How might a carbon tax affect the consumer? Has the ESG finance industry overestimated its influence on oil and gas firms? Will renewables become cheap enough? and can we find better policy alternatives?
TOPSHOT – Electric energy generating wind turbines are seen on a wind farm in the San Gorgonio Pass … [+]
Earlier in August, my co-conspirator, Bob Eccles, and I posted a “what-if” analysis on Forbes related to what would happen to Exxon’s financials if the U.S. government were to impose a $100 per ton tax on its carbon emissions. We received great feedback on questions that might inform tax and policy debates and investor discussions on energy transition.
Part 1 of the feedback series covered the following six questions: (1) Can and (2) will Exxon transform itself? (3) who owns Exxon’s emissions from state owned oil fields? (4) is a carbon tax politically feasible? (5) how should a carbon tax be optimally designed? (6) geopolitical implications of a carbon tax on the oil market.
Part 2, now, covers the following four remaining topics:
(7) how might a carbon tax affect the consumer; (8) has the ESG finance industry overestimated its influence on oil and gas firms? (9) will renewables become cheap enough? and (10) can we find better policy alternatives? We will undertake detailed analyses of many of these questions in the months to come.
Feedback, as always, on this story is welcome.
7.0 Impact on the consumer
MORE FOR YOU
7.1 Carbon taxes are inflationary
“If global oil & gas prices increase materially, that could help support Exxon’s financial strength in the short term but may eventually lead to a global economic slowdown or downturn, which would ultimately hurt everyone.”
“I think that sustainability efforts are inflationary, whether it’s carbon taxes, higher wages/living wage, or more sustainable sourcing. Low-income consumers are disproportionately affected by inflation, which means that government needs to subsidize some of this increase to protect purchasing power of lower-income consumers. Presumably, it could come from higher taxation, personal or corporate, and CO2 tax revenues. However, I find it difficult to believe that governments will not expect high emitters to pitch in, in some way/shape/form. Therefore, I think it’s reasonable to expect less than 100% pass-through, net of that contribution.”
7.2 Don’t tax scope 3 emissions. Fix the consumer’s addiction to oil instead
“Oil & gas producers aren’t peddling tobacco or drugs – they exist because the fossil fuels they produce are in demand worldwide. It is somewhat unfair to tax the producers for the Scope 3 emissions generated by their customers when the producers are selling what remains an essential resource worldwide. Not only an essential energy resource, but also a key resource for numerous other products like detergents, asphalt, polyester clothing, rubber tires etc.”
7.3 Do the less well-off need to be subsidized?
“I am not a political analyst – but I did notice how the French establishment got a serious jolt from the Gilet Jaune protests when that put extra tax on gas. Much of the outcry seemed to come from the less-well-off in the towns and provinces.”
“The European solution has been to use financial stability considerations to drive finance away from these risky industries. I suspect that less visible carbon taxes might also work, e.g. taxing the carbon on imported toys from China. And higher utility bills seem to be acceptable for the build out of green power infrastructure…But the authorities here will probably wait a while prior to taxing gas at the pump…
“The more general point, that the less well-off may suffer the most, will probably need to be addressed via some sort of more progressive approach – maybe involving redistributions, subsidies or maybe something broader a la ‘New Deal’ “
“I think complete outright bans would be something of a last resort – but on the other hand, since the 1950s you can’t burn coal or wood in London and this has eliminated the traditional, unhealthy, London fog (it was a smog really) and, of course, there are congestion charges for entering London which are much lower for electric cars … Finally, the UK Govt has decided that new diesel and petrol cars can’t be sold in the UK after 2030.”
7.4 Can the Government afford loss of revenue and such subsidies?
“Except in Europe the consumer of petrol diesel is already through sales taxes and duty paying equivalent to 250-350 dollars a tonne. And in the U.K. alone the government annual tax receipts are ~£35 billion. Can governments afford this loss of revenue and the double whammy of needed subsidies? It will be interesting to see how that is handled .. either way the consumer will pay for the loss of tax revenues and the increase in subsidy.”
7.5 Of course, these taxes will be passed on to the customer!
“Here is a paper studying pass-through of EU ETS relatively modest carbon taxes imposed six years ago. The goal of the study was to inform regulators which sectors struggle with pass-through and should, therefore, receive free allowance to avoid carbon leakage (moving of production to less restrictive jurisdictions). The paper discusses factors that determine pass-through ability, including utilization rates, market power, and ability to substitute domestic production with trade. The pass-through rates suggested by the paper are pretty high”
“But just to put it in context fuel duties and vat on petrol and diesel sales in Europe/UK are equivalent to 250-350 dollars per ton already. However you look at carbon tax the consumers pay ..time for politicians and those proposing carbon taxes to be honest ..only through political honesty will changes happen.”
“In California, we watched regulators in action. The middle-class customers subsidized the elite purchases of solar panels and Tesla’s!!”
7.6 Consumers will demand cleaner power
“People demand this. Even if costs were passed on to consumers more and more will reject these practices and exercise their purchasing power in choosing clean products, including renewable energy generated cheaper than subsidized fossil fuels especially co-located solar and wind.”
7.7 Higher prices will lead to conservation and innovation
“The scope 3 tax will indeed be passed on to consumers: this rise in prices will hurt the working poor in the US in the short term if it wasn’t phased in, however, a consistent path to higher consumer prices has always encouraged conservation in the past. Remember the 1970’s – I was a mere boy but I remember going to the gas station with my dad once a week to get our ration. Even adding $1.20/gal to gas prices is probably still below the inflation adjusted cost per fill per car back then given that mileage was closer to 8miles/gal then instead of about 22miles/gal on average now.”
“the oil refineries already pass along almost all of the cost of renewable fuel credits to comply with the Renewable Fuel Standard today. Officially they claim they absorb it, but that is because the higher the credit goes, the less competitive their petroleum product becomes, and the higher the ratio of biofuels like ethanol, biodiesel and renewable diesel in the product sold to consumers. Hence, they would rather try to eliminate this program first, but increasingly they realize they are stalling for time and steadily and surely they are building their own biofuels production plants.”
8.0 Has ESG finance over-estimated its influence on oil and gas firms?
“The financial sector is over inflating its ability to lead climate action, largely for self-serving claims to sell products; some of the new climate ETFs (exchange traded funds) are complete shams with a fig leaf of engagement to give them credibility. What is really needed is for governments to put policies that have real incentives and disincentives to go with their unaccountable rhetoric about 2050. That is the only thing that will shift behaviour.”
9.0 Will renewables ever become cheap enough?
9.1 No, they won’t
“Renewable energy sources will never supply all demand for at least the next 50 years. At some point the costs of solar and wind and other technologies will be so prohibitive to maintain that people will be complaining for cheaper energy. This is because too many want their cake and eat it, too. All you have to look at for an example is the utility crisis in Texas earlier this year. People want everything now and they want it cheap. They run into a problem and the system blows up in their faces and all of a sudden people are screaming bloody murder.”
9.2 Others are more optimistic
“With electricity at 2 cents per kw and a $40-$60 per ton carbon tax without exemptions it is cost effective to produce #GreenAmmonia with zero carbon emitted, same thing with hydrocarbon based zero carbon ammonia that otherwise emits 2 tons of CO2 for every ton of NH3 costing $8 per ton in 2021 under Justin Trudeau 90% Industry exemption plan”
10. Quest for better policy alternatives
10.1 Does Canada provide a way forward?
“The Canada plan can serve as a possible roadmap for the USA. Canada is asking for 51 pct reduction in emissions from buildings, 58 pct reduction in oil and gas, 55 pct for electricity and 60 pct for heavy industry. 52 pct for waste and other whereas both transport and agriculture get a free ride with only 7 pct and 2.6 pct reduction. It is the consumer driving these changes by selecting products which achieve the goal. I think time frame is ambitious but goals are consistently with Paris accord.”
“Direct taxation of scope 1-2 to tackle the company’s carbon intensity, and some sort of sliding-scale scope 3 taxation that discourages both the supply and the demand of highly carbon intense products, both domestically produced and imported, and incentivizes change on that front.”
10.2 U.S. government needs to invest in infrastructure
“A key difference in 2021 is that there is a growing substitute fuels market which are either low carbon (like renewable gasoline and renewable diesel made from biomass and CNG made from biogas) but also BEV (battery electric vehicle) and FCEV’s (fuel cell electric vehicle) – hydrogen production costs are already coming close to competing with Diesel in California with only LCFS (California’s low carbon fuel standards) credits as support (currently renewable wind, hydro and solar power and hydrogen made from it are not part of the US Renewable Fuel Standard that only applies to Biofuels). More infrastructure in fueling sites is needed across the country but it the lack of federal support that slows this down.”
Last word?
“If the intention is to bankrupt large oil companies, the path is clear: tax the evil-doers to extinction. If the intention is to reduce CO2 emissions then demand has to be cut, and that means consumers must bear the costs of taxation. One way or another, greening the energy system will cost consumers or taxpayers which means all of us.”
