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

Abstract

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.