Carbon Wars II: The Sequel

August 20, 2009

by David L. Levy

Why is the US oil industry reverting to the tactics of the 1990’s Carbon Wars?

In these sultry, languid days of August, large numbers of Americans are suddenly getting excited about climate change. They are not, however, worried about rising CO2 levels and the impact on sea levels, hurricanes, or glaciers. They are jumping on buses and crowding into rallies to oppose the proposed energy legislation, which is intended to address climate change. Through placards, slogans, and speeches, the attendees demonstrate their concern that their very way of life – cheap fuel and electricity, even their jobs in energy-rich states – is under imminent attack. This threat is apparently more palpable and galvanizing than climate change, a distant and abstract concern, if not a hoax perpetrated by the same intellectual East Coast Europhiles trying to impose socialist medicine on beleaguered overtaxed Americans.

Perhaps a few of these angry citizens spontaneously joined the rallies in a state of high dudgeon after perusing the 1200 page Waxman Markey bill. Most likely, their transportation and placard messages were organized by Energy Citizens, whose website proclaims that it is “a nationwide alliance of organizations and individuals formed to bring together people across America to remind Congress that energy is the backbone of our nation’s economy and our way of life.” In fact, Energy Citizens was set up and financed primarily by the American Petroleum Institute (API), the US oil industry association, with support from the National Association of Manufacturers and other groups. It has contracted with a professional events management company to plan about 20 rallies against forthcoming energy and climate legislation in Southern US states, with a focus on energy producing states such as Texas. Member companies are encouraging their employees to join in. This project complements a massive increase in lobbying efforts by the fossil fuel industry in the last six months.

The oil industry strategy has been widely reported in the press and blogosphere following an email leaked by an anonymous source to Greenpeace outlining the plan from Jack Gerard, president of the API. What has received almost zero attention, however, is any analysis of why the oil industry is reverting to the combative tactics of the Carbon Wars that characterized the mid to late 1990s.  Neither has there been much discussion of the cultural politics that provide fertile ground for the fossil fuel industry’s message among large groups of Americans (this will be the topic of a future post).

The US fossil fuel industry’s campaign against Kyoto’s mandatory emission controls is well documented (see, for example, Ross Gelbspan’s  The Heat is On and Jeremy Leggett’s Carbon War). Led by the Global Climate Coalition (GCC), the campaign involved mobilizing climate skeptics to challenge the science of climate change, funding economic analysis to show high economic costs of curbing emissions, political campaign contributions, and supporting think-tanks such as the Competitive Enterprise Institute (CEI). The first cracks appeared when European oil companies BP and Shell left the GCC in the late 1990s, but the organization collapsed in early 2000 after Dupont, Ford, Daimler Chrysler, Texaco, and General Motors left the group. Some of these companies have since joined more progressive organizations that espouse sustainability and support action on climate, such as the Pew Center Business Environmental Leadership Council and the US Climate Action Partnership.

My recent posting Back to Petroleum explored the US-European business divisions on climate and suggested that the oil industry has converged on a compromise strategy of “hydrocarbon neutrality.” While retreating from heavy investments in renewables, the industry realized that it can live with a flexible regime with low carbon prices, and no longer needs to pay the political or public relations price of fighting emission controls. Similarly, the auto industry can embrace hybrid technology and does not face imminent extinction from gas prices that might rise 50c per gallon by 2020 due to cap and trade (download here my 2002 academic article on the auto industry and climate change). Despite a few last gasps, such as CEI’s 2006 risible advertisement Carbon Dioxide: They Call it Pollution, We Call it Life, it appeared that US industry had called a ceasefire in the carbon wars and was joining the grand Carbon Compromise. A weak carbon regime would not threaten core business operations in the short-to-medium term, leaving adequate time and resources for longer-term strategic repositioning as the climate issue plays out.

So what has changed to lead the oil industry to engage in Carbon Wars, round II? The strategy is not without risks: From experience, the industry knows that “astroturf” tactics that employ front groups to give the appearance of grassroots mobilization can backfire when exposed. To avoid this possibility, API’s Gerard thoughtfully included a note on the plan stating: “for your eyes only. Please treat this information as sensitive and ask those in your company to do so as well…we don’t want critics to know our game plan.”

There are several possible ways of understanding the oil industry strategy:

1. A “Back to Petroleum” product strategy needs a new political strategy

Political and product strategies need to be coherent and integrated. Corporate strategy resembles a multi-dimensional chess game, in which players seek advantage by repositioning themselves in product and political space. When oil companies were investing more heavily in clean energy, they also needed to invest in political strategies that would support markets for these technologies and products. Now that these companies are refocusing on their core products and competencies, they are returning to the corresponding political strategies they used in the mid-1990s to try to preserve the value of their investments and assets.

2. The devil is in the details: a sectoral struggle over implementation

From this perspective, the Carbon Compromise is still on, but the current battle is about the details of implementation and the allocation of costs and benefits across sectors. In many ways, Waxman-Markey and the proposed energy legislation are generally pro-business: a flexible market-based approach with plenty of offsets to help keep carbon prices low, 85% of carbon allowances are given away rather than auctioned to industry in the early phase, and there are plenty of subsidies to sweeten the medicine. The US oil industry, however, sees itself carrying an unfair burden. According to ConocoPhillips, the direct CO2 footprint of the oil and gas industry, including exploration, production, and refineries, is 4% of total US emissions. Current proposals for cap-and-trade make refiners responsible for CO2 generated from downstream combustion of oil for vehicle transportation and oil-based heating, which represents another 24% of US emissions. The oil industry would receive just 2% of the free allowances, while the electric power sector would receive 35%.

3. The Carbon Compromise was only a second best option

Though there is considerable variation among firms and sectors, overall industry has rather reluctantly embraced the Carbon Compromise; the preferred course for most US business during the 1990s was voluntary measures. Mounting regulatory and public pressure, the strengthening of climate science, and the need to operate in carbon-constrained markets in Europe have led US business to acquiesce unenthusiastically to mandatory emission controls. A growing number of firms are waking up to opportunities in clean energy, efficiency, and carbon trading, but these are still niche markets. The unexpectedly vociferous opposition to the administration’s healthcare proposals signaled  a strategic opportunity to exploit Obama’s political weakness, and also provided a model for how to accomplish it. The goals of this effort are unclear; perhaps the aim is to defeat cap-and-trade, but more likely the oil industry expects to delay or weaken regulations.

The reality is that all three factors play something of a role. The involvement of NAM and the US Chamber of Commerce suggests that this is not just an oil industry ploy to shift the burden of costs away from the oil sector. The oil industry weathers volatile market conditions that cause gasoline prices to fluctuate by far more than the 30-50c/gallon impact that cap-and-trade could have in a couple of decades – by which time free distribution of carbon allowances is scheduled to be phased out. It is also unlikely that the industry expects to defeat carbon controls entirely; public pressure, scientific evidence, and growing vested interests in low-carbon products and services are powerful drivers that will not disappear.

It’s important to bear in mind that API includes many member companies with diverse interests. BP, ConocoPhillips, General Electric, and Shell are members of API and the US Climate Action Partnership, which has been an active advocate for cap-and-trade. Spokespeople for BP and Shell have said they will not participate in the Energy Citizen rallies. Ironically, Exxon, the largest US oil company and historically the strongest opponent of mandatory carbon controls, has recently been calling for a carbon tax instead of a cap-and-trade system – yet Energy Citizen’s main message is that cap-and-trade represents a hidden tax.

Corporate strategy is a complex game of positioning, alliances, and maneuver, and it is often difficult to infer motives or define success. In 2001, shortly after the demise of the Global Climate Coalition, the US withdrew from the Kyoto Accords as one of the first acts of the incoming Bush presidency. One industry executive told me that, contrary to conventional wisdom, “the GCC wasn’t a failure; it’s a case of mission accomplished.” The current skirmish is perhaps an attempt to preserve that accomplishment.

5 Responses to “Carbon Wars II: The Sequel”

  1. I finally decided to write a comment on your blog. I just wanted to say good job. I really enjoy reading your posts.

  2. David — The “Carbon Wars II” is a wonderfully accurate and penetrating analysis. I’m not totally sure I agree with the whole piece — but the key is your highlighting the roles of the Chamber of Commerce as well as the API. And, of course, the duplicity of some companies calling for carbon taxes at the same time they’re playing this game

    For instance, we watch the Lehrer News Hour which is sponsored in part by Chevron which boasts of its commitment to clean energy — after spending more than a decade as a central driver of the GCC and its terribly destructive disinformation campaigns.

    At any rate, I’d love you to find a visible mainstream outlet for this piece. It’s very much on point — and extremely well done. It deserves a big audience — at least among those of us who are paying attention! Thanks much for sharing this one.

  3. I’m very curious how the lopsided allowance allocation you mention in #2 came about. The current allocation shelters consumers from a price signal in residential electric power, gas, and heating oil. That’s a dubious idea – especially for the long duration involved – but why not do the same for transport fuels? Clearly electric utility PACs have a lot of power, but so does big oil. BP, ConocoPhillips, and Shell are members of USCAP, so you can’t blame it entirely on failure to engage with cap & trade design.

  4. Good question, Tom. Did the oil industry’s lawyers miss the fine print on the allocation mechanism? Unlikely! Overall, the oil and gas industry has felt less threatened by cap-and-trade than coal, and maybe the administration was more eager to buy off coal industry opposition with allowances.
    On the pricing question, giving some emission allowances out for free should not stop prices rising to reflect the marginal cost of allowances (though the utilities are expressly meant to use them to subsidize rates – not sure how that will work!)

  5. I’m not sure that current rallies being organized by Energy Citizens represent a dramatic shift in the stance of the US oil industry toward climate change. It smacks of opportunism by the API to me. Viewing the success of fake grassroots protests against the health care legislation, the API might have sensed an opportunity to flex some muscle on the climate change issue. Historically the exposure of industry funded front groups behind supposedly grass roots movement may have proved damaging, but recently that has done little to discredit or disempower the protests against health care.

    As you point out in the article, the API is comprised of a set of companies with diverse interests. This seems to be reflected in Energy Citizens broad message that any climate change regulation is a tax that will raise energy costs and harm the US economy. Some of the member companies of API probably support the complete opposition to the climate bill, while others are probably made squeamish by such a blunt and un-nuanced attack. GE certainly has an interest in renewables and energy efficient turbines and appliances. Nevertheless, all member companies of the API will benefit if it can prove that it’s a force that Congress and the White House must listen to.