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Exxon Chief Embraces Carbon Tax

It says a lot about the changing climate in business circles and in Washington that Exxon Mobil chief executive Rex Tillerson yesterday came out in favor of a carbon tax in a speech at the Woodrow Wilson Center. When I asked him afterward how high a price he thought would be needed, he said the tax should probably start out "somewhere north of" $20 a ton.

That's enough to qualify as a serious suggestion. It's about what carbon has cost in the European Union for much of the time the continent has been using a cap-and-trade approach to pricing carbon emissions. And it's almost half as much as the price many people suggest would be needed to help spur carbon capture and storage at coal plants. It's also about the level that Sen. Jeff Bingaman (D-N.M.), chairman of the Senate Energy and Natural Resources Committee, once suggested as an initial upper limit on a price for carbon.

Yes, this Tillerson is from the same Exxon Mobil that for years gave funds to groups that denied the existence of climate change or mankind's role in speeding it along. It's the same Exxon Mobil that puts the carbon-breathing tiger in your tank.

Moreover, it just isn't every day that a major business executive comes out in favor of a new tax. Tillerson said that he wrestled with this issue for the past three years, thinking that there had to be a third alternative to cap-and-trade, which he dislikes, and to the carbon tax. He said there wasn't one. (It seems to me, however, that there is another route: regulatory fiat of the sort we use when we order carmakers to manufacture more fuel efficient cars. The government could set limits on other emitters, too. But that's another story.)

Tillerson's tax is still a modest amount when converted into the price of gasoline at the pump. It would amount to barely 6 cents a gallon. William Nordhaus, a Yale economist, estimated in 2007 that a carbon tax should start at no less than $30 a ton and rise to $85 a ton by 2050 in order to change people's greenhouse gas emissions. British economist Nicholas Stern estimated in his 2006 report that the price should be about $300 a ton.

Many people will wonder whether the Exxon Mobil chief is simply trying to throw a monkey wrench into the debate just when the incoming Obama administration and Democratic leaders in Congress appear to be coalescing around the idea of a cap-and-trade system to limit greenhouse gases.

I think there's more to it than an effort to bring about gridlock. As Tillerson said, there will be a climate change proposal perhaps as early as this year and now is the time to try to shape it.

There is still a legitimate debate to be had on the relative merits of cap-and-trade versus a carbon tax. Supporters of cap-and-trade say that there's no telling what level of emissions a tax will achieve because it isn't clear how much people will change behavior at a given price level. The gap between Tillerson, Nordhaus and Stern is a good illustration of the challenge of setting an appropriate tax level.

The cap-and-trade approach sets an emission level and lets the market set a price. But as Tillerson noted, that market price tends to bounce around almost as wildly as the price of oil, making it difficult for companies to plan for the future. He clearly laid out some other legitimate questions about the cap-and-trade system that his company must abide by in Europe. Here's what he said:

"Such a system was put in place in the European Union. Unfortunately, the European scheme is struggling to achieve the overall reductions that its supporters had hoped for.

"One of the reasons for this is that cap-and-trade systems inevitably introduce unnecessary cost and complexity that undercut their effectiveness.

"It is important to remember that a cap-and-trade system requires a new market infrastructure for traders to trade emissions allowances. This new "Wall Street" of emissions brokers will take the emphasis away from the goal of reducing carbon emissions and focus its attention on trading on price volatility. For businesses and consumers, these market gatekeepers and resultant price swings add cost and they create uncertainty.

"Also, cap-and-trade systems, because of their complexity, have inherent problems with verification and accountability. They require a vast expansion of administrative and regulatory officials to ensure emissions allowances are not exceeded. This is another cost for businesses and consumers to bear."

Tillerson said that a tax doesn't carry those burdens.

"As a businessman it is hard to speak favorably about any new tax. But a carbon tax strikes me as a more direct, a more transparent and a more effective approach. It avoids the costs and complexity of having to build a new market for securities traders or the necessity of adding a new layer of regulators and administrators to police companies and consumers. And a carbon tax can be more easily implemented. It could be levied under the current tax code without requiring significant new infrastructure or enforcement bureaucracies.

"A carbon tax is also the most efficient means of reflecting the cost of carbon in all economic decisions -- from investments made by companies to fuel their requirements to the product choices made by consumers."

Unlike many policy makers and would-be policy makers, Tillerson would support making a carbon tax revenue neutral by cutting other taxes.

Tillerson isn't alone in supporting a carbon tax. Rob Shapiro, a former Clinton administration official, supports it. So does Greg Mankiw, former chairman of Bush's Council of Economic Advisers. And so does Elaine Kamarck, now at Harvard's Kennedy School but formerly in the Clinton White
House and in 2000 a policy adviser to Al Gore.

Still, Tillerson may be swimming against the tide. If there's one area where Obama has sent a clear message with his appointments, it's the area of climate change, where Energy Secretary nominee Steve Chu, White House energy and environment czarina Carol Browner and White House science adviser John Holdren are all adamant about the need to clamp down on greenhouse gas emissions. And they all seem to be heading toward a cap-and-trade proposal.

Tillerson said yesterday that cap-and-trade simply disguises the size of a carbon tax. He may be right. And that may be reason enough to do it regardless of the baggage that comes with it.

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Comments (12)

freedomev Author Profile Page:

A straight carbon tax of $1/gal over a yr is the best way to solve our energy independence problem.

We already pay it in our income taxes both as direct oil subsidies and in our military of which 1/2 goes to protect our oil supplies overseas and fight oil wars.

We can lower the payroll tax so the poor, middle class are not hurt and help them buy high mileage, electric cars to lower their energy costs. It will also revive our auto industry.

Or keep supporting Russia, Iran, Venezuela, oil dictators and terrorists while keeping the US $700B/yr+ poorer. Your choice!! I believe it's the only patriotic path.

agapn9 Author Profile Page:

To make a real difference the US is going to have to spend trillions of dollars on renewal energy - that money will have to come from somewhere - asset inertia dictates that companies won't retreat from more profitable capital to less profitable. Nations must provide signals to the market that the renewal market is more profitable short and long run. That means that oil, coal, and natural gas are going to have to be taxes a lot to push renewable to the forefront.

LACinDC1 Author Profile Page:

Tillerson and ExxonMobil know that a carbon tax is far less likely to pass Congress than a cap-and-trade system, so it is difficult to see how this move is anything but an effort to roil the waters and keep a cap-and-trade EPA regulation or piece of legislation from sailing ahead quickly. It's disturbing to see a Washington Post reporter so credulous of something ExxonMobil says about climate change.

robbrian_06 Author Profile Page:

What a bunch of mealymouthed simps. Do we have a critical financial/economic/health issue with fossil fuel dependence? Yes, we do! So let's use crises management strategies and tactics to alleviate the situation.

The Feds mandate all manner of safety and regulatory requirments on businesses and many receive millions in subsidies, tax breaks for their "compliance." The next President should put us on a war time footing with respect to clean air, renewables and the rapid shut down of CO2 producing facilities, i.e., coal, oil, natural gas (pipeline leakage) within three years.

FDR forced the automakers to build military transportation instead of cars at the beginning of our entry into WWII. He did not take the approach that all things should be funded, which, if the next President does, then we will not have an energy policy. It will be more of the same Cheney Secret Energy Plan stuff.

Moreover,we may not have ten fifteen years to get half way to energy independence and reduce global warming.

We may be looking at a very short fuse if Global Warming in the Arctic continues to accelerate at rates greater than any where else except Antartica.

Everyone needs to learn more about why the Arctic's melting Permafrost is of such critical importance to oil companies and geologists. Take a minute and read some facts.

"Global boiling"
Some geologists say rising temperatures will uncork vast deposits of undersea methane. If they're right, we're cooked.

By Kirsten Weir

shipfreakbo214 Author Profile Page:

I have such a negative view on Exxon Mobil and the rest of the oil corporations that there opinion really doesn't matter to me. There greed was a big factor in the down fall of the auto business and our personnel incomes. Record profits every year while the rest of us suffered. mm mm

cappcharlie Author Profile Page:

Should California consider a fee on corn fuel ethanol use?

* * Lower price for food, gas, water, beer, cleaner air and funds for the budget from oil profit.

* * Clean Air Performance Professionals

cappcharlie Author Profile Page:

California CalEPA Secretary Linda Adams, signed a MOU with the UN in China on earth day. China gets about 50% of the world carbon tax and the China government gets a 50% tax of the credits.

* * China goods and services may increase

* * We pay the carbon tax and EXXON, GE, Wal-Mart, BP, DuPont, GM, IBM, Microsoft and friends may all share in the public/private partnership of corporate and NGO welfare.

jayhakes Author Profile Page:

One good thing about using the proceeds of the tax for rebates is that the need for the rebates goes down if people are paying less carbon tax.

backroads Author Profile Page:

If we're speaking of another tax -- however so transparent -- I have to wonder whether now is the time to layer another on consumers. Gas taxes are now down, leading to talk of hiking the level to pay for highway maintenance. If carbon production lessens, will the tax level be hiked to make up the difference?

jayhakes Author Profile Page:

It would be better is Exxon had accepted a carbon tax after the 1992 Rio Treaty or if the coal industry was ready to acknowledge the need to act on global warming. But, hey, this is a positive step forward and offers a chance to start doing at least something to cut emissions of greenhouse gases.

Here’s what a package that could pass this year would look like:

• We could quickly phase in a tax on greenhouse gases of $30 a ton, with a provision that the price would rise 5% a year after that.
• Congress should establish an independent commission that would hopefully include Bill Nordhaus to report every two years on whether projected prices were adequate to meet emissions reduction goals.
• To make future increases politically viable and avoid the effects of a regressive tax, most revenues from the tax should be rebated through the payroll tax.
• Congress should toughen the CAFE standards adopted in the 2007 energy legislation.
• Financial assistance to states should be conditioned on the adoption and enforcement of tougher building standards.
• The federal government should give high priority to continued progress on appliance efficiency standards.
• The federal government wouldn’t fund every idea on energy that comes down the pike, but would heavily support research and development on alternative fuels with high strategic value like algae and greatly expand our mass transit options.
• The afore-mentioned commission would also report on whether the carbon tax was making industries move offshore, where they continued to add greenhouse gases into the atmosphere -- the “leakage” problem -- and offer solutions on what to do about it.

Is this a perfect plan? No. Would I accept cap-and-trade if it has enough support this year or later? Sure. But we need to get started and figure out the perfect plan as we learn more about the elasticities between energy prices, supply, and demand.

Wolverine609 Author Profile Page:

I work for an oil company - so, IMHO, Exxon has everything to gain and only a bit of money to lose by endorsing a carbon tax; they just consider taxes/fines/bribes as the cost of doing business.

Better to pay some money than have real curbs put on how much CO2 and methane we belch into the skies.

Realistically, though - stick a fork in us - we're already done, we just don't fully understand it, yet.

Look around; no matter your age, this is the best it will ever be in your lifetime.

acaswell1 Author Profile Page:

It is interesting that even the major oil companies are coming round to carbon charges. A carbon tax is preferable to cap-and-trade, but still better would be an escalating charge that is not a tax. In this the revenue collected from the public would be returned to them in the form of equal payments to all resident taxpayers so that prudent consumers will benefit while more prodigal users will be encouraged to change their habits

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