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

Martina Linnenluecke (Department of Applied Finance and Actuarial Studies, Macquarie University, Sydney, Australia)
Tom Smith (University of Queensland, Brisbane, Australia)
Robert E. Whaley (The Owen Graduate School of Management, Vanderbilt University, Nashville, Tennessee, USA)

Accounting Research Journal

ISSN: 1030-9616

Article publication date: 2 July 2018

1311

Abstract

Purpose

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.

Design/methodology/approach

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

Findings

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.

Originality/value

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.

Keywords

Citation

Linnenluecke, M., Smith, T. and Whaley, R.E. (2018), "The unpaid social cost of carbon: Introducing a framework to estimate “legal looting” in the fossil fuel industry", Accounting Research Journal, Vol. 31 No. 2, pp. 122-134. https://doi.org/10.1108/ARJ-08-2017-0138

Publisher

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Emerald Publishing Limited

Copyright © 2018, Emerald Publishing Limited

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