Australia’s $105 billion Future Fund has agreed to divest from tobacco, in recognition of the damage it causes to human health. However, the fund continues to invest public money in fossil fuels.

When asked about this in a Senate inquiry on 20 November, Peter Costello, Chair of the Future Fund, said:

The answer that the board came to was no amount of tobacco can be non-harmful, whereas it doesn’t believe that every amount of oil is harmful or every amount of gas is harmful or every amount of coal is harmful.

Fossil fuels are known to cause harm to health, economies and ecosystems both through local pollution and through climate change.

The total climate damage per tonne of CO2 emitted is called the ‘social cost of carbon’ (SCC). The US Environmental Protection Agency (EPA) calculates the social cost of carbon will be an average $39 (in $US2011) per tonne of CO2 emitted in 2015. This equates to roughly $48 current Australian dollars. Emissions in later years will cause even more damage as climate impacts increase.

While the EPA offers figures for ‘average damages’ calculated in its models, it clearly specifies that damages could be much higher. In fact, the agency suggests there is a one-in-twenty chance that the social cost of carbon could be three times higher than the average figures presented.

In economic terms, the social cost of carbon is the fair and ‘efficient’ level for a carbon price to make the polluter pay for the damage done through climate change (not including local impacts).

While there is a growing number of carbon pricing schemes around the world, most carbon prices remain lower than the EPA’s SCC figures. In 2013-14, Australia’s carbon price reached $24.1/tCO2.

While there is considerable debate about how to calculate the SCC, it is clear the US EPA numbers are conservative. Their methodology has been criticised and contrasted with the UK’s range of $41–$124 per tonne of CO2, and rising over time. While some have argued that carbon may have a short-term negative SCC (a benefit), others argue the SCC is very high – according to some “almost $900/tCO2 in 2010, rising to $1,500/tCO2 in 2050.”

A US court recently ruled against a coal mine on the grounds the mine proponents had incorrectly argued that uncertainty around the SCC meant they could ignore the mine’s climate impacts.

One factor in calculating the SCC is choice of ‘discount rate’, which represents how much we value the wellbeing of future people, including ourselves. The US EPA uses a 3 per cent discount rate, but also provides SCCs discounting at 2.5 per cent and 5 per cent per year. These are high discount rates compared with other analyses, such as in the Garnaut Review and the Stern Review. Using a higher discount rate means the calculation is less concerned about future damage. Using lower discount rates, to reflect greater concern about the future, would further increase the SCC.

Global climate negotiations have not been based on pricing carbon. Rather, governments around the world have agreed to act to limit global warming to 2 degrees average warming. This commitment sets an implicit threshold for ‘safe use’. However it is important to recognise that even emissions under this threshold would cause damage, as indeed they already are.

Meeting the 2 degree target would require keeping at least two thirds of the world’s fossil fuel carbon underground. This ‘unburnable carbon’ analysis has been endorsed by the International Energy Agency and was recently endorsed by the governor of the Bank of England and Obama’s climate envoy Todd Stern.

If the 2 degree target is the threshold for ‘safety’, then two thirds of global fossil fuel reserves are harmful.  Current investment patterns risk warming the globe closer to 4 degrees, which the head of the World Bank calls a “doomsday scenario”.

If the Future Fund wants to argue there is a safe level of fossil fuel use, it should create a policy outlining what it thinks that safe level is. Its policy should take account of the social cost of carbon, arguments about a carbon budget, as well as local impacts from fossil fuels. The Future Fund should then take steps to mitigate what it determines to be harmful investments in fossil fuels.