Friday, February 02, 2007

Climate Change Conversations with ExxonMobil, Part 2: He Said, She Said

This post is Part Two (of two) detailing a recent conference call discussing climate change policies between bloggers (including myself), and Ken Cohen, Vice President of Public Affairs for ExxonMobil (a full list of participating blogs and bloggers can be found at the end of this post).

Part One unwrapped the significance of the simple fact that this conversation even occured. Part Two will deal with the details of who exactly said what. Here goes...

Let me begin by saying that Mr. Cohen is clearly quite good at his job. As any good PR representative will do, Mr. Cohen was careful not to say anything of too much substance, nor to endorse any specific policy position.

However, Cohen did outline the following principles which Exxon apparently uses to analyze and compare various climate policy options. According to ExxonMobil, good climate change policy proposals should:

  • Maximize the use of market forces.
  • Ensure a uniform and predictable cost of reducing CO2.
  • Promote global participation.
  • Minimize complexity and administrative costs.
  • Provide transparency to companies and consumers.
  • Adjust to new developments in climate science and the impacts of policies

  • Cap and Trade?

    When Tom Yulsman, of Prometheus: the Science Policy Weblog, pointed out that a cap and trade program is a market based policy mechanism and asked Mr. Cohen if Exxon would support a cap and trade program or something like it, Mr Cohen responded that Exxon is very familiar with and operates very well in the downstream cap and trade system implemented in Western Europe. He said that cap and trade systems do indeed utilize market forces, but was careful to point out that "the devil is in the details."

    Cohen referred back to the above policy guidelines, asking:
    "Does it impose even costs for carbon across the economy?

    Is it a downstream or upstream cap?

    Whichever we adopt, we can't lose site of the very global nature of the problem. If we focus on Western Europe and North America to the exclusion of very large developing economies in Asia, we're not addressing the problem. That's not to say we don't need to take action here, but the type of action we take needs to encourage the developing world to join us.

    Does it minimize complexity to minimize administrative costs?

    Does it provide transparency to companies and consumers?

    Does it adjust to new developments in science and the economic impacts of policies? That is, is 550 parts per million the right target? It may turn out to be lower, or hopefully, will be higher, we just don't know."
    So, the short answer, does ExxonMobil support a downstream cap and trade policy? "The answer is a definite maybe," says Cohen.

    Carbon Tax?

    Susan Smith, Law Professor at Willamette University and proprietor of the Environmental Law Professor Blog then pointed out that it looks like a carbon tax best fits the guidelines outlined by Exxon. Mr. Cohen responded that, "Most economists who have looked at this issue would come away saying a carbon tax makes the most sense. It’s the most efficient policy, the most sector-neutral," Mr Cohen said. " It doesn’t favor or disfavor one part of the economy over another."

    When asked specifically if Exxon would support a carbon tax proposal, Mr. Cohen half joked, "If Exxon came out in favor of carbon tax today, many people would react by saying 'if Exxon is in favor, there must be something wrong with it.'" (Probably not entirely off the mark!).

    Cohen went on to say:
    "As far as policy options go, there are standards (like CAFE, efficiency standards, etc.), there are downstream and upstream cap and trade, and there's carbon taxes.

    We look seriously at carbon tax proposals, but again, the devil is in the details. Remember that it is a regressive tax, so do we make it revenue neutral - that is, do we take out another regressive tax like the income tax? Does it apply across the whole economy, or just to one or two sectors?

    In theory, it looks good, but the devil's in the details."
    I asked Mr Cohen to respond to the USCAP announcement calling for immediate action addressing climate change, and asked him if Exxon would consider joining the partnership. Mr Cohen said:
    "We're part of several discussion groups that look like USCAP. Their proposal is going to be one of many - at last count there are seven bills of substance under consideration - and there are now various groups coming forward with proposals. Groups we are involved in will be making proposals soon. This is all part of a healthy dialogue and process."
    I then asked if they would support policies aimed at achieving the science-based goal of reducing greenhouse gas emissions by approximately 80% by 2050 (as the USCAP proposal does), to which Mr Cohen responded:
    "As far as a specific number, 80%, for example, the question is what is the cost? Is it feasible? That gets at the political reality of making it happen."
    To me this is NOT the right question. The question is a) what do we NEED to do to avoid dangerous climate change, based on the science of what it will take to stabilize atmospheric CO2 levels at 450-550 parts per million? and b) how much will it cost NOT to achieve this target? Only then can we ask what will it cost to get to 450-550 ppm. The question, 'how much will it cost,' has no meaning if not considered in the context of how much it will cost to do nothing.

    As with any economic question, it's a matter of opportunity costs, and if the Stern Review is even close to accurate, the cost of doing nothing is far too high!

    Investing in Alternatives, and Making Environmentally Responsible Decisions Pay

    Maria Surma Manka of Green Options brought up the fact that most of Exxon's competitors, including BP, Shell and Chevron, are investing in alternative fuels and energy sources, from wind and solar power to biodiesel and ethanol. Maria implied that perhaps Exxon was not remaining competitive in a shifting energy marketplace and asked Mr. Cohen what steps the company was doing to show it's investors that Exxon was diversifying it's portfolio.

    Mr Cohen responded by pointing out that, first of all, ExxonMobil was one of the world's largest purchasers of biofuels. Exxon's basic gasoline is an E3 to E10 blend, Mr Cohen said (that is, it contains 3% to 10% ethanol by volume). He also pointed out that Exxon is funding cellulosic ethanol research at Stanford University and elsewhere.

    As far as Exxon not investing in wind and solar, as some of it's competitors have, Mr Cohen unapologetically responded that this is "simply a business decision. We are looking for technologies that will stand on their own as cost effective."

    "We are a research company," Mr Cohen said, "with over 2,000 Ph.D.s on staff. That's how we differentiate ourselves from our competitors. We wish the competition luck with their investments, but when we find a proposal that looks like we can get in there and make money doing it, we'll do it."

    This was one of several times Mr Cohen asserted that Exxon had analyzed alternative energy projects and simply found them unprofitable. He also reiterated at least twice that Exxon was looking for investments that "stood on their own two feet."

    I pressed Mr Cohen on this issue, arguing that I wasn't sure how to make sense of what it meant to talk about technologies 'standing on their own two feet' in an industry, like the energy industry, as highly influenced by subsidies, environmental regulations, and other public policies that affect how the market works. I asked Mr. Cohen if Exxon was truly looking for technologies that stand on their own in an absolute free market/no government intervention sense, or if they were looking for projects that are profitable given the existing public policy and market environment?

    To this, Mr Cohen replied that they were looking at the policy environment as well, but went on to say:
    "First, you have to differentiate between policies that have a good environmental outcome as their goal, and ones that simply support a product for the product's sake.

    Ethanol is a good example: the average rack price for ethanol was more than $3 per gallon last year, while the price for gasoline was $1.90. If customers had to pay the true price of ethanol, no one would buy it. And what is the goal of this subsidy? What does it achieve?

    What you want are policies designed with a valid environmental aim that use the power of the marketplace to spread evenly across the market."
    Now that is exactly what I've been saying all along!

    I'd love to sit here today and rant about Exxon needing to put the environment first and profit second in their business practices, or at least to ask the company to adopt a 'triple bottom line' approach - weighing environmental and social value equally with monetary value in their business decisions.

    But in reality, I have to recognize that that Exxon is a publicly traded corporation, and as such, they have a responsibility to their investors to maximize the return on their investment, and that the company will attempt to do so as best as possible, given existing market and policy forces. Exxon's whole purpose is to make money, and to that end, it is very successful.

    Given that, the single best way to affect the company's actions is to enact public policy that changes those market forces so that doing the environmentally sound thing is also simultaneously the profitable thing. Or perhaps I should put that the other way around: with the right policies in place, doing the profitable thing will (from a businesses point of view) also incidentally be the environmentally responsible thing to do.

    Until we enact policies that bring together market prices and true environmental (and societal) costs, we will constantly be fighting against market forces, a hopelessly uphill battle (if not a losing proposition from the get go). If, instead, we get market forces to work with us, a sustainable business will be the only profitable business.

    This should be our public policy goal, and carbon taxes or cap and trade programs are one step towards that goal.

    This is something that is apparently not lost on Rex Tillerson, the new CEO of ExxonMobil. In a speech before the Boston CEO Club in November, 2006 (the speech was included in our background materials before the conference call), Tillerson had this to say about public policy:
    "Policies that promote stable tax, regulatory and legal frameworks over the long-term encourage the investments needed to not only meet current ends, but also the technological advances to meet future needs while reducing environmental impacts."
    Well said, Mr. Tillerson. Now I hope you don't mind when we enact a carbon cap and trade system and give you the long-term policy framework that will make investments in low-carbon products the only profitable option for your company!

    As Mr. Tillerson, Mr. Cohen, and I all seem to agree, the beauty of the market is that businesses do an excellent job of finding ways to make a profit within given market forces, and those forces are shaped by public policies that create the tax, regulatory and legal environment in which the market functions. (Wow, now I've agreed with both President Bush and ExxonMobil in the span of five day ... yikes!)

    Implementing a carbon cap or tax will send long-term, stable price signals to companies that reducing their carbon emissions is the profitable thing to do.

    Until we use policies to break down the false dichotomy between a profitable business venture and an environmentally responsible one, we can hardly fault a company like Exxon for doing their job and making money, often at the expense of the environment. We can appeal to their good nature, for what little good that will do, or we can organize boycotts or bad PR to put some economic pressure on their bottom line, but those efforts only have success in very limited cases, and even then are very tough battles which generally affect only one company at a time.

    What will bring about lasting and widespread change in corporate actions and put us on the path to a sustainable economy - in both the environmental and economical sense of the word - are smart public policies that use, as Mr Cohen put it, "the power of the marketplace" to ensure that making a smart investment means making an environmentally responsible investment.

    Until then, we will be fighting a constantly uphill battle, one, I would argue, that is ultimately fated to fail.

    [In closing, I'd like to thank Mr Cohen for taking some of his time to speak with me and my fellow bloggers, as well as Pam Franklin and David Wescott of APCO Worldwide for organizing the conference call. It truly was an interesting and unique opportunity.]

    Participants in ExxonMobil Conference Call (and their Blogs):

  • Yours truly (of course)
  • Tom Yulsman,Prometheus: the Science Policy Weblog
  • Susan Smith, Environmental Law Prof Blog
  • Stuart Staniford, The Oil Drum
  • Maria Surma Manka, Green Options
  • Ken Cohen, Vice President of Public Affairs, ExxonMobil
  • Pam Franklin, Online Marketing Strategist, APCO Worldwide

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