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Raising the price of fossil fuels to reflect the true social cost

AUDIE CORNISH, HOST:

Even as we see the effects of climate change multiplying around us - deadly heat waves, lengthy wildfires, flooding and drought - the world's economies are still subsidizing the price of fossil fuels. Those subsidies for oil, coal, natural gas, well, they add up to nearly $6 trillion a year globally. At least, that's according to a new report by the International Monetary Fund. That figure includes traditional government subsidies, like tax breaks. But earlier, I spoke to Ian Parry, the lead author of the report, and he says that number also encompasses what he calls the true social cost of fossil fuels.

IAN PARRY: The prices of fossil fuels should reflect not only the costs of producing those fuels but also the environmental costs - the carbon emissions which contribute to global climate change and emissions, which cause local air pollution, which elevate the risks of heart and strokes and lungs - lung disease for people that are exposed to that air pollution.

CORNISH: So the idea that the cost, so to speak, is borne out just in other areas of life, maybe that people aren't making a connection to.

PARRY: Yes, that's exactly right. If we undercharge for the production and environmental costs, then there's excessive consumption of fossil fuels, and there's too little investment in clean technologies.

CORNISH: So what would happen, do you think, if you set fuel prices that reflect their true cost?

PARRY: If at the global level fossil fuel prices reflected both the production and the environmental costs, as the prices of coal, petroleum, natural gas and electricity increase, that's going to cause a reduction in energy use and a shifting towards cleaner fuels across all sectors of the economy, which in turn will reduce carbon dioxide emissions.

CORNISH: But can I just stop you here and ask a question - for instance, higher energy bills, right? I understand in Europe that the price of natural gas is increasing. People are worried about what this means for the winter if people cannot afford to heat their homes. Doesn't this just mean that the most vulnerable people who are already struggling get hit with these costs?

PARRY: Yes, and that's why it's very important to have a very comprehensive strategy that protects, that assists the vulnerable groups, which includes low-income households, also includes workers who might be displaced from energy-intensive industries, vulnerable regions and vulnerable firms. So as countries move ahead with higher energy prices, it's very important to provide robust assistance for these groups.

CORNISH: Can you name a country that has done this and if we can learn any lessons from what happened there?

PARRY: Well, I think the European Union is in the vanguard of climate policy here. The centerpiece of their policy is their emissions trading system, which imposes a price on carbon dioxide emissions. And with a recent strengthening of that program, we've seen the price really rise to quite substantial levels, over 60 euros per ton.

CORNISH: And any pain, political, social cost of that action?

PARRY: Well, European countries have had a robust system to have a just transition, so they put a lot of funding into helping workers that are displaced or vulnerable regions to the energy transition. They've made sure that low-income households are assisted for higher energy bills through various measures, whether it's stronger social safety nets - maybe it's some transitory assistance with energy bills. And it's also important for governments to communicate to the public the rationale for the reform - why are they doing these reforms and how the general public benefits. Maybe the general public is benefiting because at the same time, there's a cut in their labor income taxes. Maybe they're benefiting because badly needed investments in basic housing, schools, infrastructure and so on is being provided. So using this revenue from the reform can help build support for the reform.

CORNISH: Ian Parry, thank you so much for your time.

PARRY: Sure. You're very welcome.

CORNISH: Ian Parry is an environmental fiscal policy expert with the International Monetary Fund. Transcript provided by NPR, Copyright NPR.