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The surprising truth about the oil and gas sector’s position on a carbon tax

The industry responsible for the bulk of greenhouse gas emissions is publicly in favor of a tax on carbon.

Jason Deign
4 min read
The surprising truth about the oil and gas sector’s position on a carbon tax

There is no question that the oil and gas sector is overwhelmingly responsible for the climate crisis caused by greenhouse gas emissions. And it is also clear the industry has historically worked to avoid shouldering that responsibility.

Accordingly, you would think it would be lobbying like crazy to avoid a carbon tax — a levy on emissions that is designed to curtail use of the very products that the oil and gas sector relies on for its livelihood. But it isn’t.

In March, Bloomberg reported that the American Petroleum Institute was mulling the endorsement of carbon pricing in response to the Biden administration’s aggressive stance on climate-change mitigation.

Later that month, the industry body issued a release confirming its commitment to “sensible legislation” on carbon pricing, as part of a policy framework “to address the risks of climate change while meeting the world’s long-term energy needs.”

The framework “endorses a carbon price policy to drive economy-wide, market-based solutions to reduce emissions and tackle climate change,” the organization's spokesperson Jess Szymanski told Canary Media in an email.

Likewise, the Electric Power Supply Association, a trade group representing companies that own electricity generation assets including coal and natural-gas-fired power plants, has joined with clean energy industry groups to support exploring a carbon tax in U.S. wholesale energy markets.

In Europe, where oil and gas companies are subject to greater regulatory pressure on greenhouse gas emissions, supporting carbon taxes isn’t even a new idea.

“We have been vocally advocating this for a long time,” said Sally Donaldson, senior spokesperson for Shell, one of the sector’s top 10 carbon polluters, in an email. “Our CEO published his view on this back in 2014.”

That view was that carbon pricing is "one of the best tools we have,” Shell CEO Ben van Beurden wrote at the time. “Well-implemented carbon pricing systems...have the potential to promote low-carbon technologies and encourage energy efficiency.”

Given the oil and gas industry’s history of greenwashing, it is tempting to dismiss such statements as public relations posturing — particularly as oil majors face increasing shareholder pressure to tackle climate change.

But there could be a hard-nosed business rationale for oil and gas companies to back a carbon tax, albeit one that perhaps sees pricing as a necessary evil on the way to maintaining their "social license," or the public and political goodwill that allows them to continue to operate.

Why a tax on greenhouse gas emissions could align with oil and gas interests

The issue for these companies is that they sell fuels, not carbon. The carbon is just an inconvenient byproduct. Getting rid of this byproduct isn’t cost-effective without a functioning carbon market, however. If oil and gas companies get charged more for carbon emissions, then they will have a greater incentive to invest in efficiency improvements and reduction technologies.

The impact of carbon pricing has already been demonstrated in Europe. Oil companies in Norway have reduced their carbon intensity to less than 10 kilograms of carbon-dioxide equivalent per barrel, said Zomo Fisher, vice president of sustainability at Lundin Energy.

This compares to an industry average of 19 kilograms per barrel for International Association of Oil & Gas Producers members and around 50 kilograms globally.

Stockholm-based Lundin, meanwhile, is subject to one of the highest carbon-pricing regimes in the world, which has forced it to cut the carbon intensity of production down to around just two kilograms per barrel, Fisher said in an interview.

Most of this reduction has come from oil production efficiency improvements. Globally, around a third of the greenhouse gas emissions from hydrocarbon production are attributable to methane venting and pipeline leaks, and a further 10 percent is from flaring, Fisher said.

These indirect emissions account for around 15 percent of the energy sector’s total greenhouse gas output, based on figures from the International Energy Agency. They also “offer some of the lowest-cost options to cutting energy-related emissions,” the agency stated in its 2018 World Energy Outlook.

“Countries and companies that can credibly demonstrate that they are taking action to reduce their indirect emissions could reasonably argue that these resources should be preferred over higher-emission options in a carbon-constrained world,” it wrote.

The agency estimates that a price of just $50 per metric ton of carbon dioxide could cut more than 1,000 million metric tons of emissions by 2040. Already in Europe, carbon taxes have seen flaring fall almost to zero, said Fisher at Lundin.

The pros and cons of a carbon tax

Emissions pricing could also encourage investment in carbon capture and storage. A 2017 study conducted for the Global CCS Institute identified a levelized cost of $21.50 per metric ton for gas processing and $89 per metric ton for gas-fired power generation.

“If you are in a country where you have high carbon taxes, any investment to decarbonize production kind of pays itself back because you save so much,” Fisher said.

Some oil and gas companies in Europe are already paying up to 10 percent of their operating costs in carbon taxes, he added. “Any way you can reduce that means you’ll drive down the cost of producing oil,” he said.

Helping oil and gas companies cheapen the production of fossil fuels seems like a bit of an own goal in the fight against climate change. That's one of the main problems cited by opponents of using a carbon tax as a primary lever to combat climate change.

The other key problem, critics say, is that a carbon tax is regressive — that is, it will end up passing on to consumers the costs borne by the industries that pay it. Those costs will hit hardest for people with lower incomes, as well as people and countries those that remain dependent on carbon-intensive fuels.

At the same time, academic studies and energy system models indicate that a broad-based tax structure may be one of the simplest and most comprehensive policies to reduce greenhouse gas emissions across multiple industries. Creating "carbon dividends" that redirect taxes collected toward those most heavily impacted by their costs could reduce their economic harm as well.

Right now, the Biden administration has backed away from proposing carbon taxes or prices on carbon as part of its broad decarbonization plan. Republicans oppose the idea, and Democrats tried and failed to create a nationwide carbon cap-and-trade system a decade ago.

It's unclear if the shift in support for a carbon tax from oil and gas companies and energy producers will lead to a shift in this political calculus. But with analysts and real-world experience underscoring its potential for driving investments in decarbonization, it's certainly earning the idea a lot more attention.

(Article image courtesy of Zbynek Burival)

carbon taxoil and gascarbon capturemethane emissionsclimate change