Oil Companies Call for Stronger Carbon Pricing

Scales with earth and money - isolated / clipping path________INSPECTOR__________Map file from here: http://visibleearth.nasa
Scales with earth and money - isolated / clipping path________INSPECTOR__________Map file from here: http://visibleearth.nasa.gov/view.phpid=57735

Something strange happened during the run-up to this month's Paris climate conference. Several major oil and gas companies, including Shell and BP, acknowledged the serious threat of climate change. But they weren't done yet: they also demanded "ambitious" policy solutions to combat the issue -- including a price on carbon.

There is no mention of what specific mechanism they prefer. As the World Bank describes, "there are two main types of carbon pricing: emissions trading systems (ETS) and carbon taxes." Another term often used in place of ETS is a cap and trade system, which allows low-emitters to trade credits to high-emitters. By comparison, a carbon tax sets a price based on the amount or carbon emitted. An important distinction is that "it is different from an ETS in that the emission reduction outcome of a carbon tax is not pre-defined but the carbon price is."

Perhaps most astonishingly, Jack Gerard, the CEO of oil and gas industry American Petroleum Institute declared: "... our view is that the issue [climate change] is a serious one that needs to be addressed." This is the same API that can usually be relied upon to fund campaigns against legislation that combats climate change, including the 2009 cap and trade bill on carbon emissions and the 2010 American Power Act.

What was going on here?

First of all, the internal politics of the oil and gas industry are complex, and motives are always mixed, bets are always hedged. It is also almost certain that the industry statements were made with an eye to their PR value.

This doesn't mean that these oil companies were totally insincere. Their plan for carbon prices could help fight climate change. Here's how: oil and gas are essentially liquid carbon. If you raise the price of, say, gasoline, consumers will buy less of it. If people buy less gasoline, then less carbon is burned. Because the emissions from burning carbon are the number one cause of climate change, reducing them has a net positive impact on the environment. For this reason, many economists and environmentalists advocate higher carbon prices as a market-based way to reduce carbon consumption.

But, though the petroleum industry called for setting a carbon price, it's vague about what price. It doesn't necessarily demand a "high one." Without carbon prices set at a certain level, the mechanism doesn't work.

Of course, most businesses don't support programs that will raise the price of their products. Surprisingly, it's still possible that the oil and gas companies might see an advantage in a slightly higher carbon prices. Higher prices would likely hit their energy-producing competitor, coal, harder. Coal is an even more carbon-intensive fuel than oil or gas. In the event of a carbon tax, its price would be more affected more than natural gas'. Natural gas would actually benefit from a higher carbon price by taking over more of coal's role in power generation.

Another reason that the petroleum industry could live with a carbon price is that almost all of the world's transportation fuel -- gas, diesel, jet fuel -- is oil based. Alternative powertrains and fuels -- electric, hybrid, fuel cell, non-food stock cellulosics -- are improving dramatically. But the industry probably believes that demand for oil in transportation will remain durable for the next two decades even with a higher carbon price.

Finally, the industry can see the writing on the wall. Various kinds of carbon regulation and programs are advancing across the states or provinces of the world. If some sort of government action on carbon is inevitable, gas and oil companies would much prefer it come in the form of a pricing mechanism.

Given their history, there's plenty of reason for skepticism about the gas and oil industry's call for setting carbon prices. But, if they are serious, now is the perfect time to show us. The Paris Agreement did not set a carbon price. Instead, it established a new market-based mechanism that countries could use voluntarily to facilitate trade with other countries and business. In other words, the carbon pricing ball is in the court of individual countries and businesses. Oil and gas companies need to get specific on their proposals. They should advocate for carbon prices consistent with the Paris Agreement: high enough to keep global temperatures well below two degrees Celsius above pre-industrial levels.

There are different proposals by experts on the level of the carbon tax pricing. A recent letter signed by 32 experts including George Shultz, secretary of State under President Reagan; conservative economist Gregory Mankiw; and Nobel Prize-winning economists Joseph Stiglitz, Thomas Schelling and Kenneth Arrow and former secretary of energy Steven Chu, urged climate negotiators in Paris to use carbon taxes of $60 per ton of carbon in their respective countries to confront climate change.

We need the other major oil companies including Exxon to join the major oil companies to push for a carbon tax high enough that will encourage innovation and investments to renewable energy, batteries low carbon fuel, and help the planet heal. After all, it is their product that is responsible for a large part of the severe climate impacts around the world. They have a moral responsibility to help clean up the mess they have created.

Now that the confetti and croissants have been swept up, let's see if the positive thinking will survive the trip home.