The external cost of fossil fuel use in power generation, heating and road transport in Turkey

Fossil fuel pricing is an area generally referred to as “market failure” by economists since many of the costs associated with fossil fuel consumption, such as adverse effects on air, soil, forests, human health and climate are not reflected by market prices. In other words, the market prices do not include the social costs of using fossil fuels for energy generation. Thus, the price of energy generation from fossil fuels based only on market prices does not reflect the true cost of fossil fuel consumption. Basing investment and consumption decisions for energy generation from fossil fuels on market prices without attention to external costs is misleading from a social perspective. In the case of costs of emissions that cause climate change, the social costs are not just national or regional but also global. Estimating the external costs of fossil fuel consumption and reflecting it in actual costs, either through taxes or emissions trading, has thus become part of the international agenda. In case of Turkey, where emissions trading, carbon or fossil fuel taxes are not yet implemented nationally, European Union countries are preparing to impose border taxes on their imports of Turkish products based on the carbon content production.

This study, covering fossil fuel use in power generation, heating, and road transport sectors in Turkey, constituting 89% of total fossil fuel use, was performed with 2018 data. Results are presented by sectors for each of the seven geographical regions of Turkey, distributed by type of fuel and pollutant. Total annual external costs of fossil fuel use in Turkey, based on the emissions calculated for each sector, is estimated to be around 10 billion Euros (11 billion US$). The magnitude of the external costs of fossil fuel consumption corresponds to about 1.5 percent of GDP and about 1/3 of total annual health expenditures.

The results of the study reveal that the magnitude of fossil fuel costs not reflected in prices is considerably high. The externality cost figures calculated for Turkey in this study should be considered a low-end estimate in the light of higher figures implied in other studies. Comparison with emissions estimates in Emissions Data for Global Atmospheric Research (EDGAR) of the European Commission Joint Research Centre suggests that the upper bound of the external costs for sectors included in this study may reach 20 billion Euros. Thus, the potential socioeconomic benefits of avoiding the costs of fossil fuel use can be substantial and need to be further studied and incorporated into the design of energy and economic development policies of Turkey.

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