Economists have long held up carbon taxation as an ideal way to reduce greenhouse gas emissions, but except in a handful of cases, the tricky issue of politics has all but left the idea in the economists’ toolbox.
However, the carbon tax has picked up a bit of momentum as of late. One of the prime examples can be found in a very unlikely place: Alberta, Canada. The government that presides over the heart of the oil sands has laid out a carbon tax plan that actually looks like it has some teeth. Alberta has had a carbon tax for several years, but it was largely nominal.
The new NDP government, which ended several decades of conservative rule, has decided to increase the tax as a way to both raise more revenue – provincial tax receipts are down because of the collapse in oil prices – and as a way of convincing the rest of the world that Alberta takes climate change seriously. It may be counterintuitive, but that is what the provincial premier argues will allow more pipelines to be constructed, a chief obstacle for the industry today. And as Bloomberg View argues, if the heavy oil province of Alberta can pass a carbon tax, it should be relatively palatable in most other places. The NDP plan calls for a $20 per ton tax in 2017, which will jump to $30 the year after. Related: An Unnoticed Casualty of The Commodities Price Drop
In fact, several oil majors are lining up behind a carbon tax. That may sound surprising, but the move makes both political and economic sense. First, with the world convening in Paris to tackle climate change, there is a bit of a benefit from a political and PR perspective for oil companies to not be seen as obstructionists. Some believe that if they are not at the table, they will have less influence.
But increasingly, the carbon tax may actually make hardheaded business sense. Several oil majors are actually massive producers of natural gas. And natural gas stands to benefit immensely from a carbon tax because a crackdown on pollution will squeeze out coal from the electric power sector, a huge potential market for natural gas. In other words, a carbon tax could allow oil companies to sell more gas than it otherwise would be able to.
Royal Dutch Shell, BP, and even ExxonMobil has at times supported a carbon tax. And in October, a list of European oil companies issued a joint letter in support of the international climate change negotiations that are now underway in Paris. Related: Other Energy Companies Accused Of Downplaying Climate Change
Although many places may not opt to use a carbon tax as their first choice – usually for political reasons – they are still cracking down on greenhouse gas emissions. The United States, for example, through the EPA has capped emissions from power plants. States will have to comply with emissions targets, and the Obama administration’s plan relies heavily on natural gas to meet the emissions targets.
That is bad news if you are a coal company. As oil and gas companies jump ship, the coal industry has almost no allies left. That doesn’t mean coal will go the way of the dinosaur anytime soon, but it does mean that it will find an increasingly hostile operating environment in the United States, Europe, and even China to a certain extent.
China, still the largest consumer of coal in the world, is currently in the midst of another oppressive wave of smog, and air pollution has been so bad that some schools and highways in Beijing had to be shuttered. China will still be burning a lot of coal well into the future, but it is moving quickly to use more gas in the place of coal. In fact, China’s coal consumption may have already peaked, having declined by 2.9 percent in 2014 and falling again this year. Related: Oil Prices Under Severe Pressure As U.S. Inventories Near 500 Million Barrels
China is planning to launch a cap-and-trade program in 2017. While its efficacy is an open question, there is a rather large opportunity for natural gas to rip more market share away from coal. Just last month, China cut the price of natural gas in an effort to make it more attractive.
The decision to build many of the large LNG export terminals under construction in places like Australia were made with an eye towards a shift from coal to gas in the electric power sector. With billions of dollars invested in a variety of LNG export terminals, it is no wonder why a company like Royal Dutch Shell – which is spending $70 billion to buy LNG exporter BG Group – sees a carbon tax as a shrewd way to grow its gas business.
Although they may come in fits and starts, climate policy will tighten in the years ahead. Alberta is just the latest, but there will likely be many more provinces, states, and even countries that start slapping carbon taxes on their economies.
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And at least in theory, such a move would have the blessing of the largest oil companies.
By Nick Cunningham of Oilprice.com
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