Big Business Gears Up for Carbon Pricing
November 14, 2014
I’ve reported this before. Big corporations, having hired very smart people to advise them about the future – know that climate change is real and man made. Exxon CEO Rex Tillerson admits as much above, though hedging on the effects. A number of companies therefore understand that carbon regulations are inevitable. Many of them, including Exxon, are already pricing carbon internally. The past few month’s events just underscore the urgency.
When hundreds of thousands of marchers thronged New York City in September demanding action against climate change, they probably didn’t imagine they were affecting the “shadow” price of carbon set by their bête noire, ExxonMobil . Nor were Republicans likely aware they had performed the same feat when they seized control of the U.S. Senate on Nov. 4. After all, denial of climate change is a Republican litmus test, so the notion of paying to stop climate change is beyond heretical. What company has spent more to promote the denial of climate change than any other? ExxonMobil, with at least $29.9 million since 1997. Privately, however, the oil and gas giant—and others in the energy industry—has been operating on the assumption that it’s only a matter of time before governments around the world impose a price on carbon emissions. That assumption was borne out on Nov. 11 when the U.S. and China announced an historic climate agreement.
Pricing carbon would address what economist Sir Nicholas Stern in a 2006 report called “the greatest market failure in history.” Greenhouse gas emissions cause profound damage—drought slashes crop yields; hurricanes flood subways; rising seas inundate property—but that damage is not reflected in the emissions’ market price. Indeed, the market price is zero: The costs of climate impacts are shouldered by third parties or society as a whole.
Economists from right to left agree that taxing carbon is the most efficient way to cut emissions. A rising, predictable carbon price would unleash the power of the market against climate change, giving both producers and consumers an incentive to shift to lower-carbon energy choices.
ExxonMobil’s approach to carbon pricing was revealed in a September report in the online magazine Yale Environment 360 by Mark Schapiro, author of the book Carbon Shock. Alan Jeffers, ExxonMobil’s media officer, told Schapiro the company has been applying a proxy price to carbon since 2007. The price is different for different countries, and it goes up or down according to how likely ExxonMobil thinks a given country’s government is to regulate carbon.
ExxonMobil’s carbon price is invisible to consumers—it’s used to help executives test potential long-term investments. The company projects that governments will impose a price on carbon that reaches $60 a ton in countries that are part of the Organisation for Economic Co-operation and Development by 2030 and $80 a ton by 2040; executives ask if a new refinery or pipeline will be profitable decades from now with that additional cost.
Analysts at ExxonMobil are “in the process of refining” the carbon price in the wake of the September climate march, Jeffers told Bloomberg Businessweek. “We look at all kinds of things that affect government policies,” he says, “and that many people marching is clearly going to put pressure on government to do something.” In 2009 the company raised its in-house U.S. carbon price when Congress weighed a bill to limit greenhouse gas emissions. Republicans’ strengthened hand on Capitol Hill presumably will incline the in-house price downward, even as the emissions limits President Obama agreed to with Chinese President Xi Jinping push it up.
ExxonMobil is hardly the only big business that sees the carbon writing on the wall. At least four other oil companies—BP, Chevron, ConocoPhillips, and Royal Dutch Shell—also assign an internal price to carbon. So does American Electric Power, one of the largest and most coal-reliant utilities in the U.S. Joining them are scores of companies outside the energy sector, including Microsoft, Google, DuPont, Deutsche Bank, Delta Air Lines, Dow Chemical, and BMW. A complete list has been published by the Carbon Disclosure Project (CDP), a nonprofit in London that surveys companies on behalf of 767 investment banks and pension funds that control more than $92 trillion in assets, including Goldman Sachs, Wells Fargo, Bank of America,HSBC, Calpers, Credit Suisse, and Barclays.
“There is a global corporate consensus that carbon will be priced,” the CDP reports. The consensus reflects an emerging reality: The World Bank reports that 22 percent of global emissions are already covered by some form of carbon pricing. California, the world’s eighth-largest economy, has a de facto carbon price, thanks to its cap-and-trade law, which ratchets down the level of allowable emissions over time. The same is true of the European Union. China, the world’s largest annual emitter, is establishing cap-and-trade systems in seven regions and pledges its national emissions will peak by 2030. The Obama administration, as part of calculating the risks and benefits of potential energy policies, assigns a $35-a-ton “social cost” to carbon emissions.
The development is a striking departure from conservative orthodoxy and a reflection of growing divisions between the Republican Party and its business supporters.
A new report by the environmental data company CDP has found that at least 29 companies, some with close ties to Republicans, including ExxonMobil, Walmart and American Electric Power, are incorporating a price on carbon into their long-term financial plans.
Both supporters and opponents of action to fight global warming say the development is significant because businesses that chart a financial course to make money in a carbon-constrained future could be more inclined to support policies that address climate change.
But unlike the five big oil companies — ExxonMobil, ConocoPhillips, Chevron, BP and Shell, all major contributors to the Republican party — Koch Industries, a conglomerate that has played a major role in pushing Republicans away from action on climate change, is ramping up an already-aggressive campaign against climate policy — specifically against any tax or price on carbon. Owned by the billionaire brothers Charles and David Koch, the company includes oil refiners and the paper-goods company Georgia-Pacific.
The divide, between conservative groups that are fighting against government regulation and oil companies that are planning for it as a practical business decision, echoes a deeper rift in the party, as business-friendly establishment Republicans clash with the Tea Party.
Tom Carnac, North American president of CDP, said that the five big oil companies seemed to have determined that a carbon price was an inevitable part of their financial future.
“It’s climate change as a line item,” Mr. Carnac said. “They’re looking at it from a rational perspective, making a profit. It drives internal decision-making.”
This information comes from a recent report issued by the Carbon Disclosure Project, a nonprofit that specializes in organizing environmental information. The CDP report finds major oil companies, Wells Fargo, Wal-Mart, Walt Disney Company, automotive supplier Delphi, General Electric, energy companies like Duke, and even technology companies such as Google and Microsoft all including a future carbon price in their planning. The internal company projections range across industries, but generally it appears that the oil companies are forecasting the highest carbon prices in their internal planning, with BP pricing $40 per ton of carbon dioxide, Exxon Mobil $60, and Royal Dutch Shell $40.
At least three companies, Disney, Microsoft, and Shell, already implement their own internal carbon taxes. According to the Guardian, these companies have been enforcing the price within their own organizations in order to drive down their carbon footprint and increase efficiency. Shell has the highest price of the three, and so only uses the price for planning purposes; no money actually moves around. Nevertheless, Shell officials told the Guardian that they have declined pursuing carbon-intensive projects that a $40 per ton price makes unattractive. Disney, on the other hand, prices and taxes themselves. The funds raised from the tax deposited in their “climate solutions fund.” Currently, they price approximately $10-20 per ton, and have raised $35 million. Microsoft has the most aggressive goal, of seeking zero net emissions this year, and has the correspondingly lowest price, approximately $6-7 per ton.
While there are a variety of motivations for aggressive carbon pricing, the oil companies, such as Shell, are seeking to be prepared for increasing concern in industrial countries about the effect of carbon emissions on global climate change. As there are a variety of proposals circulating the globe, they are seeking a predictable program that will let them stay in business.
In the September/October issue of The American Conservative, R Street’s Andrew Moylan laid out the conservative case for a carbon tax. He looked at the manner in which conservatives consistently denied any problems in the health care industry, leaving the ball entirely in the Democratic court and allowing Obamacare to be passed in the first place. Moylan then laid out a plan for getting conservatives out ahead of the curve. By making the tax revenue he proposed being able to pursue other conservative policy goals, such as a more growth-friendly tax code, in exchange for addressing climate change.