Energy Industry Lauds Policy ‘Carrots’ Over ‘Sticks'

Industry executives are putting the spotlight on the pitfalls of policy “sticks” and praising the merits of policy “carrots” as government intervention in global energy markets continues at an unprecedented pace.

Oil and gas CEOs have spent much of the first two days of CERAWeek by S&P Global in Houston lauding the accelerating impact that fiscal incentive-based policies can have in driving investment in low-carbon energy and emissions abatement. The US Inflation Reduction Act (IRA) in particular has garnered outsized praise — and the envy of non-US based companies.

“Let me say, as a European, that you are lucky guys,” Jose Jon Imaz, CEO of Spanish integrated Repsol, quipped with delegates.

“I’m sure … there are aspects that can be improved in the IRA,” he acknowledged. “[But] IRA is predictability. You have a framework for capital for years. You know what is going to happen.”

Multiple executives flagged the need for robust permitting reform if capital is to be put to work at the desired pace, while also acknowledging that the energy transition will require global fiscal incentives that run multiples beyond the IRA’s offerings if the world has any chance at getting on track with Paris climate agreement objectives.

But the industry’s appetite to tap the IRA’s massive clean energy incentives as a means to jumpstart decarbonization is palpable, with once-sideline sessions discussing carbon capture and storage (CCS), hydrogen and synthetic fuel opportunities in the US routinely overflowing with attendees this year.

Deterring Investment

Contrast that with Europe. The EU is currently advancing its own set of energy industrial policies in response to the IRA, but industry executives repeatedly pointed to the continent’s multiple layers of highly prescriptive energy policies (Fitfor55, REPowerEU) alongside windfall profits taxes as “sticks” that will do more to deter net energy investment than spearhead it — and risk creating unintended consequences.

Imaz said Europe’s approach felt more like, “everything is forbidden.”

“You have to produce hydrogen, but to be considered ‘green’ means you can't use nuclear energy for that. Carbon capture is not allowed to be used. You have to add new renewable capacity to be considered ‘green.’ You have to produce the power one hour before the production of the hydrogen molecule, otherwise, it is not going to be considered ‘green’ … you have to invest a lot of money in batteries.”

Given such complexities, Imaz argued that investors will naturally gravitate toward frameworks that provide “carrots” rather than use “sticks” when given the option.

Exxon Mobil CEO Darren Woods added that Europe’s myriad windfall taxes meanwhile “wiped out” years of profits that the US supermajor reinvested back into its regional refining system to improve efficiency and raise yields of lower-emission fuels.

“In that case, what you're actually going to find is that you’re making the situation worse and that less investment will flow, less supply will be available, yet the demand will continue to be there,” Woods warned.

The Exxon boss acknowledged that governments can struggle to strike the right “balancing act” between the “narrative of the moment” and “the right long-term policy.” And speakers like Clara Bowman with e-fuels firm HIF Global argued that, at the end of the day, consumers were funding the transition regardless of whether policy “carrots” or “sticks” were used, with either their taxes funding subsidies or higher prices at the point of sale reflecting the costs of “sticks.”

But executives generally saw “carrots” as more effective in helping de-risk technologies and advance deployment than punitive “sticks.”

Self-Sufficiency

That said, some industry observers noted that capital markets — not government coffers — must eventually be the primary catalyst for the energy transition.

“In the long term, it’s hard to imagine that the subsidy-based model gets us all the way to net zero,” Joseph Majkut, director of energy security and climate change at the Center for Strategic and International Studies, told the conference. “We’re talking about a very large amount of money, and eventually private markets need to be able to shift that over.”

Hess CEO John Hess seemed to agree.

“Where a carrot can attract investment, that's a good thing,” he said. “But at the end of the day, there's still going to be winners and losers. It comes back to the same idea of having a master plan [and] having a price on carbon, so that capital markets can allocate capital to what they think the best winners are going to be.”

To this end, Jennifer Holmgren, CEO of carbon recycling firm LanzaTech, argued that one consideration governments should make in directing capital is to facilitate a more rapid leap from pilot-scale technologies to fully commercial developments since it is at this scale where “exponential” cost reductions happen and knock-on deployment can happen.

“It’s great to spend money on new ideas, but you have to get ideas past the ‘valley of death,’” she argued.