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Why Big Oil Wants A Carbon Tax


Let’s assume for the sake of this discussion (despite real-world evidence to the contrary) that all corporations only act in rational ways they think will maximize profits. How, then, might we understand the moves by multinational oil conglomerates in favor of a tax on carbon?

Late last month, six oil companies, including BP and Royal Dutch Shell, wrote a letter to the United Nations (UN) in which they argue that “a price on carbon should be a key element” of inter-governmental action to address climate change: “Pricing carbon obviously adds a cost to our production and our products – but carbon pricing policy frameworks will contribute to provide our businesses and their many stakeholders with a clear roadmap for future investment, a level playing field for all energy sources across geographies and a clear role in securing a more sustainable future.”

So one clear advantage of governments pricing carbon through a tax would be stability and predictability. Even though the cost of the products these oil companies produce would be increased, such increases would be transparent and relatively forthright, as opposed to the uncertainty that comes with, as the companies put it, “participating in existing carbon markets and applying ‘shadow’ carbon prices in our own businesses to test whether investments will be viable in a world where carbon has a higher price.” Corporations certainly like predictability and stability in legal and regulatory regimes, and it is prudent for them to be proactive in shaping those regimes wherever possible.

But perhaps something else is going on here beyond the certainty argument for a carbon-tax regime. The letter hints at this other angle, referencing “the most efficient ways of reducing emissions widely,” and listing a number of these ways, including “the use of natural gas in place of coal.” This is an important, often overlooked point: not all fuel sources, fossil or otherwise, are equally carbon intensive.

Fracking and Gasoline Are Better than Coal

The New York Times’ David Brooks notes this reality as part of his engagement with the latest papal encyclical, “Laudato Si”: “There’s some evidence that fracking is a net environmental plus. That’s because cheap natural gas from fracking displaces coal…. Because natural gas has just half as much global-warming potential as coal, energy-related carbon emissions have declined more in the U.S. than in any other country over that time.” The relative competitiveness of various fuel types in relation to carbon costs is also why, contrary to conventional wisdom, a recent study has found that gas vehicles may be actually better for the environment than electric cars. Because coal is still the source of the majority of electricity in the United States, cars that rely on electricity are actually largely relying on coal.

A recent study has found that gas vehicles may be actually better for the environment than electric cars.

Advocates of a carbon tax hope that increasing the cost of fossil fuels will make other sources of energy more competitive and realistic alternatives. Often the relative advantage a carbon tax would confer is cast in terms of renewables (e.g. wind, solar) against fossil fuels (e.g. coal, natural gas).

But carbon taxes do not affect all fossil fuels equally. So just as some fossil fuels are much more carbon-intensive than others, here we can begin to understand how, beyond the benefits of predictability, a carbon tax might actually help some fossil-fuel providers just as it has helped reduce carbon emissions in the United States. Thus, as Vox’s David Roberts puts it, “fossil fuel companies requesting a tax on their own products makes more sense than might first appear.”

Carbon Taxes Hit Coal Harder than Natural Gas

So, while the oil advocacy letter was addressed to the UN, if we shift focus to the domestic situation in the United States, the ways in which a carbon tax might benefit some fossil-fuel companies becomes a bit clearer. Bloomberg View editorializes in support of the “Big Oil” letter to the UN, and notes, however, that none of the signatories “is based in the U.S. Still, their argument should resonate in Washington: ‘Clear, stable, long-term’ policies that make carbon more expensive (the letter never uses the word ‘tax’) are necessary to reduce uncertainty, stimulate investment and encourage the most efficient reductions in emissions.” Such “efficient reductions” include switching from coal to natural gas for energy production.

In the United States a tax on carbon would disproportionately impact the use of coal relative to natural gas for energy production.

As a recent National Bureau of Economic Research working paper illustrates, for example, in the United States a tax on carbon would disproportionately impact the use of coal relative to natural gas for energy production. As Joseph A. Cullen and Erin T. Mansur write, “Higher carbon prices make coal-fired power plants less competitive than natural gas-fired power plants.” Mansur, a business professor at Dartmouth College, also co-authored the paper on electric versus gasoline vehicles.

When examining the complex issues related to debates over climate change and energy policy, it is important to keep in mind the comparative and relative advantages and disadvantages of various energy sources in varying contexts. Relative to certain kinds of coal-burning power plants, for instance, reliance on natural gas can become a carbon-reducing alternative, just as gas-powered cars can be better alternatives than coal-cum-electric cars.

Against the common understanding, then, there is some real evidence to argue that the shale boom in North America may have helped to reduce rather than to exacerbate CO2 emissions. Cullen and Mansur show how anything that positively affects the price of natural gas relative to coal, including but not limited to a carbon tax, might work to reduce CO2 emissions. Switching from coal to natural gas in the United States could have a significant impact on carbon emissions in part because coal, a carbon-intensive source of energy, is the dominant source of electricity.

Don’t be surprised, then, if some domestic producers of natural gas end up promoting a carbon tax, not only out of concern for regime stability but also out of a concern to make their product more competitive in the energy marketplace.