PATRICK BOND: ‘Red card’ the environment? Rather apply full-cost accounting

Writing against “smug greenies” — actually, a rarely sighted species, since nearly every serious environmentalist in this country is embattled and mainly wallowing in defeat — the unfortunate impression left by Mike Schussler and John Fraser in their recent article is that the economics profession is willfully ignorant of accounting techniques for pollution and resource depletion (“It’s time to show smug greenies the red card”, February 10).

Advocating for fast-track offshore gas exploitation, they argue that “the economy and ordinary people on the ground will suffer badly if everything is seen exclusively through a pair of green-tinted spectacles ... It is time for those who understand the economic forces at play to make a rallying call for balance and reason, for debate rather than the wanton destruction of potential.”

Schussler and Fraser might have informed their readers, if they really do seek genuine balance, of the subdiscipline of environmental economics. Its aim is to price in “externalities” — harmful aspects of market transactions, such as pollution, that are currently not incorporated into monetised exchange.

Through either compensatory taxation (as a pollution disincentive or to finance reparations such as cleanup funds) or more hands-on state regulation, society can rationally address externalised costs and eliminate hidden subsidies.

In 1974 Nobel laureate Robert Solow was credited with introducing resource economics to the American Economic Review, and in the same journal in 1977 his student, John Hartwick, appealed: “Invest all profits or rents from exhaustible resources in reproducible capital ... to solve the ethical problems of the current generation shortchanging future generations by ‘overconsuming’ the current product, partly ascribable to current use of exhaustible resources.”

The “Hartwick Rule” seeks reinvestment of natural capital into longer-lasting productive and human capital, to achieve a balance between different generations’ claims on the environmental “family silver”. Such economic logic would be consistent with the Brundtland Commission’s 1987 definition of sustainability: “Development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”

That principle has long been violated here by the so-called “minerals-energy complex” — Eskom and the Energy-Intensive Users Group (three dozen mainly multinational corporations), responsible for extraction and export of not only cheap electricity but most nonrenewable wealth. The minerals leave SA forever: as profits and dividends, as “illicit financial flows” (tax-dodging costs SA up to 7% of annual GDP, even the Treasury admits), and as unbeneficiated raw material exports.

The extractive industries’ rebuttal is typically that some profits are indeed returning to local shareholders of mining houses — albeit now mainly headquartered abroad. And they point to vital local benefits of resource extraction: jobs in mining and upstream/downstream industries, royalties and taxes, imported cutting-edge technology, infrastructure, fixed capital investment and corporate social responsibility gifts. (And also, ahem, of dubious benefit, empowerment shares are given to the likes of Chancellor House and Batho Batho Trust, so as to keep Luthuli House’s lights on.)

But across Africa such economic benefits are often worth less than the costs of the permanent wealth exhaustion and wealth depletion. Moreover, other factors are now being invoked by those beleaguered anti-gas activists, especially when Shell, Total and Johnny Copelyn’s Impact Africa continue offering inadequate, outdated environmental impact statements about the localised costs imposed by seismic blasting.

Two high courts — in Makhanda and Cape Town — will soon return to session following temporary antiblasting injunctions. They’ll decide whether the gas firms’ expected profits outweigh irreparable harm to marine conservation, fisherfolk territory, coastline community welfare, the ocean’s spiritual connectivities, eco-tourism opportunities, and the long overdue “just transition” labour redeployment process.

If exploration goes forward and gas is discovered at scale, environmental economists can then help society confront the two most expensive externalities of all — depletion of natural capital (following the Hartwick Rule, whether society is being properly compensated for valuable hydrocarbons removed permanently from sovereign wealth), and the “social cost of carbon”.

For the latter, once we account for climate-catastrophic damage from the anticipated methane extraction, leakage, processing, transport and combustion, the full costs of gas field natural capital accounts’ debits will vastly overwhelm the credits.

The IMF sets the cost of carbon at $60 per tonne of greenhouse gas emissions. In September 2021’s report on global fossil fuel subsidies, “Still not getting energy prices right”, the IMF estimated the cost of SA’s annual explicit and hidden subsidies to the fossil fuel industries at R770bn (including climate and local ecological externalities).

That did not seem to register, so last Friday’s IMF research paper, “How can structural reforms support the climate ambition of SA?”, was even more explicit: Pretoria’s emergency energy plans, including Eskom’s proposed methane inputs from Karpowership or competitor DNG Energy, are “often incompatible with a low-carbon economic rebound”.

The problem is that “most of the 2GW of energy [to be] procured use carbon-intensive gas technology. The 20-year power procurement agreements could therefore imply high-carbon generation for a long period.” Over the longer term, the IMF complains, Eskom appears too committed to “investing in the high-carbon sector, such as gas, without due concern for low-carbon technologies”.

IMF advice ordinarily needs thorough debunking, but this suggestion — to avoid “stranded asset” investments in new fossil-gas Eskom generators, Transnet pipelines and terminals and Big Oil’s drilling rigs — is perfectly sound.

Eskom’s apparently imminent meth addiction will, in turn, invite climate sanctions against SA exports, as even President Cyril Ramaphosa warned in November 2021: “As our trading partners pursue the goal of net-zero carbon emissions, they are likely to increase restrictions on the import of goods produced using carbon-intensive energy.”

South32 knows this and its managers are trying to divorce the Richards Bay aluminium smelter — the single largest SA energy consumer — from Eskom’s coal- or gas-fired power, and instead feed in a new pumped-storage hydropower source (Tubatse, at De Hoop Dam).

By promoting gas so fervently without having begun full-cost accounting, the government and Eskom threaten South32 and all other exporters with climate taxes known as Carbon Border Adjustment Mechanism tariffs.

Actually, the IMF is too conservative to properly internalise climate externalities, for two reasons. First, its 2°C maximum warming target this century is at least half a degree too high given the need to avoid runaway climate change and brutal Global South damage such as last week’s cyclones that killed more than 100 in neighbouring countries.

Second, by failing to incorporate mortality and feedback loop factors, the IMF’s $60/tonne price for greenhouse gas emissions is nowhere near the more recently estimated economic cost of $3,000/tonne. Apply that to SA’s 500Mt a year, and our climate debt rises each year by nearly five times our GDP.

Evading the coming climate sanctions will be the next big hurdle for the minerals-energy complex’s new meth addicts. Ironically, Schussler and Fraser claim they want “the voice of business, or the logic of economics, to be heard”.

Right then, even a small dose of environmental-economic logic could restore the needed balance.

• Bond teaches in the University of Johannesburg’s sociology department. Among his books is “Politics of Climate Justice: Paralysis Above, Movement Below”.