if of course chagrined. GDP is calculated as revenues less the costs related to generating those revenues, very roughly, not just the revenues themselves. It’s a national statistical assessment, not a company-level statistic, so like body mass index, it’s not particularly meaningful when talking about a single firm. It can be aggregated up to industries however, and the World Bank keeps track of what it calls rents from oil, coal, and gas for countries.

During the back and forth with one patient educator I asked the following question:

Since the social cost of carbon is a cost related to an economy’s industry, should it be calculated in GDP?

I don’t think the answer is yes, necessarily, but I thought it was a sufficiently interesting question to whip up a spreadsheet with some representative countries and ask what the impact to GDP would be if the social cost of carbon of their domestic greenhouse gas emissions and exported fossil fuels were counted.

GDP Impact Percentage In 2019 If Social Cost of Carbon Removed, Domestic Emissions Only
GDP Impact Percentage In 2019 If Social Cost of Carbon Removed, Domestic Emissions Only

I picked the biggest emitting countries and some big fossil fuel exporting countries, all high GDP. I picked 2019 as that pre-dated COVID-19 and its economic impacts, including on fossil fuel consumption, and all data points required for the assessment existed. After all, I needed national GDP, national GHG emissions in megatons of CO2 or equivalent, fossil fuel exports in standardized units, and fossil fuel rents from the World Bank. I used the 2019 social cost of carbon from Canada, US$178, as it was to hand, and as Canada has synchronized its methodology for social cost of carbon with the USA, it is a reasonable choice.

The first chart is domestic greenhouse gas emissions only, and the first chart is sorted from left to right in diminishing percentage of GDP impacts using this artificial measure. Saudi Arabia, having such an extraordinarily high domestic emissions rate, surprised me until I remember that one of the biggest emitters of greenhouse gases is the fossil fuel industry itself as it drills or mines for, extracts, processes, refines, and distributes its products. As I’ve noted before, the best number I have is the about 11% of all energy used in the world is used in the fossil fuel industry itself. As such, a country whose economy is wrapped up with fossil fuels, with 25.1% of GDP contributed by the industry, will have very high emissions. Of course, the country’s climate is such at that only the poorest don’t have air conditioning, they do love their cars there, and they use oil for everything, including 39% of electrical generation.

China is not a surprise either. As the country with currently the largest CO2e emissions in the world, of course the impacts of a social cost of carbon are going to be high. Among other things, we have exported an awful lot of high-CO2 manufacturing to China from the west over the past 40 years. China’s fossil fuel rents are only 0.9%, second lowest among these countries. It digs up a lot of coal, and even exports some fossil fuels, but that’s not what makes its economy tick.

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And I wasn’t surprised, although I’m saddened, about Canada. While I happen to have an absurdly low carbon footprint, I’ve lived and worked all over Canada, assessed provincial electrical and building heating variances, and am very clear that Canada lives in a glass house when it comes to climate change. Our increasing carbon price is great and studied globally, but at $65 CAD this year, it’s almost $200 CAD below the social cost of carbon. Fossil fuels are 1.7% of our GDP, which is much lower than the industry or most Canadians realize.

Australia equally didn’t surprise me. I found out recently that it’s the only country in the world whose average square footage of residential living space per person was greater than the USA’s, which puts its rooftop solar penetration into a bit sharper relief. The 2.3% of its GDP that’s from fossil fuels doesn’t surprise me either. (Mea culpa: in the piece on Australia’s Net Zero plan I’d used the ratio of revenue to GDP of 12% as if it were contribution.)

The United States and the UK are unsurprising. The USA has a lot more moderate climate zones than Canada, and as such doesn’t burn nearly as much natural gas and oil to heat itself in the winter. The UK is more moderate yet. The USA has become a net exporter of oil in recent years, and it has fossil fuel rents of 1.4% and 0.6% respectively. What’s surprising to me is how much weight the fossil fuel industry has in the USA despite being one-70th of its economy. There’s some legacy nonsense there that must tick off Silicon Valley and the finance industry to a great degree. Of course, healthcare at #1 clearly has far too much political power, to the detriment of the health and wealth of average Americans.

Norway is interesting as a major fossil fuel exporter, in that its domestic greenhouse gas emissions are so low, while of course its fossil fuel rents of 6.1% are second only to Saudi Arabia in this lineup. Norway is virtuous locally, not globally.

GDP Impact Percentage In 2019 If Social Cost of Carbon Removed, Domestic & Exported GHG Emissions
GDP Impact Percentage In 2019 If Social Cost of Carbon Removed, Domestic & Exported GHG Emissions

But what about if we add fossil fuel exports and related emissions? That certainly changes the relative merits of these countries, doesn’t it.

Unsurprisingly, Saudi Arabia fares badly. Since it exports so much oil and a fair amount of gas, its GDP would be hit by almost 44% using this metric. It’s only interesting in that its GDP didn’t go entirely negative. It’s possible that Libya, with a combined fossil fuel rent in 2019 of 44.9%, would see GDP approach zero if social cost of domestic and exported CO2e were included.

China, on the other hand, barely budges. Its relatively small exports means that it doesn’t get hit hard by adding the CO2e related to fossil fuel exports.

Canada and Australia aren’t faring as well, however. Our domestically high carbon and export heavy economies, especially Australia’s, mean that if we were paying the social cost of domestic and export CO2e, our GDPs would be hit by around 17% and 19% respectively.

Unsurprisingly, the UK and USA barely budge, 0.8% and 0.3% respectively, ending up the least hit by this combined measure. Of course, as the two countries where the Industrial Revolution started, their historical GDP would be massively hit if we calculated it that way. They remain affluent countries due to having burned immense amounts of coal, oil, and natural gas in the past before we realized that this was a problem. As a result, any Americans or Brits who had been patting themselves on the back, please stop.

And then there’s Norway. There’s probably a good ski jump metaphor in there somewhere. From 2% to 22% GDP impact, if you count the carbon it sells abroad. That’s a greater increase than for Saudi Arabia. Remember that comment about Norway being virtuous locally, not globally? Well, there’s the evidence.

Fossil Fuel Rents - Coal, Oil and Gas 'Contributions' To GDP
Fossil Fuel Rents – Coal, Oil and Gas ‘Contributions’ To GDP

For completeness, I’ll put up the last chart, a ‘normal’ way of looking at fossil fuels and their ‘contributions’ to national GDP. Note that the countries extracting, processing, refining, and distributing them are also seeing disproportionate non-CO2 pollution impacts from fossil fuels as well, and those aren’t represented in any of these numbers either.

Saudi Arabia and Norway have ‘pride’ of place in this list, and Canada and Australia only look good by comparison. And you’ll note that China’s fossil fuel rents are down there with the UK’s under 1% of its GDP. I was a bit surprised by the UK’s results. Even coal, which was the source of massive labor disputes and cliches like selling coal to Newcastle, peaked at 0.5% of the UK’s GDP in 1982, and combined peak fossil fuel rents were only 2.3%. Apparently the UK is getting less North Sea oil and gas than I’d assumed.

So should the social cost of carbon be included in GDP? Probably not the way I’ve been representing it. Should the cost of environmental, social, and health impacts of economies be counted, as they are uncosted negative externalities? Yes, that would be good, but measures are useful if they are indicative of something that can be usefully actioned and if there is some semi-enforceable treaty or regulation or legislation adding carrots and sticks to it. I don’t think that’s this measure, but it was interesting to work it out.

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Michael Barnard

is a climate futurist, strategist and author. He spends his time projecting scenarios for decarbonization 40-80 years into the future. He assists multi-billion dollar investment funds and firms, executives, Boards and startups to pick wisely today. He is founder and Chief Strategist of TFIE Strategy Inc and a member of the Advisory Board of electric aviation startup FLIMAX. He hosts the Redefining Energy - Tech podcast (https://shorturl.at/tuEF5) , a part of the award-winning Redefining Energy team.

Michael Barnard has 726 posts and counting. See all posts by Michael Barnard