US Oil Embraces Carbon Price -- Is It Too Late?

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Major oil and natural gas producers are more serious than ever in hoping Washington will adopt a price on carbon, but they may be too late. President Joe Biden and members of the Democrats’ narrow majority in Congress have multiple proposals to go big on climate change, but few feature an economy-wide carbon price. The concern for advocates of carbon pricing in the oil and gas industry is that the alternatives will neither put the right incentives in place for them to economically decarbonize operations, nor incentivize energy consumers to embrace the lower-carbon fuels they could help supply. It may seem counterintuitive for an industry known for its heavy greenhouse gas emissions to ask to be taxed on those emissions, or at least incur a cost of some form. But US giants Exxon Mobil, Chevron and ConocoPhillips and their European counterparts with significant US operations, including BP, Royal Dutch Shell and Total, endorse exactly that. Energy Intelligence understands that industry calls for a carbon price have moved beyond the passive endorsement of years past to an active effort to urge policymakers to implement a carbon price as soon as possible. Even the lobbying group American Petroleum Institute has embraced it -- to the ire of detractors like Occidental Petroleum and smaller producers who worry about their competitiveness. Rising calls for a carbon price come as investors and other stakeholders increasingly demand that producers align their business strategies with the Paris climate agreement, which most believe will require a carbon price to achieve in a cost-effective manner. Major producers already use long-term carbon price assumptions to help guide investment decisions, alongside their oil and gas price outlooks. But unless carbon prices come to fruition, companies could hurt their competitiveness by forgoing otherwise attractive investments. A universal carbon price, as opposed to sector-specific subsidies, fees or other policy-led incentives, would also broaden the range of emissions mitigation solutions and stimulate more cross-industry collaborations, advocates say. California’s low-carbon fuel standard, which targets transportation fuel emissions and is otherwise agnostic in its application of market prices on those emissions, is instructive. Annual declines in allowable emissions per unit of fuel energy sold have fostered a wide range of low-carbon fuel alternatives, from manure-fed renewable natural gas to “drop-in” renewable jet fuel and diesel, to bioenergy with carbon capture and storage -- and the likes of Chevron and refiner Valero are stepping up investments. Advocates of a federal carbon price insist wider investments in carbon capture and storage, integrated solutions with agriculture, waste management and other industries, and crucial technologies wait in the wings and can advance once the right economic signals arrive. Otherwise, significant constraints will remain given the industry’s tight capital budgets and high debt load. A Tax by Another Name? Major oil and gas producers aren’t the only ones clamoring for a carbon tax. The bipartisan Climate Leadership Council, which boasts integrated oil majors, auto companies, banks, and consumer goods firms among its founding members, has backed a universal carbon price since 2017. Taxes are often a political nonstarter in the US, so such groups tend to call their proposed taxes “fees” or simply “prices.” Advocates also often pair their plans with some form of dividend paid to consumers -- making it more progressive by defraying the increased energy cost. A rebate could also make it more durable because voters would see a direct benefit. As popular as revenue-neutral carbon prices might be among US corporate giants -- and even some Republicans -- they don’t yet seem to have enough momentum to pass through Congress. Some progressive Democrats fear carbon pricing’s regressive attributes, even with dividend plans, and President Biden must navigate campaign promises not to raise taxes on households earning less than $400,000 annually (NE Mar.18'21). Biden's $2 trillion infrastructure plan supports a clean energy standard, but with few details. An accompanying tax hike to fund the plan would come via a country-wide corporate tax increase. The proposed Clean Future Act, introduced in the House of Representatives, similarly favors a utilities-centered clean energy standard, with a similar mechanism taking effect economy-wide in later years (NE Nov.19'20). Some Democrats have introduced a carbon tax bill as well, with revenues returned to taxpayers. But for now, attention -- and political capital -- is being spent sorting out the finer points of the infrastructure plan. Carbon price advocates are vying for a seat at the table and finding some reception -- but it may not be enough to sway the country’s trajectory. Casey Merriman, Phoenix

Low-Carbon Policy, Carbon Markets , Fiscal Terms
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