The numbers behind Exxon’s support for a carbon tax

Exxon Mobil Corporation is no longer the most valuable energy company in the U.S. That distinction now goes to NextEra Energy Inc., the world’s largest provider of wind and solar power. Exxon isn’t even the most valuable American oil company—as of this week that's Chevron Corp. What was once the world’s largest company is no longer part of the Dow Jones Industrial Average.

Exxon is down but definitely not out. As Bloomberg News reported this week, Exxon projected a significant rise in its own CO₂ projections over the next five years. The carbon forecasts reflect growth plans that have been thrown into distress by the pandemic, and its figures on future emissions hadn’t been disclosed to investors. (Exxon has said the forecasts were preliminary and have already been changed.)

Exxon, of course, has long faced allegations of downplaying climate risk while warning against the costs of cutting CO₂ emissions. There’s even a hashtag, #ExxonKnew, that encompasses both the underlying climate science and climate economics.

For climate economics, the debate over the benefits and costs of cutting CO₂ emissions boils down to what the right carbon price ought to be. That doesn’t mean it has to be an actual carbon tax. The price could be either that, a tool often preferred by economists, or it could be an implicit price via all sorts of other policies like clean electricity standards or other regulations. Either way, it is a way to bring the cost of releasing greenhouse gases in line with the environmental damage. There are big questions over how far and how fast to go. Perhaps surprisingly, Exxon and others in the oil industry support a carbon tax.

How much should it cost to release a ton of CO₂? The standard economic calculations often come out to a cost borne by society of around $40 per ton. That’s the price polluters should pay for each ton of CO₂ emitted today.

These calculations are artifacts of antiquated assumptions. Pricing CO₂ at around $40 would lead to global average warming of around 3°C above pre-industrial levels by 2100. Scientists know that these levels of warming would be catastrophic in ways not yet reflected in standard benefit-cost analyses. If you update the assumptions to reflect lower warming, you end up increasing the “optimal” CO₂ price to $100 or even $200 per ton.

A number of fossil energy companies, including Exxon, have publicly supported the Climate Leadership Council’s carbon tax plan that proposes a $40 per ton CO₂, rising at five per cent above inflation per year. Such a plan, on its own, would indeed be good. An increasing carbon tax—any carbon price, explicit or implicit—would lower emissions.

The principle is so well established that economists call it the Law of Demand: price goes up, quantity demanded goes down. Study after study shows how this and similar carbon tax plans would cut U.S. emissions over the current policy baseline by between 35 per cent and 40 per cent by 2030, more so than Obama-era commitments under the Paris climate agreement. All else equal, even a low carbon tax is good.

All else, of course, isn’t equal. One pillar of the Exxon-supported plan is “significant regulatory simplification.” In principle that, too, sounds good: Get rid of rules and regulations that are no longer necessary, as the carbon tax takes care of things.

Details matter. A carbon tax alone, after all, is not the solution to climate change. A tax high enough to effectively ban all fossil fuels? Perhaps. But, of course, that leaves out politics as well as the fact that most of us still rely on internal combustion engines.

“For more than a decade, ExxonMobil has supported an economy-wide price on CO₂ emissions as an efficient policy mechanism to address greenhouse gas emissions,” Exxon said in a statement. "An effective carbon policy should replace the patchwork of literally thousands of regulations, laws and mandates today that have the effect of putting a price on carbon in a costly, inefficient way.”

A closer look at the numbers reveals why Exxon and other fossil-fuel companies would support these kinds of bipartisan carbon tax proposals. Coal is already on its way out, but it’s not completely dead. Most baseline projections have coal providing somewhere between 15 per cent and 20 per cent of U.S. electricity by 2030. Almost any carbon tax prices coal out of the U.S. electricity system once and for all.

Katie Jordan, a doctoral student in engineering and public policy at Carnegie Mellon, has run the numbers on the $40-per-ton CO₂ tax supported by Exxon. It almost doesn’t matter if the tax grows at five per cent per year or not—coal is so carbon-intensive that it’s gone by 2030. While natural gas is also projected to decrease, it still accounts for 30 per cent of U.S. electricity generation by 2030, down from around 50 per cent without a $40 CO₂ tax. A Rhodium Group analysis shows similar results for a $15 per ton tax, rising at between $10 and $15 per year.

The upshot for Exxon: Even a $40 CO₂ tax is barely noticeable for its oil business. It would translate to around 35 cents per gallon of gasoline at the pump. People will still drive.

Or maybe a better way to look at it is that, even with a $40 CO₂ tax, the future of internal combustion engines will depend on factors other than the tax, many linked precisely to the kinds of regulations that might be traded away in order to pass a tax. California Governor Gavin Newsom’s recent decision to phase out the sale of gasoline-powered cars after 2035 in the state, which alone accounts for around 15 per cent of all gasoline sold in the U.S., might well foreshadow regulator actions at the federal level.

If coal gets priced out of the electricity system once and for all under a $40 CO₂ tax, the natural gas business could well be reenergized, increasing gas prices and profits—especially if it means fewer other regulations on the business. “Exxon knows that a carbon price that protects its business plan will not protect the climate,” says David Hawkins of the Natural Resources Defense Council. “No mystery that it is lobbying for the price that protects its business and damns the climate.”

Would a carbon tax alone be good for the climate? Yes, of course. But trading away an ambitious green investment and broader climate plan in favour of a “simple” carbon tax isn’t a trade worth taking. Exxon’s support for such a plan should tell us as much.

© 2020 Bloomberg L.P.