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Big oil wants a price on carbon. That's not as weird as it sounds.

Tax us!
Tax us!
(Shutterstock)

Last Friday, in a letter to the leaders of the upcoming international climate talks in Paris, six of Europe's biggest oil and gas companies formally requested an international price on carbon, while acknowledging that such a measure would be "transformative across the energy sector."

Which seems weird.

But fossil fuel companies requesting a tax on their own products makes more sense than might first appear. Europe's oil giants know that climate policy is moving ahead with or without them, and they'd prefer to have some influence over how that process plays out. What's more, a carbon tax could benefit them in the short term, as it drives electricity producers from coal to gas. American oil companies stand to benefit from a carbon price as well, but they operate in a uniquely polarized, partisan environment that doesn't allow them to say so (though Exxon has flirted with endorsing a carbon tax).

In the long term, these companies are making a fateful wager: that they can participate in global decarbonization in a way that allows them time to establish a predictable market environment, make a lot of money, and manage a long-term transition away from their core products. It's risky, but at this point it may be their only option.

European oil companies realize: if you're not at the climate policy table, you're on the climate policy menu

European climate politics are well ahead of America's, with a carbon trading system (the ETS) covering about half the continent's carbon emissions and a patchwork of national policies filling in (some of) the gaps. There is little denial of the basic scientific consensus and increasingly little denial that the transition to a low-carbon economy is, politically speaking, inevitable. Only the timing and the policy pathway remain to be determined.

With that in mind, Europe's big oil and gas companies — Britain's BP and BG Group, Italy's Eni, Norway's Statoil, France's Total, and Anglo-Dutch Royal Dutch Shell — want a seat at the table in international climate negotiations. They want to use their clout to help shape carbon policies to their liking.

Most of all, they want to avoid the nightmare of a global patchwork of different carbon policies, all with different stringencies and regulatory requirements, which would create an administrative nightmare and a highly volatile climate in which to develop investment strategies. And they are getting nervous about all this talk of divestment and stranded carbon assets.

So this is their bid: they want a single, predictable policy, shared by all the participants in international climate talks.

(Flickr/UNclimatechange)

Negotiators in Bonn, busily delaying important decisions. (Flickr/UNclimatechange)

Right now, climate negotiators are meeting in Bonn, Germany, the last time they will meet face to face before COP21 (the 21st United Nations Climate Change Conference) in Paris six months from now. The talks are as contentious as ever, and negotiators are desperate for signs of progress, so the companies have timed their proposal well for maximum hype.

American oil and gas companies face different political incentives

The three biggest US oil companies, ExxonMobil, Chevron, and ConocoPhillips, did not add their signatures to the letter. This was probably overdetermined, but among the reasons are the close ties these firms have to the Republican Party, which is foursquare opposed to emission-trading systems like the one in Europe. (And the one in the US Northeast. And the one in California.)

Congressional Republicans and oil-state Democrats would not react happily to oil companies supporting a European climate tax proposal offered to the UN. Indeed, "European climate tax proposal offered to the UN" is pretty much everything the US conservative base hates, in a nutshell.

Exxon, notoriously, has long taken a highly ideological approach to climate politics. The company was heavily involved in funding the climate science denial industry in the US at least through 2008. (Right about the time there was a surge in untraceable, dark-money donations to those same groups. Probably nothing.) Even today, Exxon CEO Rex Tillerson speaks on climate politics with barely concealed contempt, insisting that there's no need to reduce emissions because "mankind has this enormous capacity to deal with adversity" and that his company has no plans to invest in renewable energy because "we choose not to lose money on purpose." And then there's this:

The company recently sent a representative to lobby the Vatican over an encyclical Pope Francis plans to deliver this summer on the impact of climate change. Exxon reportedly fears that such an encyclical could damage its business.

rex tillerson (Nicholas Kamm/AFP/Getty Images)

Exxon CEO Rex Tillerson isn't mad at the Pope, just ... disappointed. (NICHOLAS KAMM/AFP/Getty Images)

Meanwhile, the CEO of Chevron has lashed out at European oil companies, saying, "I don’t think that putting a price on carbon is necessarily the answer. I’ve never had a customer come to me and ask to pay a higher price for oil, gas or other products."

"We did not sign that letter and we don’t intend to," he said, lest any doubt remain.

Most of this is posturing. Like many other companies, Exxon now builds a carbon price into its long-term investment planning. It knows as well as its European counterparts that some kind of price on carbon is inevitable. But in US politics, Big Oil is GOP and GOP is Big Oil, so don't expect any public words of accommodation from US oil companies any time soon.

Congress is unlikely to be moved by this gambit from European oil companies

Six oil giants are speaking as one in support of carbon policy. Will that make any difference in US politics?

Probably not. Over at ClimateProgress, Emily Atkin offers a simple chart that explains why:

(ClimateProgress)

Oil and gas companies will benefit from carbon pricing, at least at first

European oil and gas companies seem to have figured out a simple fact about the math of a carbon price: at least in the early stages, it is likely to benefit gas at coal's expense, while oil will remain comparatively unaffected. That's why AP's story on this is headlined "Oil and gas turn their backs on coal as climate deal nears."

Coal is low-hanging fruit, extremely carbon-intensive and beset by abundant, cheaper, cleaner alternatives. So it is likely that any carbon price will hit coal first and hardest. The immediate effect will be to accelerate the ongoing shift from coal to gas, which can only benefit oil and gas companies sitting on enormous natural gas reserves. That's why they're all (even Exxon) touting natural gas as a climate solution.

(The question of whether natural gas is actually better for the atmosphere than coal is quite complicated; read Brad Plumer's explainer.)

Oil is not like coal. There are few cheap or readily available alternatives in many key petroleum applications like freight and shipping, airplanes, heavy industry, plastics, and chemicals. Oil has a lower "elasticity of substitution" than coal, which means it is less vulnerable to a price on carbon. (A $20-per-ton carbon price only raises the cost of a gallon of gasoline by 20 cents, less than typical year-to-year swings in prices.)

Coal is already on the knife's edge; a small carbon price can push it over. Oil is far more entrenched. So oil companies can live with a modest price on carbon for a long time, especially if the price stays as low as it is now in Europe, at around $7.80 per ton. It's a smaller cost, and a smaller risk, than the fluctuations in oil prices they already deal with every day. And it's much less of a threat than more targeted policies like, say, California's low-carbon fuel standard (LCFS), which the industry hates with the fire of a thousand suns.

schwarzenegger Justin Sullivan/Getty Images

In January 2007, California Governor Arnold Schwarzenegger signs a low-carbon fuel standard into law. (Justin Sullivan/Getty Images)

A carbon price is the first step on a long, uncertain journey

Despite the somewhat cynical take offered above, it is in fact a pretty big deal that several large fossil fuel companies see the writing on the wall. What's more, they say some interesting things in their letter.

In the first paragraph, they acknowledge the 2°C climate target agreed to by all participants in international climate talks. As a new UN report says, hitting that target "necessitates a radical transition ... not merely a fine tuning of current trends." (Someone else has been saying that too.) Hitting 2°C involves, among other things, reducing the use of oil and gas to as close to zero as possible, as soon as possible. It's not nothing for oil and gas companies to acknowledge that goal.

They also say that a carbon price "discourages high carbon options and encourages the most efficient ways of reducing emissions widely, including reduced demand for the most carbon intensive fossil fuels, greater energy efficiency, the use of natural gas in place of coal, increased investment in carbon capture and storage, renewable energy, smart buildings and grids, off-grid access to energy, cleaner cars, and new mobility business models and behaviors," which is about right.

And they call not only for national and regional carbon pricing but for a linked, international pricing system, which is a basic policy premise of any serious global effort to decarbonize. They say that "low-carbon business models and solutions are fragile until they reach critical size, but with linked carbon pricing systems worldwide, uncertainty would be reduced and such solutions will start to create value for business more rapidly," which is also true.

Most of all, they say, a consensus around carbon pricing provides "a clear road map for future investment."

Again: to hit the 2°C target, the use of oil and gas would have to decline to almost nothing, within the lifetime of today's youth. Once oil and gas companies start down this road, they are committed to some mix of two strategies: 1) steering the process from within, so oil and gas hang around as long as possible, and/or 2) attempting to dominate rising clean-energy markets. Exxon aside, intransigent stasis is no longer an option.