07 October 2009

Are WRI and ExxonMobil in Agreement on a Carbon Price?

UPDATE: John Larsen responds in the comments He helps to resolve the units question I raised in Comment #1, and indicates that despite his obvious distaste of the thought, WRI and ExxonMobil share similar views on a starting price on carbon.

In an interview last week John Larsen of the World Resources Institute says that a starting $10 per ton price on carbon is a "sufficient price":
ACES essentially sets a price floor on allowances of $10, which will ensure that a sufficient price on carbon is established even if demand is low.
A price on carbon of $10/ton is $10 per ton less than that which has been called for by Rex Tillerson, CEO of ExxonMobil earlier this year:
Rex W. Tillerson, the chairman and chief executive of ExxonMobil Corp., delivered a speech in Washington yesterday endorsing a carbon tax of about twenty dollars per ton as a better way to address global warming than the principal alternative-policy idea, known as a cap-and-trade system, which has already been adopted in Europe.
So lets get this straight . . . WRI thinks that a carbon price half of that called for by ExxonMobil is "sufficient" -- at least to start -- and we are arguing over an incredibly complex cap-and-trade program, which probably won;t pass anytime soon and if it does, has more ways to avoid the carbon price than you can imagine. The question that comes to mind is, why?

Why not simply pass a $10 per ton carbon tax, which now seems uncontroversial, and then argue about how fast to increase it and how to (re)distribute the revenue? If I weren't in such a charitable mood I'd probably suggest something cynical, like cap and trade not being about a carbon price after all.


  1. A reader writes in to suggest that one or the other of the above confuses CO2 with C. Perhaps. I wouldn't be surprised. But lets say that Tillerson meant t/CO2, that would still be about $6 per ton C, and within spitting distance of WRI in any case.

  2. Dr. Pielke asks:

    “Why not simply pass a $10 per ton carbon tax, which now seems uncontroversial”

    It’s controversial to me.

    For reasons documented here, I’m not the least bit concerned with CO2 emissions.

    I AM concerned about a tax which would be passed along to ALL consumers of ALL carbon based energy.

    Granted, this would be better than Cap & Trade, but…
    Is this what politics has come to? Is settling for the lesser of available evils the BEST we can hope for?


  3. Roger, I asolutely agree with you. This is the type of discussion we should be having.


  4. Looking from a totally cynical (or, should I say, public choice) perspective at the problem one question still puzzles me: what do ExxonMobil and other companies of its sort have to gain from advocating CO2 tax or Cap and Trade implementation? It cannot be about PR only.

    Do they play nice because they count on government subsidizing alternative energy sources research and therefore, transferring tax money to their research branches? Or maybe they want to be close to the political process to be sure that eventual legislation will not harm them too much? Is it a kind of damage control?

  5. I think it would be fairer to tax based on CO2e. Say $3/tonne for CO2, $75/t for Methane, $898/t for Nitrous Oxide and so on up to $44,400/t for HFC-23. This is using the table from SEC 712 of Kerry-Boxer (page 410).

    We also need some way to account for the lifecycle costs for GHG emissions.

    Jaramillo, P., W. M. Griffin, and H.S. Matthews. 2007. Comparative life-cycle air emissions
    of coal, domestic natural gas, LNG, and SNG for electricity generation. Environmental Science & Technology, Vol. 41, No. 17, 6290-6296

    For instance, if a power plant buys coal from Columbia, which they already do, the diesel fuel to haul it here, wouldn't normally pay the CO2e tax. This would put domestic producers at a disadvantage, since the railroads would be taxed for the diesel fuels they use to haul the coal.

  6. This is the oddity in the climate debate - Exxon etc stand accused of making oil cheap in order to make more money - effectively being a pusher to our user. Yet, as was proven last year, they make far more money from scarcity of supply. It was in fact Clinton & Chavez (head of opec at the time) who fixed the price at 30 dollars a barrel. Neither Saudi Arabia or Exxon were at all happy about this low price and exploration subsequently dropped. The reason for the price deal was because economists were insistent that a high oil price hurts the economy ergo a low price boosts it. US voters on all sides were also much happier with low fuel taxes at that time too. Remember that it seemed to always be the number one issue at election time; the presidential ratings being an almost precise inverse correlation to the oil price. And of course it caused a huge upsurge in gas-guzzler sales. Various facts that many hypocrites like to forget now. To repeat, the price was low because the voting public demanded it and the economists recommended it. Exxon and other oil companies surely had a big hand in shaping energy policy in the Bush administration but the effect was obviously to increase prices not lower them.

    Obviously now the market fluctuations are far more important than such a puny tax. The price has increased from 30 to 100, passing 150 briefly. You can bet your bottom dollar that Exxon are much happier with that price and exploration has surged with many succesful new finds. Quite simply a carbon tax doesn't affect Exxon one iota though. The European experience is that even a high fuel tax doesn't actually limit overall demand very much: People adapt because they depend on it. The only benefit of an extra tax therefore would be if that revenue was directed towards alternative fuel research. As 20 dollars a ton is really quite trivial, I don't see the harm that SBVOR sees. Lesser of two evils? That's the very definition of democracy.

  7. Wall Street's favourite scientist James Hansen said

    “Trading of rights to pollute … introduces speculation and makes millionaires on Wall Street,” Hansen said in his keynote lecture at Columbia University’s 350 Climate Conference held here Saturday. “I hope cap and trade doesn’t pass, because we need a much more effective approach.”

    Sorry Doctor Hansen, your 15 minutes of fame is now over.

  8. "Why not simply pass a $10 per ton carbon tax"

    Agreed, seems more efficient to me than C&T. (No brokers, banks, specialized software, lawyers, ...)

    "which now seems uncontroversial"

    Hmmm, I thought one of the reasons politicians liked C&T was that it's a hidden tax (not a direct tax in the sense of "Read my lips, no new taxes").

    "If I weren't in such a charitable mood I'd probably suggest something cynical, like cap and trade not being about a carbon price after all."

    Don't leap to unsubstantiated conclusions now ;)

  9. jgdes

    I agree. Further, since the Kyoto Protocol was signed and global warming became high profile, the pressure to keep oil prices low has greatly diminished. Oil companies have reaped a bonanza since then with oil hitting 150 dollars a barrel having been $12 before Kyoto in 1998.

    The only people who will pay for global warming are consumers because every single cent of cap and trade or tax will be passed on to them.

  10. Cap and Trade as proposed in the Waxman-Markey bill is a mess.
    I have extensively covered the problems of emission trading
    Market Reduction of CO2: Cap and Trade - or Not?
    Basic Idea -- Offsets -- Tree Planting -- Manufacture Shift -- Fair Trade -- Surreal Market -- Real Market -- Allowances: Auctions + Hand-Outs -- Allowance Trading -- Companies: Business Stability + Cost -- In Conclusion

    as well as Carbon Taxation ( http://ceolas.net/#cce4x )

    As always:
    Where there is a problem - Deal with the problem.

    Since electricity generation and transport alone account for 4/5 of emissions (which it may be beneficial to lower for all else they contain, whatever about CO2),
    a policy focusing on them alone, with additional
    distribution and competition efficiency benefits as explained,
    is enough to meet initial reduction targets.
    It also means nothing is lost if, in future review, CO2 reduction measures are considered not to be worthwhile, for whatever reason.

    CO2 reduction with mandated targets is simply treated like any other emission substance
    (mercury is an interesting parallell, with EPA
    set levels and targets).

    Along with other measures, such as opening grids to service provider competition,
    long term fed/state guaranteed loans to utility companies minimizes impact on consumers.
    Electricity generation and distribution changes

  11. Mr. Pielke makes an interesting comparison between one sentence of mine taken out of context and a sentence taken from Rex Tillerson's recent speech in Washington.

    First I can safely say that ExxonMobil and WRI do not see eye to eye on what to do about climate change. Simply comparing carbon price amounts hardly scratches the surface of our very different perspectives on climate change especially when your units are off (Tillerson was apparently talking dollars/ton of carbon, my comments referred to HR. 2454 allowances which are in CO2e).

    My overall comments were clearly focused on the fact that, contrary to assertions by others, (http://thebreakthrough.org/blog/2009/09/climate_bill_analysis_part_20.shtml) allowance prices will not go to zero under HR. 2454 because of the auction reserve price contained in the bill. This lower bound price provides sufficient certainty for those making investments in low carbon technology. If I'm a regulated business and I'm going to retrofit my factory to be more efficient it would be nice to know that the price won't bottom out on me. That was my point.

    Here at WRI we believe that a strong, sustained and increasing price on carbon is essential to driving new investment and cutting GHG emissions to the levels that science clearly tells us are necessary to avoid catastrophe. We don't believe in a single number such as $10 ton CO2e, we believe in a robust policy framework that transforms our economy to be the low carbon leader of the 21st century. Would a higher price be better for the climate? Absolutely.

  12. First, we are informal around here so please call me Roger, Mr. Pielke was my grandfather;-)

    Let me first dispense with the straw man. I did not assert that WRI and ExxonMobil "see eye to eye on climate change." The focus is specifically on a carbon price as I indicated

    Lets also take the units clarification that you offer, which I allude to in the first comment here. Under that assumption, WRI and ExxonMobil are apart by only about $4 per t/C.

    This seems to me within spitting distance. Since a "a strong, sustained and increasing price on carbon is essential" why don't you guys applaud Tillerson's call for a climate price, on which you are in very close agreement?

  13. Roger. Thanks for clearing the air on units and on whether or not WRI and ExxonMobil share similar views on climate policy broadly speaking.

    I guess the point of my response was lost.

    Sure, I agree that a company such as ExxonMobil calling for some price on carbon is certainly a sign of how the debate has changed of late. Good for them for finally taking a seat at the table.

    I still don't think that Tillerson and I agree on what the "right price" should be. Myself and WRI do not know what the right price should be, we do know that the science says we've got to get emissions down in a big way very quickly.

    Again, my comments on WRI's website reflect an opinion that there is a need for sufficient lower bound price certainty for people to make investments and that components of HR.2454 help create and maintain that certainty. So I'm talking about the lower bound for carbon prices not the upper bound.

    This is a key difference with Tillerson who is essentially arguing that the upper bound of the start price for carbon should be no higher than $6/ton CO2e.

    The behavior (investment, fuel choices, etc.) of regulated entities would be very different if they knew the price of allowances would be no more than $6/ton versus a scenario where they knew the price would be no less than $10.

  14. JLarsen,

    "allowance prices will not go to zero under HR. 2454"

    Does this matter? What is to stop the numerous parties receiving allowances under 2454 from selling them for far less than the floor?

    Even if 2454 made it illegal to do so for less than $10 (and I'm not under the impression that it does), corporate level financial transactions could be used to achieve the same practical effect.

  15. -13-JLarsen

    Of course no one knows what the "right" price for carbon is, nonetheless policy has to implement specific numbers, and WRI has expressed a willingness to start at $10/ton.

    Apparently you have more info on ExxonMobil than I do, as I have not seen Tillerson's comments expressed as a ceiling. I interpreted it as a opening negotiating position.

    Can you provide a link to where Exxon says that $6/ton is a ceiling price?

    If that is the case then you guys are further apart. If not, then you guys are expressing very similar views as the behavior of regulated entities won't be much different at a starting at $6/ton veruss $10/ton. The point of argument would be how fast to increase the price.

    Of course this discussion will eventually lead us to the question, why not a carbon tax?

    If Exxon is OK with $6/ton, why don't you guys take whats given and hurry up and support that in law, and just subtract $6/ton from your Waxman-Markey allowances? You can still fight over cap-and-trade, and meantime you get a price on carbon?

    What am I missing?

  16. I don't have much more to go on than you do. Tillerson's comments signal a willingness to support a carbon tax of $6/ton CO2e. That figure is both the lower and upper bound since there is no market just a tax. Again, I assure you WRI and ExxonMobil do not agree.

  17. -16-JLarsen

    You forgot my last question:

    "If Exxon is OK with $6/ton, why don't you guys take whats given and hurry up and support that in law, and just subtract $6/ton from your Waxman-Markey allowances? You can still fight over cap-and-trade, and meantime you get a price on carbon?"

    Also, as you know, tax rates can change, and a market is unnecessary for that to happen. Actually, markets can provide less guarantee that a carbon price will move in the direction that you want, e.g., see EU ETS of late.

    So back to my question, why not take a carbon tax at whatever level is politically acceptable and build your cap and trade on top of that?

    I'm sure I'm not the only reader here with that question.

  18. John, you have mischaracterized the Breakthrough Institute's analysis of the potential for over-allocation of emissions permits. We did not in fact assert that prices would fall to $0 per ton, as you incorrectly imply in linking to our analysis: "Over-Allocation of Pollution Permits Would Result in No Emissions Reduction Requirement during Early Years of Climate Program." In fact, we conclude that carbon prices under Waxman-Markey are actually "likely to hover at or even below the $10 per ton floor on allowance auction prices" if pollution permits are in over supply. We explain why the permits price could actually fall below the $10 floor price on auctioned permits in detail in our post, and excerpted below.

    In fact, our analysis of the potential for over-allocation and likely impacts in the early years of a Waxman-Markey cap and trade program is actually very consistent with your own.

    We both see the significant drop-off in U.S. emissions reported last month by the EIA as a likely portent of an over-supply of emissions permits when a cap and trade program is implemented in 2012. You write:

    "The House climate bill requires total U.S. greenhouse gas emissions to be 3% below 2005 levels in 2012, when its cap-and-trade program begins. Given that the EIA projects that U.S. emissions are 6% below 2005 levels today (and are only forecasted to rise slowly), it is very likely that the bill’s requirements for the first year of the program would be met."

    We similarly write:

    "The reason for this projected over-allocation of pollution allowances is because the House cap and trade legislation would initially distribute allowances based on 2005 emissions levels, which were much higher than 2008 or 2009 levels. By the time the Waxman-Markey emissions cap would go into effect in 2012, U.S. emissions may still be recovering to pre-recession levels and may remain substantially lower than historic 2005 levels."

    [this comment is split into two to adhere to space limitations, see part 2 below]

  19. [Part 2 of 2 comments]

    We actually developed and analyzed two likely recovery scenarios based on EIA and CBO emissions and economic forecasts to bracket a range of likely emissions outcomes. In the faster scenario, US emissions recover to near the cap level in 2012 (3% below 2005 levels) and overallocation only persists for a year or two. But that scenario is on the high end of likely economic recovery forecasts. The slower recovery scenario, consistent with EIA projections, leads to an overallocation of permits for several years after 2012.

    You also conclude that an over-allocation of permits under cap and trade will lead to low demand for emissions permits, and a collapse of carbon prices down to the floor price set by the bill on auctioned permits, with firms banking excess and low-cost permits for future years. You write:

    "If we continue at 2009 emissions levels, there would be lower demand for allowances and offsets from regulated entities such as utilities and coal-fired plants than projected by EIA and the U.S. Environmental Protection Agency. However, ACES essentially sets a price floor on allowances of $10, which will ensure that a sufficient price on carbon is established even if demand is low. In addition, some regulated companies will likely buy up low-cost allowances and bank them for future use."

    We similarly conclude:

    "Slack demand and the resulting low price for pollution permits would create a strong incentive for firms to hedge their future carbon liabilities by buying and banking emissions credits while they are in excess and prices are low, building up a bank of permits for the future while continuing with business-as-usual practices."

    Where our analysis seems to differ is in factoring in the impact of offsets along with over-allocationed permits (we consider offsets, your Q&A does not discuss them) and in assumptions about the impact of the floor price on auctioned emissions permits.

    You seem to assume that the floor price will ensure that the effective market clearing price for all emissions permits (and offsets?) will stay at or above $10 per ton CO2e. However, the $10 floor price only applies to the ~15% of permits that are auctioned at the outset of Waxman-Markey's cap and trade program. The vast majority of both emissions permits and offsets will be traded in secondary markets and exchanges, not purchased at government auction where a floor price is imposed. With the vast bulk given away for free, and with offset prices also a major driver of market clearing prices, we envision plausible scenarios where the clearing price for permits and offsets in secondary markets is actually at or below the $10 floor on auctioned permits. As we explained in our post:

    "The Waxman-Markey floor on permit prices would prevent the auction price of carbon dioxide in the primary auction market from dropping below $10/ton. However, with the majority of permits given away for free in the first decades of the Waxman-Markey cap and trade program, and a substantial over-allocation of permits projected in the early years of the program, the correspondingly slack demand for permits may result in a large secondary market for emissions allocations in which permits trade for substantially less than $10/ton."

    Hopefully this clarifies the findings of our analysis. If you have questions in the future about this or any other of our analyses, you have my contact information. I hope we can avoid mischaracterizations of our analysis or conclusions in the future. With respect,

    Jesse Jenkins
    Director of Energy and Climate Policy
    Breakthrough Institute

  20. -18, 19- Jesse

    Your comment suggests that in the actual market (as opposed to auction) a carbon tax would establish a firmer floor on a carbon price than would the auction.

    I'd be interested in John Larsen's reaction, given my question in #17 above.

  21. -20 Roger,

    Are you envisioning a carbon price along-side a cap and trade market? Or suggesting the establishment of a floor price across all permits under cap and trade?

    The simply way to ensure prices do not collapse would be to establish a cap and trade system that auctions 100% of allowances (as opposed to giving away 85% of them as in Waxman-Markey) and then controls prices within a politically-acceptable range, say between $6-10 per ton as the starting floor and $12-25 per ton as the starting ceiling, rising at a fixed percent above inflation each year.

    Like the low carbon price expected to result from Waxman-Markey, that price would not be sufficient to drive the transformation of the U.S. energy sector. A CO2 price at any level will not overcome the many non-price-based barriers to the invention, commercialization and adoption of clean and efficient energy technologies. But unlike Waxman-Markey, that kind of cap and trade system would generate sufficient funding to make the direct investments necessary to catalyze clean energy innovation and drive emerging clean energy sources into the market despite their higher costs, allowing them to capture economies of scale, continuous "real-time" R&D improvements, and the learning-by-doing effects that drive down the costs on almost all new technologies. That's the kind of approach to creating a clean and prosperous energy economy the Breakthrough Institute advocates (see here and here for example).

    But now we've obviously veered far into the realm of the sensical, not the realm of Congress...

  22. Roger Jr,
    re #17
    "why not take a carbon tax at whatever level is politically acceptable and build your cap and trade on top of that?"

    see #10 above...

  23. Let's not forget that for the people who discuss these matters, the tax will have a negligible effect on their lifestyles. For others, it may have may mean they can't clothe their children properly.

    Carbon trading was established as part of article 17 of the Kyoto protocol. Perhaps I am being too bold when I assert that without it, there would have been no Kyoto Protocol and in fact no global warming as a mainstream political issue.

  24. re 18,19

    Jesse is right, his work at Breakthrough did not state that allowance prices would go to zero. My sincerest apologies for getting that point completely wrong. He's also right that in most of the areas he mentions we both agree though we do disagree on how secondary market prices would differ from auction prices. I'll be following up with Jesse separately on that point. Again, my apologies.

    I can't speak for WRI but I personally do not think that a carbon tax and a cap and trade program are mutually exclusive. Indeed this is already the case in many Northern European nations. Some adopted carbon taxes first and overlaid cap and trade later (Sweden, Finland, Norway) others have cap and trade and are now thinking of apply a tax in selected sectors (France).

    The current issue in the US is that we live in a political system that is flavor of the month. If a $6/ton carbon tax gets through Congress then the box is checked and that's it for who knows how many years (its taken us 20 to get to this point). Meanwhile, the international community laughs at us for not leading on this (still a potential outcome regardless of this low price scenario) and nothing really changes. We need to do more and it needs to happen soon.

    A longterm emissions cap could get us to a better place depending on how its designed. I know that no one is happy with Waxman Markey, that's the definition of compromise, but it does set a path for significant reductions and if something similar were to get through the Senate we're in a very different place than if Rex Tillerson has his way.

  25. RE JLarsen #24

    "A longterm emissions cap could get us to a better place depending on how its designed. I know that no one is happy with Waxman Markey"

    Yes - the Cap without the Trade...

    This is similar to what David Sokol, Chairman of MidWestern Energy said, despite apparently largely benefiting (at least short-term) from free allowance handouts..

    Washington Post article

    House of Reps testimony

  26. Butterfingers... :-)

    RE last post (#25)
    I got the link wrong above, to the Washington Post

    ( http://www.washingtonpost.com/wp-dyn/content/article/2009/05/18/AR2009051802647.html )