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Markus Stocker

Between information technology and environmental science with a flair for economics, the clarinet, and the world of soups and salads.

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Today I have yet another post on external costs and how they may lead to potentially irrational decisions with disastrous effects. The discussion is based on the flaring of natural gas by Shell in Nigeria. BBC reported on this awhile ago.

In a nutshell. The natural gas – a by-product of crude oil extraction – is burnt off to mimic the Old Faithful Geyser. The gas could be stored, distributed (e.g. to a needy local market) and be profitable but Shell’s answer is: Not profitable. The local market would require an investment (e.g. infrastructure, security) which Shell argues is an assignment for the government. The government blames Shell saying it ought to act responsibly.

I’m sure, Shell did the maths and the decision is certainly rational w.r.t. their best interest. Unethical? Perhaps. Should Shell act more responsibly? Probably. So, why don’t they care? I’m sure they do care; they just care for some dimensions a lot more than probably you and me do. For obvious reasons.

Provided there is an association between the flaring and social, human health and/or environmental damage what we have here are billions of external costs no one is accounting for. Let’s assume there is an association between the flaring and higher rates of cancer, children with asthma, infertility, noise and environmental damage. Would it still be rational, in their best interest, to burn the natural gas if Shell would have to account for the cost of the damage associated with the practice? Unlikely. Would it decide to invest now in storage and distribution of the natural gas? You bet.

Come on, you creative minds out there: How can we fully internalize social, health and environmental costs in every human action?