After COP-21 in Paris, governments remain committed to a United Nations process whose chief accomplishment is a set national voluntary physical emission reductions targets (Intended Nationally Determined Contributions, or INDCS), without any enforcement mechanism. Even if those emission reductions are realized, the INDCs submitted at Paris will not achieve the UN’s stated objective of “holding the increase in global average temperature to well below 2C above pre-industrial levels.” Nevertheless, supporters claim that Paris lays the necessary foundation for progress towards that objective.
Virtually all energy and climate economists, and even the President of the United States, have voiced support for a carbon price as the best instrument for reducing carbon emissions within countries and globally. Carbon prices provide greater economic efficiency, gradual and stable policy, and balance both climate and economic considerations. Sadly, the Paris agreement hardly acknowledges the possibility of of carbon pricing.
Before Paris, six oil and gas majors called on governments to “introduce carbon pricing systems where they do not yet exist at the national or regional levels.” A carbon tax is the logical instrument to meet their request for “clear, stable, long-term, ambitious policy frameworks.“ ExxonMobil (the great white whale for environmental activists) has identified a carbon tax regime as the superior policy instrument for establishing a carbon price.
Disappointingly, these same hydrocarbon elites have yet to offer actual terms for what would constitute an acceptable carbon tax regime. For example:
- What is the initial carbon tax level and how will it rise over time?
- How are the proceeds to be used? How much of the proceeds will go towards offsetting regressive impacts of the tax? How much of the proceeds will go towards funding climate adaptation?
- Should the tax apply to all greenhouse gas emissions equally in the economy, without exceptions?
- What, if any, other carbon policy instruments apply concurrent with the tax?
How can governments be expected to embrace carbon taxation as the preeminent policy instrument, when the elites of the hydrocarbon industry themselves remain equivocal with the terms, and aloof towards the political process which might actually advance such a tax? This surely must be one of the most fundamental strategic questions facing their corporate leadership.
Perhaps this leadership has rationalized that, at least within the short and medium term, actual carbon policy across the major global economies will not materially impact them. Projections from multiple groups (See BP, ExxonMobil, IEA , and EIA) show that global crude oil consumption will stabilize, if not modestly grow. Sustained global growth also remains the reasonable expectation for natural gas consumption. Even post-Paris, the demand outlook for these two core commodities are not fundamentally problematic.
If the best the world can actually do is what was promised at COP-21, then does the hydrocarbon value chain—exclusive of coal—have much to worry about? Probably not, in the short and medium term. Therefore, why volunteer additional risks across their value chain via carbon taxes before one is forced on them via the political process?
The case for actively forwarding a carbon tax is grounded in the collateral damage that will likely follow if the industry continues down its present path. The Canadian Oil Sands are an example of what might lie in store. Under national CO2 reduction targets, production of relatively high-carbon crude oil may be perversely constrained, even as the world comes nowhere close to the level of implicit carbon pricing that would actually contract the economical exploitation of the resource. Further obstruction of economically viable energy infrastructure by the environmental activist NGOs (ENGOs) is also to be expected. That community is increasingly applying its disappointment regarding the limited ambition of the Paris agreement by engaging in a political guerrilla war against new hydrocarbon infrastructure investments. A war of attrition on infrastructure will become the new normal. This is certainly the reality in Canada, and is increasingly in the United States.
Many within the hydrocarbon value chain will doubtless ask, what is to be gained from seriously trying to implement a carbon tax regime now? What “quid pro quo” do the hydrocarbon elites get for their proffer of actual carbon tax terms? Would the ENGO elites stand down on obstruction? Would they accept reliance on economic signals versus outright regulation? Could they accept carbon taxes as the pre-eminent, if not sole, policy instrument to reduce carbon emissions? These are all very legitimate concerns.
One might have hoped that elites from the hydrocarbon value chain, ENGOs, and world governments would have come together in Paris to explore a more optimal climate policy agenda based on carbon taxation. There is no evidence, however, that this occurred or was even contemplated.
Without the United States taking the lead in pricing carbon via carbon taxes, it is almost impossible to imagine how the concept would gain any momentum in other developed economies. Alas, the unique political situation in the United States makes it look like a heavy lift on the Left and Right. Why risk offering actual terms unless some politically feasible pathway exists to implement them?
But, regardless of who is next elected President, how can one expect such a fundamental reinvention of United States climate policy to occur unless the hydrocarbon elites are prepared to genuinely engage in the political process with real terms? Their advocacy may not be a sufficient condition to achieve a breakthrough in the United States, but it is certainly a necessary condition. And it could be a game-changer.
Ultimately, the climate change risk has to be credibly and proportionately dealt with. Failing to engage with real terms related to an economy-wide carbon tax design in the United States in 2017 (let alone 2016) would be a fundamental strategic error. Acknowledging climate science and the risks of carbon emissions while advocating only conceptually for policy instruments and internalizing short run collateral damage isn’t a genuine response to the risk faced by the oil and gas industry.