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The State of the Global Markets 2015

Exxon Supports Carbon Taxes

Commodities / Climate Change Nov 16, 2012 - 07:01 AM GMT

By: Andrew_McKillop

Commodities

Best Financial Markets Analysis ArticleSurprising to some, Exxon Mobil Corp. is now flexing its political and media muscles as part of a growing coalition, ranging from environmentalists to advocates of reindustrialisation, political isolationists and a large slice of the energy sector, which backs a US carbon tax. This new taxation would be an alternative to the costly additional regulations the Obama administration is mulling. Once upon a time, that is 3 years ago, any talk about carbon taxes was anathema in Washington.


 Completely linked, more so than any hypothetical network of CO2 sequestering depositories linked by CO2 pipelines to every greenhouse gas emitting power plant or factory, Barack Obama is in  negotiation with lawmakers aimed at cutting the federal budget deficit through a combination of tax increases for the wealthy and "selective taxes in specific areas" - carbon tax - and government spending cuts. Raising energy taxes now seems the best and easiest way out for lawmakers seeking a broad-based additional source of taxes, because the bonanza of shale gas, and soon shale oil, has delivered and will deliver cheaper energy. On the back of cheap energy, this makes it easier "to sugar coat the bitter pill" of more taxes.

Conservatives, business economists and fossil-fuel lobbyists united in 2009 to fend off climate-change legislation that would have established a US cap-and-trade mechanism modelled on the obligatory system, called ETS, that struggles forward in Europe but has been abandoned by Japan and Canada. Major reasons for this include the large and continuing rise of energy prices in Europe, which are often 3 to 5 times average US energy prices. The tax-raising goal is primordial: a future US energy taxation system, heavily extended from present Federal and State taxation of the energy sector, could raise an estimated $100 billion in its first year.  Only a drop in the ocean of Federal debt and deficits, to be sure, but the Obama administration has to raise government revenues any way it can.

CARBON TAX
A carbon tax would force electricity producers, oil refiners and energy intensive manufacturers to pay a fee for the greenhouse gases they emit. Adding more momentum to the new tax proposal, lawmakers and president  Obama are confronted with a dysfunctional jungle of US taxation systems, both Federal and State with myriads of exemptions: the US tax code counts about 72 000 pages of text - and goes on growing, but tax receipts are not. Obama and political leaders, as in other OECD countries have repeatedly pledged to simplify taxes across the board, expecially the corporate tax code, while raising tax revenues to narrow the deficit.

Ironically, "global warming crisis" faces now massive scientific challenge to the "central hypothesis" that human CO2 emissions warm the atmosphere, and this changes the climate, but debate on the hypothesis has become almost a side issue. Besides, the US in 2012 had a record-hot summer, and the devastation from superstorm Sandy, following the fires and drought of the summer, have increased concern about global warming, or at least climate change. Outside the US, however, belief in climate change due to global warming, in turn due to human CO2 emissions continues to wane.

Today, the change of heart among lawmakers has become so large that US Republicans, defending the ideal of a cleaned up and simplified tax code, are shifting towards widespread support to a carbon tax because this appears to be "a clean instrument". Republicans, like their Democrat rivals find their electorates are now more unsure than ever about global warming, but due to experience in 2012 very few now stand out and say global warming is a hoax.

Voter opposition to taxing energy "to save the climate" is now far less widespread than even 12 months ago, and the new Obama administration will surely and certainly spearhead the drive to attain the political big lift, especially through communicating that delay in combating climate change, and delay in fighting the USA's debt-and-deficit crisis are two life-threatening issues. Obama, freshly reelected, has already given space to both issues, in the same press conference at the White House. His advisers make no bones about the other great advantage of a carbon tax: it will be fast and easy to levy.

NO NATURAL DISASTER
Lss than 3 years back in time, almost any hand-on-heart business-defending lobbyist in Washington presented carbon taxation as an unmitigated national disaster. This talk has toned down and shifted to ways and means for raising more taxes, fast, but without further damaging the economy. A decade of recent climate-related natural disasters in the US, mostly due to hurricanes and drought, has generated the cross-party will to do something, especially to mitigate the costs of future disasters through emergency preparedness and building new, more resistant and tougher infrastructures. But this sets its own costs, which are high, as post-Sandy analysis is showing.

The Washington-based American Enterprise Institute, a former and classic hand-on-heart defender of not further taxing energy, held a full-day debate on November 13 to examine how best to implement a carbon tax. The bitter pill of new taxes is coated with the hope, the Institute's economists said, that a correctly designed and applied US carbon tax "could enable a cut in corporate taxes", but also and perhaps mainly could head off the battery of new regulations proposed under Obama's first term by the Environmental Protection Agency.

To be sure, there are still Washington lobbyists who hold to the line that carbon tax is not the lesser of several evils, but a new and big one, but this line is now undermined by the direness of the fiscal cliff and the USA's perilous financial future. New sources of federal revenues have to be found, and a broad-based carbon tax could bring in $100 billion in its first year. Environmentalists are of course heartened by the proposal, saying that a tax is the best way to curb the use of fossil fuels such as coal and oil while permitting the USA's cheap gas bonanza to go ahead, boost energy efficiency, and help cleaner energy source development. Broad-based support, even among economists who have worked for Republican administrations, is a new feature in Washington.

Exxon, which for both overt and covert reasons has supported a carbon tax for several years - opposed to legislatively capped carbon emissions with trading of emission permits - is now a leading supporter of an easily implemented carbon tax of the type that Obama's second-term administration is sure to push forward. The most simple and direct reason for Exxon's renewed and stronger support is of course covert: its public line is the tax will "spur energy efficiency and new technologies through market innovation", but Exxon, with its all-gas subsidiary XTO Energy is the biggest  natural-gas producer in the US and a carbon tax will almost certainly boost demand for natural gas, due to gas-fuelled power plants emitting one-half the carbon dioxide that coal-fired plants emit for the same output of power. Although Nymes natural gas prices have edged up recently, to around $3.70 per million BTU, these prices are still troublingly low for the financial health of companies like XTO Energy. As recently as 2006, US gas prices were still able to attaint $16 per million BTU.

KISS OF DEATH TO COAL
The fossil energy source that is hit hardest will be coal, already assailed by the explosion of US gas supply at rock-bottom prices, and subsidy-driven renewable-source power generators. To be sure, in situ underground coal gasification offers large potentials - but not for at least a decade ahead. The biggest and fastest-operating substitute for coal is natural gas. The US coal industry, according to Sourcewatch.org still employs about 145 000 persons directly, and as many as 5 times that with dependent and related jobs, but the outlook is dire. Washington lobby talk on the carbon tax now also includes strategies for damage limitation in the US coal industry - necessarily oriented to finding overseas coal export markets to stem the damage.

The major problem, for conventional "physical coal" is that all the world's largest consumers - by rank China, the US and India - are for sometimes very different reasons capping or diminishing their coal consumption. Non-power sector consumers of coal, which traditionally featured the iron and steel industry and other basic metals industries, are also set to either reduce or nearly eliminate their coal needs in the upcoming decade, for example through ever-rising scrap-based metals founding rather than virgin metals production.

Adding carbon tax to the coal-toxic cocktail of existing and proposed Environmental Protection Agency regulations spells an almost certain wipeout for the US coal industry. Many industry analysts suggest the US coal sector may lose 50% of its current output level (already down by 15% in 2 years), by or before 2022. The most likely "floor price" for CO2 taxation in the US is presently estimated at around $20 per ton, with a direct and further hit to coal's able to compete with gas and the renewables. This tax rate would enable the raising of at least $100 billion in the first year, according to the American Enterprise Institute.

Underlining the link with the natural gas industry and its troubled financial outlook, Exxon has itself published reports and statements where a CO2 rate of $20 per ton is identified as a tax level able to create a "revenue neutral" playing field - for gas producers but not coal producers. This stance is heavily criticized by several economists who argue that a US carbon tax "will be just the start" of further and higher taxes across the board, for all industries, whether inside or outside the energy sector. They argue that it is "unreal" to imagine that revenues from a carbon tax would be matched by cuts in other taxes.

Conversation on this subject will continue, but the present outlook is for a US carbon tax being passed and applied, this year.

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2012 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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