By Gernot Wagner
Not so fast. While API’s expected endorsement is indeed a sign of the times, it’s not a good one.
For one, API is late to the party. BP Plc, ConocoPhillips, Exxon Mobil Corp., Royal Dutch Shell Plc, Total SE and many others have supported just such a price for a while. In January, Total SE quit its API membership because of a conflict over climate change policy. BP, Shell and others said that they would remain in the group to influence discussions from within. In a statement at the time, Shell said that API was moving closer to Shell’s own stated views on climate policy. That seems to have finally happened.
Earlier this week, Megan Bloomgren, senior vice president of communications at API, said in a statement that the industry is “evolving,” and “our efforts are focused on supporting a new U.S. contribution to the global Paris agreement.”
API’s potential support for a carbon price comes with a serious catch. A draft statement reads, as reported by the Wall Street Journal, “API supports economy-wide carbon pricing as the primary government climate policy instrument to reduce CO₂ emissions while helping keep energy affordable, instead of mandates or prescriptive regulatory action.”
The group has signaled an embrace of carbon pricing because it sees the writing on the wall. In fact, that writing has been on the wall for a while.
In 2009 and 2010, during President Obama’s first term in office, the policy on the table was a comprehensive climate and energy bill, centered on an economy-wide emissions trading system akin to what the European Union and California have in place. Such a cap-and-trade system has two parts: a cap on emissions, and a flexible way to trade individual emissions allowances. The result is a carbon price now hovering around $18 per ton of CO₂ in California and around €40 ($48) in Europe, with signs pointing to significantly higher prices.
The U.S. bill at the time was co-sponsored by California Representative Henry Waxman and then-Representative Ed Markey, now a Senator from Massachusetts. It was widely known as “Waxman-Markey.” Nobody knows for sure what kind of price the cap-and-trade system would have set, but estimates generally hovered around $20 per ton of CO₂ at the time, as high as around $30 by now. That $20 number at the time roughly corresponded to the formal Obama administration’s estimate of the social cost of carbon, first published in 2010, of how much emitting each ton of CO₂ should cost.
By 2013, that social cost of carbon estimate had been updated to $50 for a ton of CO₂ emitted in 2020, in 2020 dollars. The economy-wide carbon tax supported by BP, ConocoPhillips, Exxon Mobil, Shell, Total & Co? A $50 starting value, rising at 5% plus inflation each year. The catch with that plan, as much as with API’s potential support for a carbon price: preemption of most, if not all, other regulation. API’s draft statement specifically calls out “mandates or prescriptive regulatory action” and calls for the carbon price to be a “primary” tool.
Alas, neither California nor the European Union have their cap-and-trade systems as their only or even primary climate policy tool. Both have a significant number of other greenhouse-gas regulations. Waxman-Markey, too, was a much more comprehensive climate policy bill than just establishing an emissions trading system.
It is abundantly clear that carbon taxes alone aren’t good climate policy. Making climate policy work takes a lot more than that. One indicator here is the social cost of carbon number. The Biden administration just reverted the prior administration’s changes and reinstituted the $50 figure. That was only the first in several steps the Biden administration ought to take. The resulting figure is anyone’s guess, but it will surely be higher, likely well over $100.
Another good indicator of how far the climate policy discussion has advanced in just the past decade is the evolution of Markey. His bill would have established an economy-wide carbon price of around $20 to $30 per ton of CO₂, a step API vehemently opposed at the time. Now-Senator Ed Markey is a co-sponsor, with Representative Alexandria Ocasio-Cortez, of the Green New Deal.
Gernot Wagner writes the Risky Climate column for Bloomberg Green. He teaches at New York University and is a co-author of Climate Shock. Follow him on Twitter: @GernotWagner. This column does not necessarily reflect the opinion of Bloomberg LP and its owners.