Non-renewable natural capital and the social cost of carbon in wealth accounting

Fossil fuels represent a significant portion of the wealth of resource-rich nations – up to 35% (on average) of total national wealth across the Middle East and North Africa, according to the World Bank (2021). But combusting these resources releases greenhouse gases into the atmosphere, driving costly climate change, ultimately reducing natural capital, productive capacity, and the inclusive wealth of nations. Yet, in most wealth accounting studies, fossil fuel assets are valued in isolation from their broader social costs.

This study incorporates the social cost of carbon (SCC) — the present value of the future damage costs resulting from a marginal increase in emissions — into mainstream approaches to valuing fossil fuel stocks. We find that the value of fossil fuel reserves is sensitive to the carbon price, the extraction and decarbonisation pathway, and the discount rate.

The results have implications for how fossil fuels should be valued in wealth accounts, how they should be reflected in national statistics, and the future of wealth in fossil-fuel rich economies.  

Key points for decision-makers

• To the authors’ knowledge, this is the first time the SCC has been included in the value of non-renewable natural capital.
• The initial SCC that would fully offset the private benefits of using fossil fuels is shown to be between US$50 and US$100 per tonne of carbon dioxide (tCO₂) for many regions.
• The authors generalise shadow prices under different resource allocation mechanisms (RAMs).
• Whereas previous estimates and current accounting practice assume constant resource extraction and an unlimited quantity of fossil fuel use, which is not consistent with long-term mitigation and fossil fuel phase-out goals, the authors embed declining extraction and the unburnable natural capital stock constraint, that is, the value of the fossil fuels that must remain in the ground unburnt to decarbonise the economy, within their calculations.

The analysis suggests several important changes should be made to wealth accounting in practice.

• First, the wealth of fossil fuel-rich countries should be revised down if we expect carbon prices to become binding in the real-world (for instance under carbon border adjustment mechanisms).
• Second, the change in wealth of resource-rich nations should also be revised in a manner consistent with their stock estimates.
• Third, accounting for non-renewable natural capital should be taken seriously from a methodological standpoint.