Harnessing the power of new technologies and free markets

ExxonMobil Chairman and CEO Rex W. Tillerson, speaking to the Economic Club of Washington, D.C., urges governments to adopt sound and stable policies in addressing energy and environmental challenges. He argues that, if governments are adopting policies to regulate carbon emissions, a revenue-neutral carbon tax is preferable to a cap-and-trade system.

The U.S. oil and gas industry has a vital role to play in helping the nation and the world meet those challenges, Chairman Tillerson told the assembled group. The industry contributes more than $1 trillion annually to the U.S. economy, is responsible for 7.5 percent of the country’s economic output, and supports more than 9 million jobs, which is about 5 percent of total U.S. employment.

However, such economic contributions — including the $14 billion that ExxonMobil paid in 2008 state and federal taxes — are often overlooked by the public and its elected leaders.

“Despite the billions in value and investments that are created, and the millions of jobs supported, discussions about our industry focus almost solely on energy prices and quarterly earnings,” he said. “This misplaced focus drives public policy in the wrong direction.”

For example, Congress in recent years has enacted tax laws that are expected to cost the industry an additional $10 billion. And taxes and fees proposed by the current administration could total more than $400 billion over 10 years.

Tillerson said these misguided actions will undermine the nation’s economic recovery, lead to higher energy costs for consumers, and hinder the development of new technologies needed to develop new energy supplies and address environmental challenges.

$25 trillion industry investment required
The importance of sound public policy becomes even more critical in light of International Energy Agency (IEA) estimates that world energy demand in 2030 will be about 35 percent above 2005 levels. To meet this significant growth in demand, the IEA estimates the energy industry will have to invest more than $25 trillion in developing additional supplies.

At the same time, Tillerson said energy-related carbon dioxide emissions are expected to rise by an average of 1 percent annually through 2030, with much of this growth coming from rapidly developing nations such as China and India.

Tillerson declared that the best hope for meeting these global challenges is to harness the power of new technologies and free markets.

“Time and again, our industry has proven that innovation and cooperation unleash human ingenuity and bring far-reaching technological advances that can transform the economy, protect the environment and increase energy security.”

Managing climate risks
The key to encouraging advances in technology, said Tillerson, is government policy that maximizes the use of free markets, minimizes complexity and gives business the predictability it needs to invest with confidence.

He added that when it comes to managing the risks of climate change, effective policy must be guided by five principles:

• Establishing a uniform and predictable cost for emissions for use in all economic decisions so that government doesn’t have to arbitrarily pick winners and losers
• Allowing markets to select the best methods to reduce emissions through new investments and technology
• Minimizing administrative complexity to reduce emissions at the lowest cost to society
• Maximizing cost transparency
• Encouraging global participation through policies that recognize the economic realities for both developed and developing countries

Tillerson explained that a cap-and-trade system for reducing carbon emissions, such as the current proposal before Congress, does not support these principles of effective policy.

“Unfortunately, a cap-and-trade system will result in volatile prices for emissions allowances, and this volatility will carry a heavy cost for both the economy and the environment. For businesses and industry, price volatility undermines the ability to invest in advanced technologies. Price volatility also creates economic inefficiencies and invites market manipulation in the markets for allowances.”

Tillerson noted that the Congressional Budget Office concurs with ExxonMobil’s assessment. Its study of cap-and-trade concluded, “Volatile allowance prices could have disruptive effects on markets for energy and energy-intensive goods and services and make investment planning difficult.”

Best solution is carbon tax
Tillerson said a far better alternative to cap-and-trade is a revenue-neutral carbon tax. Such a tax has the advantage of being focused on achieving society’s shared goal of reducing emissions over the long term.

“It can be predictable, transparent, and comparatively simple to understand and implement,” he said. “And because a carbon tax is directly applied to the carbon content of fossil fuels or to other greenhouse gas emissions, there is no need for a government to pick winners and losers in industry through complex allowance-allocation processes.”

Another advantage of a revenue-neutral carbon tax is that it would ensure that government policy is focused on reducing emissions, not on becoming a revenue stream for other purposes.

“By returning carbon tax revenue to consumers through reductions in other taxes, such as payroll taxes or a simple dividend, we can reduce the burden on the economy and on our most vulnerable citizens.”

Tillerson added that a carbon tax may provide a more viable framework for engaging participation by other nations.

“It is a tax framework that is easier to implement and does not cap economic growth. Given the global nature of the greenhouse gas challenge, it can also be easily adapted to reflect the circumstances of each country.

“The American people want climate policy to be transparent, honest and effective,” Tillerson concluded. “I firmly believe it is not too late for Congress to consider a carbon tax as the better policy approach for addressing the risks of climate change. Indeed, there has never been a more opportune time for Congress to pursue this course of action.”