December 21, 2016

Hydrocarbon Elites Post-Trump



 

The elites of the hydrocarbon industry, including ExxonMobil, Shell, BP and Chevron, have endorsed carbon pricingor planned for its promulgationas the world seeks to reduce the risks from climate change. With the incoming Trump administration, which strongly proclaims its intent to be a friend to the energy extraction business, the time is right for the hydrocarbon elites to put their notional support into practice.

For all of their publicly stated support, hydrocarbon elites have been slow to demonstrate to policymakers what they think carbon pricing ought to look likein the United States, or elsewhere. They have yet to explain any specifics that they would support, such as: the initial price, on what basis it would change over time, and any necessary collateral conditions such as removing regulations or streamlining infrastructure decisions.

Hydrocarbon elites have also refrained from overtly critiquing the UN process that created the Paris Accordeven though its approach of specific national emissions reductions is loosely aligned with a policy preference for carbon pricing. They also have not addressed the fact that the stated goal of the Accordcontaining global temperature increase to less than 2Cimplies a rate of decarbonization that would negatively impact their economic positions, and likely require carbon prices and international cooperation way beyond what is politically achievable.

That was the growing dilemma up until November 8. Would the developed world seriously embark on a process of decarbonization sufficient to avoid 2C? With the Democratic Party likely in the executive branch in 2017 (or so was the assumption until November 8), this could not be dismissed as genuine possibility.

Of course, that basic assumption was entirely turned on its head when Donald Trump won the presidency.  Now, the basic planning question must be: just how far will the Trump administration go to remove the federal government from all policy and administrative initiatives to reduce carbon emissions?  Will the Trump administration extricate the United States from its Paris commitments, if not the entire UN Convention on Climate Change itself? Will it remove existing regulatory constraints on increased hydrocarbon production and related infrastructure? Will Congressional Republicans be emboldened to remove all subsidies and mandates for low carbon technology and energy efficiency?

From a certain perspective, this looks like Christmas come early for the elites of the hydrocarbon value chain. And yet, climate risk exists, and requires a reasonable and proportionate policy response. Industry knows this, and popular opinion is behind it. Moreover, as much as one administration can rollback regulations, another can stand them up again.

The hydrocarbon elites in the United States must be wondering if now is the time to strike. If Trump, and his cabinet appointees, are to be friends of the industry, then can it get a reasonable and fair carbon price out of them? Will these hydrocarbon elites engage with the Trump administration to vigorously ask for a carbon pricenot just with high concept, but actual policy recommendations?  Will they actually engage in the legislative process?

They should.

Now is exactly the time for hydrocarbon elites to advocate for a reasonable and proportionate carbon tax that would preempt past failures. This is precisely the moment where their long-run strategic interest can be best served by a such a tax: when the environmental movement is undone from what likely lies ahead of them for the next four years. Industry will be able to bargain hard for good terms and get much of what they ask for in regulatory relief, tax reform, and infrastructure allowances. Better now to lay the foundation for carbon taxes as the principal means to deal with the risk and forestall future interventions.

If that advocacyand hopefully some policy breakthrough on carbon policydoes not occur, then the next four years will feature more civil disobedience and litigation from the American environmental movement. It would be better to challenge that movement to join the industry in advocacy of a U.S. national carbon tax. What tactic would better identify common ground or, at least expose, the political risks of tying the environmental movement too tightly to leftist politics?

Since the infrastructure and tax proposals from the Trump administration will embellish the U.S. deficit, there should be significant interest in finding decent funding mechanisms. Regardless of the merits of reductions in corporate and personal tax rates for the U.S. economy, or increased infrastructure spending, constraining the explosion of the federal debt should still be a compelling objective. A national carbon offers a means to do that, while providing more reasonable and proportionate carbon policy.

Such a carbon tax proposal could be framed as a North American initiative, challenging both Canada and Mexico to conform to it. Both have every interest to do so. The absence of any “free rider” within North America should be of mutual benefit to all three countries. The Canadian national pricing standard already aims for a price on carbon emissions of $50/tonne by 2022, and a U.S. carbon price could be harmonized with that one through negotiation.

If a more elegant carbon tax position from North America becomes the new paradigm for how the global community deals with climate risk, then all the better. The uncertain UN process, which has been centered as much on North-South transfers as on actual carbon policy, has all the worst characteristics of a New Year’s pledge to lose weight—good intentions mask prior failures and unreachable goals.

But none of this can even seriously be put in play unless those hydrocarbon elites are willing to engage with the political process with real terms. The nomination of Rex Tillerson adds more opportunity for this to be realized, based on his likely position within the Trump administration, his support for carbon taxes, and his familiarity with the leaders of the hydrocarbon industry.