Big Oil Waves the White Flag on Climate Change
— March 16, 2021
By Paul Tice
The surprising API statement, which follows similar recent announcements by the Business Roundtable and the U.S. Chamber of Commerce, represents a clear capitulation by the advocacy group. But it is also a cynical peace offering, given that the cost of any carbon tax would not be borne by the industry, but rather, passed through to, and ultimately paid by, U.S. consumers, falling disproportionately harder on lower-income Americans due to its highly regressive nature.
Over the past 12 years, the domestic shale revolution has more than halved the price of crude oil and natural gas, significantly lowering the cost of energy for every household. Layering on a carbon tax—particularly at this point in the cycle—would reverse this trend while feeding inflation into every corner of the economy and weakening the overall competitiveness of American industry.
Moreover, it would likely have no discernible effect on U.S. fossil fuel production or greenhouse gas emissions, given the inelasticity of demand and the demonstrated ability of the national economy to withstand oil prices north of $100 per barrel and double-digit natural gas prices in the past.
And precisely because it would not fix the problem of climate change, a carbon tax would never go away and would only increase over time. Most proposals acknowledge this reality by building in automatic inflaters that ramp up steadily over time.
Tactically speaking, the API’s policy shift is designed to ensure the long-term survival of the oil and gas industry—both through the next four years of the Biden administration and the next decade of so-called energy transition into 2030—by taking a page out of the tobacco industry playbook.
In 1998, after decades of litigation, the major cigarette makers reached a Master Settlement Agreement with 46 U.S. states, five territories and the District of Columbia, which provided for annual government settlement payments based on cigarette sales volumes—this on top of the standard tobacco taxes levied against the industry.
Effectively, the MSA co-opted government support for the tobacco industry over the long term to ensure a steady stream of settlement and tax payments (totaling approximately $27 billion in fiscal year 2021) for budgetary purposes. A carbon tax would have the same salubrious effect on the oil and gas industry.
Based on Tax Foundation estimates, a carbon tax starting at $50 per metric ton and growing at an annual rate of 5% would generate roughly $2.6 trillion of government revenues in its first ten years.
Despite such impressive numbers, the oil and gas industry may have lost its fiscal leverage at this point. Most Democratic Green New Dealers can see through the too clever nature of a carbon tax and how it would prop up the fossil fuel industry as a going concern. Perhaps this is why the Biden 2020 campaign manifesto was notably silent on the topic.
Moreover, as the last 12 months have clearly shown, all of the Keynesians within the Democratic Party have now become Modern Monetary Theorists, unfazed by outsized fiscal deficits and ticking government debt clocks. With the ability to print money in a protracted low interest rate environment, even a super value-added tax on carbon becomes less of a priority—especially if there are regulatory strings attached.
Ironically, the only other people joining the API at the carbon tax negotiating table may be a handful of big-government Republicans focused on wealth redistribution.
The lobbying group’s tax flip-flop is just the latest misstep in the energy sector’s feckless PR response to the growing drumbeat around global warming over the past two decades.
Rather than confronting the existential threat posed to fossil fuels by the combination of climate change theory and absolute government power head-on early on—starting with the suspect historical and computer-modeled data underlying climate science—the industry has allowed itself to be divided and conquered over time.
When “dirty” coal was first being pushed out of the U.S. generation mix by state and federal regulators, American energy producers played up the “clean” natural gas in their mix. When oil sands was the next to be targeted, U.S. companies sold off their Canadian assets and retreated back across the 49th parallel.
Now, the climate mob has finally come for natural gas—with pipeline blockades, flaring restrictions and fracking bans—and the industry response is to improve its emissions disclosure, talk up net-zero goals for the distant future and waste precious capital on carbon capture science projects—all of which just further concedes the underlying premise.
Pushing back on climate change and questioning the global warming dogma is viewed, at this point, as déclassé in most energy corporate circles.
Until more oil and gas companies finally wake up to the fact that the end game of the climate change movement is fossil fuel cancellation, the industry is likely to continue with its current API-endorsed policy of collaboration over confrontation.
In The Art of War, the ancient Chinese military strategist, Sun Tzu, notes that one of the essentials for military victory is knowing when to fight. Now would be that time for the U.S. energy sector.
Paul Tice is an Adjunct Professor of Finance at NYU Stern.