"Tax Me, Baby!" : Big Oil's Response to Pricing Carbon

“Tax me, Baby!” Yikes! These are not words that you generally expect from anyone—and petroleum company executives maybe even less than most of the rest of us. And if I change the notional quote to “Tax my carbon emissions,” you have to figure it’s an excerpt from a speech by David Suzuki. But some oil companies are starting to sing that tune. They want to be taxed?! What’s going on?

The first thing is that 'Big Oil' is starting to see real anti-carbon public sentiment settling in. In North America, where I live, there is certainly a loud, boisterous, arms-folded, pouting, fossil fuel fan club … still. But despite a well-financed campaign that tries to sow doubt about the science, the majority—even in the US—accepts it. Climate change skeptics are dwindling in credibility, and volume. And in most of the world they are dwindling in numbers as well. The oil companies are pretty convinced that public pressure to address global warming is building and will continue to build.

Now, suppose you are an oil company exec looking at the assortment of things that society might do to reduce carbon emissions. Which ones do you like?

  1. tax fuel production
  2. regulate/limit fuel production
  3. regulate/limit fuel consumption
  4. cap-and-trade on carbon production
  5. tax fuel consumption

Option 1 is a straight cost to the industry with no redeeming features. Options 2 and 3 are almost as bad.

Option 4. Cap-and-Trade. Well, that seems like it should be a little more acceptable to the oil industry at first glance. It offers the oil producers the chance to ‘buy’ the right to make their product. Certainly for a while they can count on being able to find companies who will sell them emissions rights. This could go on for decades: widget manufacturers are able to find less emissions-intensive ways of getting widgets out the door … they sell the value of their excess emissions reductions to others, including oil companies. And it won't be expensive for most oil producers in the short term; the amount of energy used (and carbon credits required) for the production of conventional oil can be extremely low.

There are two problems with Option 4—one for policy makers and one for industries: For policy makers, the problem is that you can't cap every emitter; it's too tedious and bureaucratically inefficient to go after little guys. So a lot of emissions escape the net. That makes it more important to find big, concentrated sources of emissions that you can cap--and cap them as aggressively as feasible. The problem for the oil industry is just that: if you are targeted--and oil companies can be good targets when we add energy burden for processing and refining--you will be squeezed harder and harder and see most of the emitters get a free ride.

Well, here we are at Option 5: Tax. But if the other options are so problematic, why isn’t support for this option running rampant? The answers, from the point of view of both policy and industry, are creatures of short term expediency. Remember, most governments and industries resisted any anti-carbon measures. But, also, cap-and-trade has its apparent appeal. From a government's point of view, until they feel a lot of pressure from the industries that their cap-and-trade scheme targets, it feels comfortable for them to play economic favourites and make themselves more electable. Also contributing to electability is the fact that the individual voter is not being hit directly. That's important.

Now look at it from the oil industry's point of view: A carbon tax is a high profile hornets' nest and they may not want their customers thinking about carbon at all. Maybe in the early days, when carbon licenses will be cheaper, it’s better to take the carbon charge and pass it on to the consumer than see the whole issue given a very high profile in the public mind. This protects public product demand: “Don’t you worry about carbon emissions.” There is some smoke and a few mirrors here: the consumer will pay more for fuel but then has no capacity to sort out carbon as the culprit.

But this is short term thinking; the interim advantages of cap-and-trade disappear for all players over time. Still why are some oil companies in the newspaper now, asking for a tax right away? Cap-and-trade hits the biggest emitters the hardest. That separates the field into those who know that they must probably support a universal carbon tax eventually and those who want the change to get started now. This distinguishes oil that is easily just pumped out of relatively shallow wells on solid ground from all the other kinds that are, to varying degrees, 'tight', deep, underwater, heavy, or not in an 'oil' form at all.

Canada’s bitumen resources are a case in point. Processing a sand-bitumen mess into oil is difficult and energy-intensive. It is a flagship case that makes whole-economy carbon taxation preferable to industry-targeted cap-and-trade.

Still, not all bitumen processors want a tax. That's because there are many oil companies involved in those Northern Alberta and Saskatchewan resources, and most of them have ‘conventional’ oil operations that are much more important to them than their bitumen play. When a company sees its operations focused very highly on bitumen, the desirability of moving toward a broad-based tax can be more apparent earlier. We can't actually say the reasons that companies like Suncor and Cenovus, both of whom are very concentrated in bitumen, favour a tax. It may have a lot to do with the foregoing, though.

Will governments respond? Let's stay with the Canadian picture. The Alberta government, newly elected, might respond with a tax. But the Alberta population and, therefore, energy consumer and potential revenue base is not very large, so the effectiveness of a provincial tax is lower. The real opportunity is at the national level. The Canadian federal government is most important in this case: relative to the national as opposed to the provincial economy, Alberta's bitumen industry is smaller. Also, the national population base is larger. It works.

But ... there's always politics: The federal government reverse a long standing public position against a comprehensive carbon tax? Hmm. Much depends upon how the prime minister chooses to do the math. Will he want to see logic from the point of view of the most important players in the bitumen patch, or the majority of the players? Who might scream the loudest? What will they scream? Who has the most credible case on job-creation? What can he convincingly say to a cynical electorate concerning his change of heart?

No change in favour of a national carbon tax will be popular with the voters. So, in Canada, none is likely before the federal election this fall; the current government has invested huge political capital in making ‘carbon tax’ dirty words. But maybe some day soon the logic will penetrate.

But let's say that the federal government works up its courage after the federal election, would a federal carbon tax get support from provincial politicians? Well, in the most populous provinces putting more burden on the smaller energy consumer  instead of the 'tar sands' will not be popular. This will require reason and leadership. "Someone? Anyone?"

Now, if we did start to see carbon taxes, the next question is, where should the money go? Governments would want to slide it right into general revenues. That's like running up the 'down' escalator. Putting more stimulus into what remains, for the time being, a carbon-intensive economy would be somewhat counterproductive. The effect might be marginal but the carbon reduction power of a carbon tax would be diminished if much of what it is spent upon is ‘regular old’ high-carbon activity.

If carbon tax revenue doesn't go into general revenue, where should it go? The oil industry would say that any tax affects its viability and that the revenue should flow into that industry so that operations can be made less carbon-intensive and jobs can be saved. Yeah … NO! The best way to spend carbon tax revenue is in helping to create demand for sustainable sources of energy; better to have the new jobs there. If the oil industry wants the tax revenue they should really work on developing their own sustainable energy initiatives.

The time for a straight, comprehensive, broad-based carbon tax is here for some and not far off for others. But it will be a complicated evolution. The market capitalization of oil firms is dependent upon the value of their assets. Anything that encourages the public to conclude that global warming and climate change are real, present, and caused by the human activity diminishes the financial value of the oil reserves that such firms carry on their books. That is why some of these companies seem to be spending hugely to discredit climate science. The idea that some of their precious oil resources must never and will never be extracted, processed, and sold is pretty scary for their Boards. This is the dreaded ‘stranded assets’ situation. So it's hard for them to be in favour of any policy that hits carbon emissions. 

No matter. The weight of evidence will pile up against the weight of mere PR campaign. One day, the dam must break. Exactly what is 'ruined' when that dam breaks is up to those who live in the valley. Whatever the ultimate, long term value of petroleum resources, when climate truth dawns and the carbon penalty hammer falls, it will be an easier blow for oil companies if it falls on many heads--not just theirs.

Times change. As each oil company discovers that its economic modeling is showing a higher total cost for buying their required carbon credits as opposed to paying their share of a society-wide carbon tax … “Tax me, Baby!”

I'm blogging in support of my new book, 'Will Sustainability Fly?'at willsustainabilityfly.com

 Click on the questions to see some more answers:

A lot of money has been spent to ensure that (in this case) Americans stay skeptical about global warming and climate change. Are they?

How is the tax vs cap-and-trade discussion evolving elsewhere?

What’s the talk in the eye of the climate/oil hurricane?

What’s being said about who would get the tax revenue?