When do assets become liabilities? The case of fossil fuels.
As environmental and resource economists gather in Lisbon for the 2026 World Congress, Bennett Institute research asks whether fossil-fuel reserves still represent wealth – or are becoming a growing economic liability.
How valuable are fossil fuels? This should be a simple question, but economic statistics make it nearly impossible to tell. Our newly published research exposes how governments (and lobbyists) get this wrong and sets out a new approach. Our answer draws on economics, engineering, ethics, and science. Answers that ignore any one of these should be dismissed.
Currently, coal, oil, and gas reserves appear on national balance sheets as economic assets. In the Middle East and North Africa, they account for roughly a third of national wealth. In the UK, they account for 4% of natural capital assets.
But there is a catch.
Exploiting these reserves moves carbon from underground to the atmosphere, causing climate change that damages crops, homes, health, infrastructure, and even labour productivity. Economists call these damages the social cost of carbon: the monetary value of the harm caused by an additional tonne of CO2.
Here’s the paradox: national accounts include the private returns from fossil fuel extraction, but ignore the social damages from combustion. This omission makes reserves appear more valuable on paper than they are in the real economy, flattering today’s balance sheets by loading hidden costs onto tomorrow’s. Even the UN’s statistical standards – the official rulebook for national accounts – pretend we can separate the value of the fuels from the costs of the damage they will do. It is akin to celebrating an increased credit limit whilst ignoring the bill that follows.
In new research with Rintaro Yamaguchi (NIES, Japan) and Giles Atkinson (LSE), we seek to correct this. Our research question is simple: what happens to national wealth if we value fossil fuel reserves inclusive of the climate damages they would cause when burned? Put simply, we subtract the costs of emissions from the value of reserves, producing an account that reveals net wealth, rather than just gross revenues.
The results are striking.
The technical paper is open access. But for most, the key finding is the ‘break-even’ carbon price – the one at which damages from combustion exactly offset the returns from extraction. Below this threshold the benefits from exploitation outweigh the costs of climate change: drill baby drill. Above it, and the climate consequences of combustion are so severe that reserves are worth more as stores of carbon underground than as a source of energy today: accelerate towards net zero.
We find that in many regions the break-even carbon price is as low as $50 – $100 per tonne of CO2. Is that high? Not especially. The current price for an EU emissions allowance is US $82.22 per tonne, with a 52-week range spanning $66.33 to $109.44. Expert estimates of what the global social cost of carbon should be are often higher: the Biden-Harris Administration’s EPA placed it at $190/tCO2. The UK Green Book for valuing emissions in project appraisal sets a central estimate of $372/tCO2.
Of course, there are caveats. The costs and benefits of fossil fuel extraction accrue to different people, in different countries, over different generations. The break-even carbon price depends on assumptions regarding how much we care about future generations, the availability of alternative energy technologies, and the size and affluence of the population. Beyond carbon, fossil fuel combustion also creates toxic air pollution with direct effects on health, labour supply, and innovation. Incorporating these particulate emissions would even further reduce the net accounting value and break-even price of fossil fuels.
What’s the upshot?
National accounts conceal the cost of carbon, dissociate it from the source of emissions, and overstate the value of reserves. Such distorted accounts support distorted decisions. Globally, fossil fuel subsidies are double those for renewables, and the average effective carbon price is negative because the implicit subsidy granted to fossil fuel polluters – consumers like you and me – now surpasses US $5 trillion a year.
Integrating climate prices into fossil fuel valuation would speak directly to debates over new North Sea licences, tax breaks and subsidies for oil and gas versus renewables, and the contribution of hydrocarbons to the UK economy. These are contentious topics. Academics may be cancelled for setting out the facts. Politicians may be rewarded for perverting them. But these discussions should take place in light of the best available information.
Our point is not that we should stop burning fossil fuels tomorrow (we shouldn’t), or that these assets have no value today (they do). It is that good economic policy starts with honest accounting. There is sufficient scientific and economic evidence to do this better, now. Accounting practices should neither force – nor allow – us to pretend we are dumber than we are.
Professor Matthew Agarwala is the Bennett Chair of Sustainable Finance at the Bennett Institute for Innovation and Policy Acceleration, University of Sussex; Research Affiliate at the Bennett School of Public Policy, University of Cambridge; and Senior Policy Fellow at the Tobin Center for Economic Policy, Yale University.
