Carbon Pricing: The Surprising Support From the Oil and Gas Industry
In November 2021, U.S. Energy Secretary Jennifer Granholm asked the National Petroleum Council (NPC) to conduct a study on the at-scale deployment of low- and zero-carbon hydrogen energy in such economic sectors as power generation, industrial processing and transportation. The NPC was originally convened by President Harry Truman after World War II to share the perspectives of the oil and natural gas industry with the federal government. When the NPC was rechartered in 1972, the range of represented constituencies was expanded, but the body remains a key channel of communication between oil and gas and government stakeholders.
In response to Secretary Granholm’s request, the NPC released in April 2024 a “working draft” of Harnessing Hydrogen: A Key Element of the U.S. Energy Future. As the title suggests, the report presents a positive take on hydrogen as an energy commodity. Indeed, the first sentence in the Executive Summary reads as follows: “Hydrogen can play a key role in reducing U.S. carbon emissions, particularly in . . . hard-to-abate sectors, at a lower cost to society than alternative abatement methods”.
The next page of the Executive Summary lists the report’s four main themes. The first is a restatement of the opening sentence. The second says, “Significant and immediate actions beyond current policies are necessary to unlock various LCI [low-carbon-intensity] H2 demand sectors at the scale needed to support U.S. net zero by 2050 aspirations.” One of the NPC’s recommended actions under this theme, indeed “Recommendation 1”, is for “the administration [to] work with Congress to establish an economy-wide price on carbon well before current incentives, such as 45V, expire.”
The oil and gas industry—in favor of a price on carbon!? One suspects that public awareness of this position is limited (although the NPC has been on record with it since 2011) and that the reaction of most people upon learning about it would be surprise. However, this proactive advocacy of a carbon price is in keeping with, indeed is demanded by, the tenets of business strategy. This can be seen in one of the prominent features the NPC wants to see in a carbon pricing mechanism: it should be “well-designed to provide predictable signals for decisions about long-lived capital investment” (emphasis added).
Predictability is one of those aspects of the business environment that is so self-evidently beneficial that it is rare for anyone to stop and think about why this is the case. Devote a little thought to the question, though, and it quickly becomes clear that predictability has value to the degree a company casts itself into the future. For companies that primarily live in the moment (and there are many), it does not matter if the future can be anticipated.
Future-casting takes various forms, from budgeting exercises to staffing projections. It is arguably the case that strategic planning is the most demanding form of future-casting. Such planning is based on the idea that “if we do a good job of taking stock of the forces shaping the future of our business environment, we will be able to set ourselves up optimally to take advantage of market opportunities and fend off competitive threats.” However, the foreseen rewards of a strategic plan tend to disappear if the future business environment changes in significant ways that are not foreseen. If predictability prevails, the rewards will be realized. If it doesn’t, the consequences can be dire. (The current travails of offshore wind development in the northeastern U.S. provide a good case in point. At this point, outside observers of the oil and gas industry may say, “Yes, predictability is certainly desirable, but how could it possibly make sense for an industry to promote a measure that will raise the prices of its products?” After all, basic economics says that if the price of something rises, demand will fall.
This is true, but oil and gas companies are staffed with technically sophisticated managers who are well-equipped to understand the dynamics of climate change, from the molecule-level physics that is responsible for atmospheric heat entrapment to the negative feedback loops that are at play in the complex systems of the geosphere. In fact, academia aside, there probably are no societal entities better equipped to understand the likely trajectory of climate change than oil and gas companies. (The literature supporting this proposition is extensive; a 2023 article published by the Harvard Gazette— “Exxon disputed climate findings for years. Its scientists knew better.”—is representative.) So, with a clear awareness of climate change (albeit one that has not prevented obfuscation in their public communications), oil and gas executives are presumably motivated to find and promote a prudent path forward for their industry, specifically one that is “phased-in and coordinated to minimize adverse impacts on energy security, reliability, and affordability,” in the words of Recommendation 1.
The clarity around the non-sustainability of a fossil-fuel-based energy economy is actually a blessing for the oil and gas companies. When large companies get dislodged from their positions of market leadership, it is almost always because they have too much confidence that the conditions of today will endure over the long term. Since the oil and gas companies are in a position to know that disruption to their current business models will arrive one way or another, they are able to plan for a very different future without undue distraction from the virtues of the status quo.
In the final analysis, it appears that today’s oil and gas companies have confidence that, given their ability to engage in sophisticated strategic planning, and the scope of the resources they can apply to strategic implementation, a predictable business environment will be a great boon in keeping them ahead of every form of disruption.