The Case for Endless Oil

- Q causes asthma. - I own a factory. - That factory is cheaper to operate if it emits Q than if it doesn't.

This is an externality.

If I emit Q, I gain profit, and others take a loss, as they have to deal with the medical bills, and reduced quality of life associated with asthma. If I am never forced to pay for this, it's an uncaptured externality, meaning that effectively, I'm paying too little to emit Q.

There's no arbitrage opportunity, the only way to stop me from emitting Q is to find a way to capture the externality. In the United States, this would probably occur either via a lawsuit that attempted to make things right, or I'd simply be stopped via regulation that prohibited the emission of Q at unsafe levels.

The general criticism against fossil fuels is that they have a similar, but harder to quantify issue. Scientists generally agree that changing the atmosphere changes weather and hydrology in somewhat hard to predict ways. This means that whenever you add carbon, you're really increasing the risk of expensive problems. As a simple example, if you raise the ocean level by even a foot or three, there are huge amounts of infrastructure that are suddenly underwater, or that need expensive protection.

Or perhaps the additional carbon causes weather patterns to change in manner that leaves the Dongjiang basin dry. Then a large area is useless for agriculture and industry, and the existing infrastructure is devalued.

But I can burn oil all day, and I don't actually pay for those damages. They're uncaptured externalities. My use of oil is cheaper than it really should be, because it doesn't reflect all the costs.

As such, there's nothing to arbitrage.

* How do you suppose these conservationists aim to correct these "externalities"?*

Generally speaking, the goal is to come up with some sort of estimate on what costs are being incurred to others, and then apply that charge.

An example of a situation where this worked very well was with SO2 in the United States. Sulphur Dioxide emissions were causing acid rain, which caused a number of harms to others. As such, the government set a limit as to the total amount of SO2 that could be emitted, and created a market where companies could bid for the right to emit that SO2.

This encouraged companies to innovate, and find ways to reduce SO2 emissions. It worked incredibly well, costing companies far less than anticipated, and essentially solved the SO2 emission problem in the US, reducing it to levels that don't cause meaningful damages.

That merely goes back to proving the point that the markets themselves create the incentives for resources allocation - ie innovate and adapt and for this reason it has been historically foolish to bet that we will run out of a given resource.

You're seeing what you want to see. Markets are not perfect problem-solving devices. The price of oil reflects only the costs to get it from the ground, and the demand to burn it right now. It does not include the portion of the harm that may be accumulate from billions of people burning oil every day for decades.

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edit: and you see how bad people are with understanding the financial impacts of long-range things all the time. An easy example is to look at how poorly insulated many houses are, even in cold climates. The homeowners could spend $1,000 on insulation and save $600/yr for the next 15 years, but they don't do so, because the true price isn't sufficiently transparent.