The advantages of a revenue-neutral carbon tax for emissions reduction

An interview with Sherri K. Stuewer, ExxonMobil vice president of Environmental Policy and Planning.

The climate change legislation the United States Congress is currently considering has generated a lot of public debate — and some misconceptions about ExxonMobil’s position on the issue. Can you help clarify where the corporation stands on the issue of climate change?

ExxonMobil believes that the risks posed by rising greenhouse gas emissions to society and ecosystems are serious enough to warrant action — by individuals, by businesses and by governments. We believe that the broad objective of climate change policy should be to reduce the risk of serious impacts on society and the environment, while considering the importance of energy to global economic development.

ExxonMobil’s support for thoughtful research and analysis on climate issues is long-standing. Our scientists have published more than 40 papers on climate science and technology in the peer-reviewed literature, and regularly participate in national and international expert panels, including the Intergovernmental Panel on Climate Change.

We are also actively working on technologies to reduce emissions from our own operations and from our customers’ use of our products.Most recently, we announced a large new research program to investigate the production of liquid fuels from algae. In addition, we provide support for fundamental science research on new low-emission energy technologies at numerous universities, including our $100 million pledge to the Global Climate and Energy Project at Stanford University.

There are two upcoming initiatives on the issue of climate change that could have major implications for companies doing business internationally: one, agreement on a post-2012 international framework in Copenhagen later this year, and the other, cap-and-trade legislation, which the U.S. Senate may consider this fall. What are your thoughts on each?

The pending Copenhagen discussions have set ambitious goals. These involve extension of the Kyoto Protocol beyond 2012 as well as efforts to engage developing countries in actions to limit emissions and adapt to climate change. A key element of the international debate is how financial aid and technology transfer from developed countries will support actions by the developing world. New approaches to deliver offset credits, especially from protection and expansion of forests, are also under discussion. Offset credits allow emission reductions in developing countries to be used to satisfy requirements for reducing emissions in developed countries.

Given the global nature of the climate change challenge, and since developing countries will account for a significant portion of emission increases, progress globally on emissions reductions is essential. At the same time, U.S. policy makers must seek a domestic policy that does not place the United States at an economic disadvantage with respect to other nations.

The cap-and-trade bill, passed earlier this year by the U.S. House of Representatives, is one of the most complex pieces of legislation ever considered by Congress. Its provisions would affect every aspect of the economy from energy and transport to trade and agriculture. We believe that the bill is deeply flawed and would result in unnecessary damage to the U.S. economy. It will increase volatility in energy prices and add unnecessary burdens to average families. It is not the right approach to address the risks of rising greenhouse gas emissions.

It’s been said that the cap-and-trade bill that recently passed in the U.S. House of Representatives will create a kind of “Wall Street” of emissions traders. Is that true?

It is. In fact, that’s one of the objections we have with the bill — with its emphasis on trading, it takes the focus away from the goal of reducing greenhouse gas emissions.

For example, we know from experience that cap-and-trade programs inherently increase price volatility. This volatility leads to unpredictability, which increases business risk and discourages the type of investments needed in new technology that will be required to reduce emissions. These risks ultimately undermine the long-term objective and effectiveness of such a program.

The House bill protects certain industries from the costs of cap and trade, artificially creating “winners and losers” that could result in the loss of American jobs. The National Black Chamber of Commerce recently released a study that stated the bill could result in as many as 1.5 million jobs lost per year by 2015 and more than 2 million jobs lost per year by 2030. Furthermore, it transfers U.S. money overseas — $40 billion to $60 billion a year, according to the same study.

There are other unfortunate aspects of the legislation that have a particular impact on our industry. It unfairly targets domestic refining, which will increase reliance on petroleum imports and reduce national energy security. The bill also provides emissions permits for older, higher-emitting coal-fired plants, while not adequately recognizing the greenhouse-gas reduction benefits of readily available natural gas.

Is there a better approach? What policy does ExxonMobil support?

ExxonMobil agrees with many of the world’s leading economists and commentators that a revenue-neutral carbon tax or greenhouse gas emissions fee would be a much simpler, more transparent and more cost-effective approach. It would create a uniform and predictable cost on greenhouse gas emissions across our economy, and it more easily lends itself to global application. A carbon tax is much more efficient administratively since it can be largely built upon the existing tax infrastructure.

Considering the recent economic difficulties, it’s important to point out that a carbon tax avoids the complexity and the opportunities for manipulation inherent in building a large, new commodity market. Trading of carbon allowances, directly and through complex derivatives, will unnecessarily raise the costs of energy and contribute to the volatility of energy prices throughout the economy.

Finally, making the carbon tax “revenue neutral” means that it cannot merely be used to increase government income. Instead, money from a revenue-neutral carbon tax would be returned or recycled to the economy through reductions in other taxes such as those on labor or capital. There are also proponents of a carbon tax that advocate returning the revenues directly to consumers through a ‘dividend’ process. Making a carbon tax revenue neutral provides a way to help reduce the burden of emission reductions on the average family.

Critics of a carbon tax argue it merely provides cost certainty and does not provide certainty in the amount of reductions of greenhouse gas emissions. In fact, the initial tax rate trajectory could be set based on the best current understanding of what is necessary to reduce emissions along a desired path. This tax rate trajectory could then be updated periodically based on actual performance versus the emissions goals established by policy makers.

Combined with additional advances in energy efficiency and new technologies driven by free-market innovation, a well-designed, revenue-neutral carbon tax could play a significant role in addressing the challenge of rising emissions in the United States.