Factoring External Costs into Policy and Investment Decision Making

Abstract

South Africa’s addiction to fossil fuels for both electricity production and freight transport place significant external costs onto society. This paper identifies and reviews such external costs, particularly those resulting from greenhouse gases (GHGs) and air pollution. An economy-wide carbon price required to achieve the 2⁰C target of the Paris Agreement is also identified from the literature. The aim of the paper is to provide policy and decision makers with a road map for estimating and including externalities in their decision making processes and to illustrate the significant size of fossil fuel externalities. Road freight was found to generate GHG and air pollution externalities of approximately R10.42/t.km, while rail freight only generated an estimated R0.012/t.km for GHG and air pollution related externalities. Coal-based electricity was found to have an external cost of about R0.48/kWh in terms of GHG and air polluting impacts. To achieve the 2⁰C target, it was found that an economy-wide carbon price of R505.63/tCO2e is required by 2020. It is important to note that external cost estimations are extremely context specific, and dependent on a number of variables. The reported figures should be used only as a guideline to begin to encourage the wider use and reporting of externalities in policy and investment decision making.