Two things to start: First, the FT’s latest Future of Energy report looks at the prospects for natural gas, wind power and carbon pricing as the world shifts away from its reliance on fossil fuels.
And second, activist hedge fund Engine No 1 told ExxonMobil it would face an “existential business risk” by pinning its future on fossil fuels as governments move to slash emissions. Derek Brower and Justin Jacobs got the scoop. Calpers seems to agree: yesterday, it became the latest big pension fund to say it would vote for the activists’ slate at Exxon’s annual general meeting next month.
Welcome back to Energy Source. Our first item today sticks with Exxon — and more specifically its activist board member Jeff Ubben — who has hit out at “irresponsible” net-zero emissions targets and defended the oil major’s climate strategy.
Our second item is on carbon pricing and the case for introducing one in the US — despite the policy’s lack of popularity.
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Why Exxon won’t go net zero
Jeff Ubben, the activist investor who was recently brought on to ExxonMobil’s board, told a private Wall Street gathering recently that the net-zero emissions targets proliferating across governments and energy companies are “irresponsible” given the immense difficulties of achieving the ambitions.
“Just saying you’re going to go to net zero, whether you’re a politician or a [non-governmental organisation] — net zero by 2040, net zero by 2050 — that is such an irresponsible statement,” he said at the event.
“Net zero is the hardest thing you could ever imagine,” he told attendees.
Ubben also gave a broad defence of ExxonMobil’s existing transition strategy, which is focused on supplementing its core oil and gas business with investment in carbon capture and storage (CCS).
It will dash any hopes (or fears) that Ubben’s seat at Exxon’s head table might herald a more revolutionary BP-like green reorienting of the US supermajor into clean energy businesses.
Ubben made his name as an activist investor at ValueAct, a fund he founded, and his appointment last month was widely seen as an effort by Exxon to placate shareholders amid pressure to deal with climate risk and improve returns.
It also came amid an intense proxy fight with the activist hedge fund Engine No 1, which is pushing a vote at the company’s May 27 annual general meeting to overhaul the company’s board. Yesterday, Calpers joined some other pension funds in announcing it would vote for Engine No 1’s slate at the AGM.
In defence of Exxon
We reported over the weekend that Engine No 1 is telling Exxon’s shareholders that management has put the company at “existential” risk by failing to come up with a “credible plan to protect value in an energy transition”.
In a follow-up interview with ES, Ubben argued that net-zero targets rang hollow without clear plans for decarbonising emissions-intensive sectors such as heavy industry and long-haul transport.
“They’re just issuing edicts and they know they’ll be long gone by the time the target comes,” he told ES.
Instead, Exxon’s focus on CCS, Ubben said, “plays to our strengths”.
Engine No 1, however, dismissed the strategy as more PR than reality. The activist fund called Exxon’s $100bn idea to capture carbon from dozens of industrial facilities in Houston an “advertising blitz” that “lacked any real substance”.
Ubben maintains it is the best path forward for Exxon, while acknowledging the company had work to do.
But he argued that the company needed a more robust carbon price — probably about $100 a tonne, double the current $50 a tonne tax credit available to CCS projects — to move ahead with significant investment.
“The challenge is, it’s not really economic, it’s just increased costs. So do I want Darren to get fired [for moving too fast before the incentives are in place]?” Ubben asked rhetorically, referring to Darren Woods, Exxon’s chief executive.
“I could push them, for the good of the planet, but we also need some help.”
The case for a carbon price
Joe Biden marks 100 days in the White House this week. Despite his focus on revamping US climate policy, one phrase that has not passed his lips in that period (at least as far as ES can tell) is “carbon price”.
As I wrote yesterday, the president has been silent on the prospects of adopting such a market-based tool to drive a shift away from polluting fuels. Instead he favours using blunter, sector-specific emissions mandates to force companies to clamp down.
That is despite a growing cacophony of support for carbon pricing coming from industry, which sees it as the lesser evil when set against the emissions standards.
So what’s the case for pricing carbon? There are three main arguments for it.
A carbon price — whether in the form of a tax or cap-and-trade mechanism — is an economy-wide solution to the emissions problem. By putting a price on carbon in the US, polluters across the country would be spurred to reduce their emissions.
It does not involve meddling in individual sectors — meaning no one industry can claim it is unfairly targeted over another. No surprise then that it is a favourite of economists.
“The risks of climate change are large and relatively diffuse and by putting a price on those risks within the economy, all these economic actors are going to be incentivised to reduce greenhouse gas emissions when and where it’s profitable to do so,” Joseph Majkut, director of climate policy at the Niskanen Center, a Washington think-tank, told ES.
“You’re allowing market actors to respond to incentives — and the idea is that they will do that very efficiently.”
A carbon price also has the advantage of raising funds.
“People call it a double dividend because on the one hand, you reduce carbon . . . on the other hand, you also get economic growth from it,” said Brandon Pizzola, senior manager at EY’s Quantitative Economics and Statistics team.
EY reckons a (relatively modest) $25/tonne carbon tax could raise $1.1tn over a 10-year period — which could help the Biden administration pay for its planned green infrastructure spending without ramping up corporate taxation.
“One of the big pieces of the Americans Jobs Plan clearly is climate. Another big piece is funding it in some way . . . So just as an alternative revenue raiser, it could work in the current context,” said Pizzola.
Proponents also argue that a carbon tax would provide long-term durability in climate policy — which has a tendency to be changed with each new administration.
That would allow companies to plan for the future with greater certainty.
“Our modelling shows that in an uncertain world with a reasonable expectation that there’s going to be a [different] policy in the future, people might wait to make investment decisions,” said Karen Palmer, a climate policy expert at the Resources for the Future think-tank.
A carbon tax would overcome this problem, according to RFF. As companies would be able to assess spending plans based on a more complete picture of the future policy landscape.
Conversely, regulatory standards — especially if they are based on existing laws — will be vulnerable to legal attacks, obstruction and delays.
“Any meaningful climate policy will face concerted opposition,” argues Jonathan Adler, professor at the Case Western Reserve University School of Law. “If climate policy is to be effective, the fact of such opposition, and its potential to delay and derail implementation, must be taken into account.”
Voters are less keen on the idea of a price on carbon. And as a result, there is little appetite in Congress for bringing forward legislation.
So for now, Biden’s silence on the matter is likely to continue. The stick he has chosen to prompt industry to cut down on emissions is a so-called “clean energy standard”, which would push power producers to decarbonise by 2035.
“The votes are just not there for a price on carbon,” said Frank Pallone, chair of the House Energy and Commerce Committee as he voiced support for a CES last month. “I think it’s time to try something new.”
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Energy Source is a twice-weekly energy newsletter from the Financial Times. It is written and edited by Derek Brower, Myles McCormick, Justin Jacobs and Emily Goldberg.