This is the second of three posts on a recent conference call I took part in with the VP for Public Affairs of ExxonMobil, Ken Cohen, on Exxon's recent (apparent) change in positions on climate change policy. Part one deals with the background on Exxon's climate policy position. Part two lays out some of my reactions to Exxon's seemingly new position. Part three sums up with some random observations.
Going into the call, I wondered: Is Exxon voluntarily changing their stance on climate change policy, or do they see the writing-on-the-wall and want to use the opportunity for PR? After the call, I'm still not sure. One thing for sure, Exxon is unapologetic about their business. They are proud to be the largest publicly traded company in the world and plan to remain so. At the same time, they express a desire to be known as 'environmentally responsible.'
To me this seems an impossible position. How can a company that produces a product that by it's very nature has negative environmental impacts be an environmentally responsible company? So I asked. Mr. Cohen was again unapologetic in stating "We are a petroleum company." Within that big constraint the desire is to minimize the environmental impact of petroleum production. It is Exxon's stance that technological improvement and environmental responsibility are complementary, not conflicting goals. After all, Mr. Cohen said, "successful economies are the most environmentally advanced."
But, are environmental improvements the consequence of advances in production technologies, or the result of technologies developed in response to environmental policy (I wish I would have asked the question that coherently, but my real question was much more convoluted--there's a reason I write more than I speak)? This is where I think Exxon's position has changed. Rather than now funding organizations that attempt to discredit climate science, Exxon now views climate policy, environmental responsibility and technological advances as complementary. As Mr. Cohen said, technological advances over the past decade (such as remote drilling) make environmentally responsible drilling much more feasible. Such advances probably would not have occurred in the absence of environmental policy. Exxon appears to be taking this into account when formulating their position on climate policy.
So what does a good policy design process look like? In Exxon's view, policy design involves 3 steps:
- Agreement on the fundamental facts
- Determining a range of policy options
- Cost-benefit analysis to determine the most efficient policy
Mr. Cohen feels that Exxon (and other businesses) play important roles in steps 1 and 3. Step 2 is outside their reach for the most part. So what is the most efficient policy? This is where Mr. Cohen surprised me. Usually businesses attempt to side step the issue of policy design. Mr. Cohen took it straight on: A good government policy is one that keeps market incentives intact. That is, government intervention should only take forms that "allow the market to ferret out the winners and losers." I can't say I disagree.
Where Mr. Cohen I do disagree is in the specifics of what type of policy might meet Exxon's goals. Looking through their talking points on climate policy, it looks to me like they are perfectly describing a Cap and Trade type system. Here's a review of Exxon's first principles of policy design with my comments on how a cap and trade system meets these objectives:
- Maximize use of markets
Cap and Trade Carbon Markets ARE markets.
- Ensure a uniform and predictable cost of carbon across the economy
Uniformity is ensured by having a single price for carbon across uses and users. Predictability is a little tougher. Only a fixed tax is fully predictable. But it strikes me as a little odd that a company that deals with unpredictable oil prices would rank predictability in carbon prices so highly.
Gotta buy carbon to use it.
I think the U.S. sulfur dioxide market proves that cap and trade systems are less burdensome than alternatives (like taxes).
Prices are observable.
Prices will react to this uncertainty. Markets are very good at incorporating uncertainty and signaling changes in that level of certainty through prices. I'm trying to think of a good example of a market that works surprisingly well in the face of scientific uncertainty--hmmmm---I'm thinking---hold on--hey, what about oil? Sorry, I made it a long way without sarcasm.
Mr. Cohen isn't as convinced as I am that Exxon's recommendations imply a cap and trade system. Exxon has concerns about distortions in other markets and predictability of costs. In any case, Mr. Cohen advocates the use of market mechanisms in climate policy but is reluctant to make a specific recommendation on what that policy will look like. I'll take that...at least they're willing to consider climate policy and are calling for "economically efficient" policies.
