Hints at More Drilling Fall Short of Wooing Oil Company Support for Climate Bill
The suggestion from two key senators that climate change and energy legislation could allow expanded oil and gas drilling has failed to charm the fossil fuel industry that opposed the House bill.
The biggest oil and gas companies and their trade group said they will have to hear a lot more than what Sens. John Kerry (D-Mass.) and Lindsey Graham (R-S.C.) wrote in an Oct. 10 New York Times op-ed, which referenced additional drilling as part of a bipartisan approach.
Oil and gas companies fear Senate climate legislation will look much like the House bill that set up a program forcing businesses to buy allowances for carbon emissions. The early years of the cap-and-trade program would give away 85 percent of the carbon permits, but petroleum refiners would receive the smallest share. More drilling won't suffice, an industry spokesman said.
"In short, it's nowhere near a trade off," said Lou Hayden, policy analyst at American Petroleum Institute, trade group for 400 oil and gas companies, refiners, pipeline companies and fuel transporters.
Costs that would be imposed by the House bill are "so great it would restrict a lot of U.S. refining capacity," Hayden added. "Access to domestic oil and natural gas should not be held hostage to a very costly and very unbalanced climate change bill."
Kerry and Graham wrote that "we are committed to seeking compromise on additional onshore and offshore oil and gas exploration -- work that was started by a bipartisan group in the Senate last Congress. Any exploration must be conducted in an environmentally sensitive manner and protect the rights and interests of our coastal states."
The "Gang of 10" last year called for production greater than 50 miles off the coasts of the Carolinas, Georgia and Virginia, if those states agree, and they would get a revenue cut. It also would reduce the no-drilling buffer off Florida's Gulf of Mexico shores to 50 miles.
Neither office currently will go beyond what is in the op-ed. Kerry spokeswoman Whitney Smith said that the senator's office was "not ready to talk specifics yet, it's just too soon." Graham's office did not respond to voice and e-mail messages.
Kerry and Graham gave a kind of "rough architecture" of what a bipartisan bill could look like, said Mark Muro, director of policy for the Metropolitan Policy Program at the Brookings Institute. The op-ed probably should not be viewed as laying out specific provisions, he said.
"Clearly, it's essentially a political ploy in the effort to try and find a sweet spot for a potential bipartisan bill," Muro said. "There are a lot of differences of opinion about how important increased drilling will be ... and whether it stands for something more."
If a provision on drilling ultimately ends up in Senate legislation, it might not matter whether the legislation has the support of industry, another analyst said. In fact, putting the proposal in print might have less to do with winning the hearts of the oil industry than winning the votes of senators.
Adding language on drilling might bring in senators from states along the Gulf of Mexico like Sen. Mary Landrieu (D-La.), or those from Indiana and Ohio where manufacturing businesses use natural gas and other fossil fuels and residents warm homes with heating oil. Diesel and other fuel prices also affect agricultural states, said Samuel Thernstrom, resident fellow at the American Enterprise Institute and communications director at the Council on Environmental Quality from 2001-2003.
"The industry position on these things is important, but by no means the end of the story," Thernstrom said. "A lot of what proponents of the climate bill are trying to do is give people an excuse to find a way to vote for it. They're trying to persuade people that are really having a hard time making up their mind."
Drilling stalled
The Gang of 10 proposal never moved forward as a bill after President Bush last summer lifted a moratorium on offshore drilling and a congressional ban was allowed to lapse as well. (A large portion of the eastern Gulf of Mexico remains off-limits until 2022 under a separate 2006 bill that expanded gulf leasing.)
Oil companies say the lifting of some limits on drilling has not made much difference in terms of their access. The Interior Department still needs to issue exploration leases and so far has not started doing so, Hayden said.
In fact, "the estimated total number of oil wells, natural gas wells and dry holes" completed in the third quarter of this year was down 46 percent from the same period a year earlier, a level not seen since 2003-2004, API said in a statement last week.
"It's important for America to be investing in energy security," said Rob Young, spokesman for Exxon Mobil Corp. "The best way to do that is to have access to the U.S. resources that have been off limits. We would be encouraging any policy provision to go down that path."
But Exxon Mobil and other oil companies said they would need to see a specific drilling provision in legislation and what else is in a Senate climate bill before making a decision on support or opposition.
"All we can do is respond to what's out there," Hayden said.
Industry lays out wants
For now, that means oil and gas companies must wait and lobby for what they want and don't want in a Senate bill. So far, they do not like that the bill from Kerry and Sen. Barbara Boxer (D-Calif.) is similar to the House measure from Reps. Henry Waxman (D-Calif.) and Ed Markey (D-Mass.)
"We are still assessing Kerry-Boxer but acknowledge that it contains many elements similar to Waxman-Markey," said Chevron Corp. media adviser Justin Higgs. "We do not support Waxman-Markey because it places transportation fuels under the cap-and-trade program, it is not equitable, it lacks provisions to control costs and it lacks transparency for consumers."
The companies say that the provision on free emissions allowances in Waxman-Markey is not equitable. Electric utilities in that bill get 35 percent of those free permits in 2012 and 2013, with the sector's free permit portion shrinking every few years after that. Oil refiners, in contrast, receive 2 percent of those free emission allowances for two years. That will drive up fuel costs and potentially the price of anything that is shipped or trucked, the oil companies have said.
"We're just saying you can't treat emitters so disproportionately," Hayden said.
Chevron said it wants climate change legislation that meets seven principles. In a statement it outlined those as: "shared reduction of greenhouse gases by top emitting countries"; a recognition of oil, gas and coal "as critical energy sources expected to dominate energy supply for the long-term"; continuation and enhancement of programs to promote energy efficiency and conservation; a "measured and flexible approach"; ensuring that no sector or company is disproportionately burdened; accelerating research and development of carbon mitigating technologies; and transparency of "costs, risks, trade-offs and uncertainties."
Royal Dutch Shell PLC spokesman Bill Tanner said legislation should create "an environment that will allow continued investments in energy supplies and the efficient deployment of low-carbon technologies to address greenhouse emissions.
"With energy demand expected to grow, we should focus on legislative efforts that keeps open all supply options while respecting the need for proper policy frameworks and incentives, Tanner added. "We believe that a federal cap-and-trade program that sets mandatory caps on emissions -- along with a price on carbon -- is the most effective way to slow, stop and reverse greenhouse gas emissions."
Exxon Mobil said it rejects cap and trade as the best option and instead favors a carbon tax as the cleanest, most market-based option.
Although a carbon tax has not had much traction on Capitol Hill, Chairman and CEO Rex Tillerson earlier this month rejected the idea such a plan is politically impossible. "It is not too late for Congress to consider a carbon tax as the better policy approach for addressing the risks of climate change," Tillerson said. "Indeed, there has never been a more opportune time for Congress to pursue this course of action."
Copyright 2009 E&E Publishing. All Rights Reserved.
Source: New York Times
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By Ryan Schuchard and Laura Ediger - Ryan Schuchard and Laura Ediger Earlier this year, we noted several factors that are key to staying on the critical path to an effective climate treaty: The U.S. must enact serious climate legislation, both China and the U.S. would have to ratchet up their respective commitments, and the U.S. Senate needs to ratify the international treaty produced by negotiations in Copenhagen this December.
There is movement forward. On June 26, the U.S. House of Representatives approved the American Clean Energy and Security Act, the nation’s first-ever cap-and-trade bill that is also known as Waxman-Markey. China and the U.S. have held numerous climate policy talks, and the U.S. has exerted more leadership in U.N. negotiations than it has in more than a decade. At the recent G8 summit, U.S. President Barack Obama and Chinese President Hu Jintao joined other heads of major economies in agreeing that they should not allow the world to warm more than 2 degrees Celsius.
Yet China still has not committed to specific emissions cuts and targets, a step not only essential to the fight against global warming, but one that will also influence whether the U.S. Senate passes Waxman-Markey. Whatever happens in the Senate, it is clear that climate will remain a dominant trade theme between China and the U.S., the world’s No. 1 and No. 2 greenhouse gas emitters. For business, this means that a new policy landscape on emissions will take shape, with potential impacts on regulatory regimes in both countries as well as transnational issues, such as supply chain emissions.
The following guide offers insight into what you can do to ensure that your company is positioned for success in this rapidly changing climate.
Anticipate: Understand the Emerging Landscape
Upcoming legislation has the potential to reshape the way U.S. businesses use energy resources, both at home and abroad. Two key issues will determine whether China and the U.S. move toward meaningful cooperation on climate issues in the near future. The first is whether China accepts emissions-reductions targets; the second is whether the U.S. Senate passes a Waxman-Markey bill that China does not perceive as overly restricting Chinese imports.
China’s current climate programs are limited to the promotion of energy efficiency, and the country’s leadership shows little sign of moving toward carbon-dioxide emissions caps, despite pressure from the U.S. On the U.S. side, domestic manufacturing lobbyists are creating pressure for an eventual cap-and-trade law to contain measures to protect the U.S. from inaction by China. Watch these relationships as the bill goes through markup by July 31 and through committee by September 18, in preparation for a fall vote.
If Waxman-Markey passes, the Senate likely will vote in December on a global climate treaty brought back from Copenhagen by chief U.S. climate negotiator Todd Stern. To secure ratification, perceived leadership by China will be even more important. According to Sen. John Kerry, D-Mass., the 60 votes required for cap-and-trade are within reach, but the 67 votes needed to ratify a treaty will be nearly impossible without more significant commitments than China has signaled so far.
China -- which has consistently positioned itself as a developing economy that cannot afford to cut emissions -- even as it pushes other countries to make sharp cuts -- knows that as the largest global emitter, no climate treaty will work without it. And while negotiators undoubtedly will continue to take a tough line in the build-up to Copenhagen, there already have been signals that a deal can be reached. After his June trip to Beijing, Stern said he expects China to commit to stabilization of long-term emissions around 450 parts per million, as well as a target year for peak emissions.
To stay apprised of possible new commitments by China, follow China’s evolving 2011 to 2015 five-year plan, watch ongoing meetings this summer between Stern and China’s climate change envoy, Xie Zhenhua, and pay attention to whether coalitions of industrialized and developing nations are able to agree on reduction targets as the G-20 meeting in the U.S. approaches. Â
A thornier issue is how the two countries will manage emissions in value chains that cross their borders. In March, China’s head climate negotiator, Li Gao, famously asserted that the U.S. should take responsibility for emissions that happen in China due to the significant volume of goods produced in China for the U.S. market. Then in June, when the U.S. House of Representatives added mandatory carbon import tariffs for countries like China to Waxman-Markey, China’s Vice Foreign Minister He Yafei firmly stated that his country opposed that possibility. President Obama has said he prefers to avoid such measures, but others have pointed out that tariffs could strengthen the U.S. negotiating position as the Senate tries to develop a politically feasible bill.
Assess: Know Where Your Company Stands
Regardless what happens in the near-term with U.S. legislation, bilateral relations with China, and the Copenhagen negotiations, companies should assess how their markets, operations and supply chains will be impacted by potential new policies and regulations, which may include price and market mechanisms, financial incentives, and technical requirements.
All signs indicate that over the long-term, climate change and related policy responses will push prices up for carbon-derived energy. The key question for global companies is whether climate policy will evolve in a smooth and comprehensive way, or whether pockets of local opposition will spark balkanized schemes. The former scenario is most conducive to efficiency and low-transaction costs, the latter more likely to lead to gaming and continued erosion of public trust. So, when considering your company’s exposure, think not only about the direct cost of carbon, but also overall market stability and the risks of an uncertain policy regime.
A related issue is the establishment of border measures, which are aimed at addressing cross-border emissions or “leakage,” while applying even trade pressures to both sides. If border measures are passed through Waxman-Markey or other legislation, don’t count on a trade war, but do expect the World Trade Organization (WTO) to permit them. The WTO is likely to treat cap-and-trade the same way it treats value-added taxes, with border taxes allowed if they reduce distortions. When assessing your exposure, make sure you are aware of where your supply chains cross borders, especially those associated with energy-intensive production.
Act: Take Informed, Decisive Action
It is in the interest of business to promote strong climate policy, both to insure against potentially disastrous long-term consequences and to support innovation and entrepreneurship. An informed analysis should include a full picture of potential policy impacts, including the costs of inaction. Economists agree that, in net present value terms, the costs of ignoring climate change are much worse than those expected to arise from mitigation efforts, such as short-term spikes in energy prices (which will be temporary as companies invest in low-carbon alternatives). Also, be wary of analyses that use overly simplistic calculations of policy costs to assess climate policy. If and when you do decide to influence Waxman-Markey’s undecided senators (PDF), you may be most influential if joining forces with existing groups, such as U.S. Climate Action Partnership or Business for Innovative Climate and Energy Policy -- or by working with BSR and other players in the field to create other kinds of momentum.
Waxman-Markey in the U.S. Senate: Will It Pass?
Passing the Waxman-Markey bill through the U.S. Senate requires 60 votes, and as of early July, there were 45 supporters and 23 undecided voters, mostly industrial state Democrats and Republicans. Winning over the 15 voters needed to reach 60 will be no small task, and there are a number of perspectives on what it will take.
According to U.S. climate expert Joseph Romm, the key is portraying the bill as the single most important vote that senators, who see themselves as historic figures, will ever cast. New York Times columnist Thomas Friedman says the solution is threefold: Obama must hit the speech trail, young people must organize public events, and ultimately Republicans must understand that conservation and conservatism are related.
In more practical terms, it will also help if flexibility is built into the bill, as was done to aid its passage in the U.S. House of Representatives. In addition, issues that go beyond cap-and-trade, such as nuclear energy and the potential impacts on agriculture, may need to be addressed.
In the end, the Senate is likely to be a more challenging environment for this bill than the House because rural voices, which so far have been un-supportive of cap-and-trade, are amplified. Also, given the highly partisan nature of the dialogue and rhetoric so far, Republicans may be wary of lending their support.
On the other hand, says Sen. Jeff Bingaman (D-N.M.), most senators are at least persuaded that the science is clear and requires a policy response. The political analysis website the Daily Kos has published a preliminary vote-by-vote assessment that predicts failure, so the one sure thing is that the next few months will be a difficult test of the political skills of Senate leaders and President Obama.
Companies with operations in China should take the time to share with employees, partners, and other members of the business community why climate change is material to your business, and the importance of the U.S. and China making joint commitments. You can help take a lead in transparency by supporting and joining a regional or national climate registry (PDF). Finally, given the upward price pressure of carbon-based energy, consider collaborative opportunities to work with facilities and suppliers to increase energy and carbon efficiency.
Increased awareness of the direction climate policy is headed in both the U.S. and China is beneficial for business planning, as changes in energy subsidies or incentives and cross-border emissions regulation all carry significant financial implications. Understanding the international dialogue and positioning by each side will help you predict upcoming regulatory shifts in both countries, and will create the opportunity for informed action to influence policy. As Waxman-Markey winds its way through the Senate en route to the White House, don’t lose sight of the effects this bill may have for your business far beyond U.S. borders.
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