by Charles Perrow

In 1984 I published a book, Normal Accidents (revised edition, 1999), that argued that we should abandon systems with catastrophic potential if they were interactively complex and tightly coupled, unless they could be redesigned to minimize these dangerous characteristics.  Complexity and coupling can be reduced through modular, rather than integrated designs, and catastrophic potential reduced through deconcentrating hazardous materials close to population centers or sensitive ecologies.  We might decide that some systems with catastrophic potential are so vital that the risk of a rare, but possible system failure is worth running.  Government officials felt that way about our nuclear defense system for many decades, steadily increasing the risks of a huge catastrophe.  I will argue that deepwater drilling, especially in ecologically sensitive areas, should be abandoned, because it combines complexity and coupling with catastrophic potential.

Interactive complexity is not simply many parts; it means that many of the parts can interact in ways no designer anticipated and no operator can understand.  Since everything is subject to failure, the more complex the system the more opportunities for unexpected interactions of failures.  Tight coupling means that failures can cascade through the system since the system cannot be stopped, fixed and restarted without damage; substitutions are not available, and failed subsystems cannot be isolated.

I do not think that the failure on April 20, 2010 of the rig built by Transocean and run by BP had a system accident (or “normal accident”).  While such rigs are very complex and very tightly coupled, it is more likely that faulty executive decisions resulted in knowingly running unnecessary and dangerous risks.  To be a system failure, in my definition, requires that even if everyone tries as hard as they can to operate safely, it is in the nature of complex, tightly coupled systems to inevitably (though rarely)  have the unforeseeable interaction of failures, usually small ones individually, that can cascade through the system.  This was not the case with the Transocean rig; BP management frequently overrode the objections and warnings of its own operators and engineers, and those of its subcontractor, Transocean, and independent consultants.  Nothing that transpired was unexpected.

BP has had a history of ignoring warnings by its own staff in order to cut costs.  A refinery explosion in 2005 and a massive oil spill in Prudhoe Bay, Alaska in 2006, resulted in (small) criminal penalties for executive malfeasance; the pipeline had a smaller spill last year, and there are currently strident warnings about the dangers of a massive spill on the pipeline in Alaska.  The firm had a close call in 2005 with its deepwater drilling Thunder Horse rig.

With this record, perhaps deepwater drilling is safe if the other firms engaged in it do practice safety.  It is hard to tell.  Exxon-Mobil is reportedly very concerned with safety after the Valdez accident, and said to be the industry leader in safety.  But it is not encouraging that in July of this year Attorney General Eric Holden was asked if BP was doing anything different than others in the industry.  He noted “certain commonality of the way oil companies had been operating” in the Gulf, but since the investigation of drilling is ongoing, he would give no specifics.  BP may be an extreme case of putting profits over the safety of their workers, the environment, and the viability of the firm, but disasters in the chemical industry have been increasing in recent decades, so one should not be reassured that BP is the only bad apple.

The Materials Management Service (MMS) reports there are 33 rigs that have permits for exploratory drilling in deepwater in the Gulf; 29 were inspected after the spill and no serious violations were found. One may be skeptical of their finding.  For example, MMS only recommends, but does not require, a backup blowout preventer (the preventer failed in the April 20, 2010 Horizon accident).  MMS does not set specifications for all pipes, allowing BP to use less safe pipes in its rig, and so on.  Furthermore, the unsafe practices in the Horizon rig occurred when the rig ran into trouble; inspection would not catch such bad practices.  We cannot be reassured that BP is an outlier and other firms would operate safely, though a news story about Exxon’s last minute abandonment of a project, the deepest drilling at the time, is encouraging.  Less encouraging is that another drilling firm bought the lease to the abandoned exploratory drilling and has continued to drill, but for two years has recovered no oil from what is expected to be a vast pool.

Perhaps we should be reassured that the Horizon accident has alerted the industry to the dangers of deepwater drilling sufficiently to make accidents extremely rare, and furthermore has led them to have adequate emergency response facilities on hand if there is the rare accident.  After all, the nuclear power industry appears to have made significant safety improvements since the TMI accident; could not the deepwater drilling industry improve as well?  A rebuttal is that nuclear plants in the U.S. continue to have near misses despite improvements, and are not as much endangered by storms and hurricanes. BP, at least, does not appear to have changed its safety provisions in spite of the Thunder Horse near-disaster on July 11, 2005, because of a pump valve installed backwards and cracks in underwater pipes because of shoddy welding, and its Atlantis rig is being investigated because of whistleblower charges of unverified engineering documents.

An argument against a ban on deepwater drilling is that the expensive rigs able to do this would simply move to other locations that have no ban.  It is similar to intensive policing in one area; it simply drives the criminals to other areas, thus we should make no effort to increase policing in the high crime area – an argument for inaction. Were they to move to Norway or Brazil, where drilling takes place, they would have to have stronger safety standards – e.g. a backup blowout preventer – than those required in the Gulf.  But they might move their rigs to other nations where standards are presumably below those of the Gulf, and where there may be ecosystems as vulnerable as those of the Gulf.  The only response to this argument, unfortunately, is that one has to begin somewhere, and the U.S. ban just might encourage other nations to tighten regulations.

A further argument has been put forth by the oil industry and state governments bordering the Gulf: the economic impact upon the area would be severe in terms of jobs lost and business activity associated with pumping, transporting and selling the oil.  But the effect upon oil-related jobs is not likely to be as severe as the effect upon non-oil activities.  Oil is capital intensive, with few workers per unit of capital; non-oil activities such as fishing and tourism are labor intensive.  More jobs are at stake in non-oil operations.

A final argument is that we need the oil; shutting down deep-sea drilling would raise the price of oil in the U.S. and make us more dependent upon foreign sources.  Raising the price of oil is to be encouraged.  A higher price of oil would mean that investments in non-carbon sources of energy, such as solar, wind, and geothermal would increase, as would investments in efficiency and conservation.  The price of oil should be much higher to encourage these investments.  Since a carbon tax is out of the question in the U.S., and a pollution tax on gasoline unlikely because of public opposition, and especially oil industry opposition, curtailing production is the next best step.  Another step, a bit more likely than a carbon tax, would be a steep tax upon imported oil, reducing our dependency by tipping the market away from imports.  The market at present is not a “free” one, since the true costs of burning oil are not reflected in its price – the “externality” of pollution is treated as a free good when it actually imposes a heavy tax upon citizens and their environment.

The interactive complexity and tight coupling of deep-sea drilling rigs is apparent; even if BP had not skimped on safety and not overridden the objections of their own personnel and those of their subcontractors, the system could have the rare but possible unexpected interaction of failures. They are inevitable since nothing is perfect.  Profit motives and lax regulation only make such disasters more likely.

Last week, the Financial Times reported that two large oil companies, BP and ConocoPhillips, along with Caterpillar, manufacturer of heavy industrial machinery, pulled out of the US Climate Action Partnership (USCAP). USCAP, which still has 23 members paying $100,000 a year for the privilege of membership, is the leading business organization promoting cap-and-trade legislation in the US, and many of its members have also been active on the international scene, advocating for a coordinated global approach to emissions reduction. BP’s action is particularly significant because it has long been an industry trendsetter – it was the first oil major to acknowledge climate change and to leave the Global Climate Coalition, and it was a founding member of USCAP in 2007.

Even as BP and Shell were retreating from renewables during 2009 and moving Back to Petroleum, the oil industry still appeared to be part of the grand Carbon Compromise, pursuing a strategy of “hydrocarbon neutrality.” The industry realized that it was not mortally threatened by a flexible carbon regime with low carbon prices; indeed, it could even prosper as demand for liquid fuels for transportation grows, especially in India, China, and Brazil. The industry is also repositioning itself with major investments in relatively low-carbon natural gas. 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 shifts as the climate issue plays out. The Carbon Compromise would also help industry avoid paying the political or public relations price of fighting emission controls, such as the embarrassment caused by CEI’s 2006 risible advertisement Carbon Dioxide: They Call it Pollution, We Call it Life.

Back in August 2009, the oil industry was fighting a rearguard effort against cap-and-trade legislation in the US. The industry front-group Energy Citizens contracted with a professional events management company to plan about 20 rallies, with a focus on energy producing southern states such as Texas and Louisiana. Member companies encouraged their employees to join in. Energy Citizens’ 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. This project complements a massive increase in lobbying efforts by the fossil fuel industry in the last six months.     

At the time, the oil industry campaign seemed like an anachronistic, even quaint echo of the carbon wars of the 1990s. In hindsight, it appears to be a prescient strategy that would help prepare the ground for the coming climate backlash. This backlash has been spurred by a confluence of seemingly unrelated events. Climategate broke just before the Copenhagen negotiations became hopelessly mired. An unusually cold winter in Europe and the eastern US, together with record snow in Washington DC has fired up the rhetoric of climate deniers, and their voices have been amplified and channeled to mass audiences through the tabloid press and talk radio. It was not cold everywhere, of course – for the planet, the decade 2000-2009 was the hottest on record. But it was cold where it mattered, for the media and climate policy. Public opinion polls in the US and the UK show a dramatic jump in the last year in the percentage of people who don’t think that climate change is a priority issue.

The loss of Ted Kennedy’s Massachusetts senate seat to Scott “the truck guy” Brown deprived the Democrats of their supermajority and made them even more dependent on Republican votes. As the Obama administration has tried to redirect its attention toward unemployment and the economy, healthcare reform has stalled and climate has fallen even further down the priority list. Business senses the vulnerability of the Democrats and is shifting campaign money to Republicans, who could recapture the Senate in the mid-term elections. In Europe as well as the US, concern about budget deficits is constraining ambitious clean energy agendas.

The resurgence of climate denial and the woes of the Obama administration are not unrelated. Like the global climate, the political, social and economic system is a dynamic system with complex feedback loops. The confluence of a few minor developments can cascade into a major shift in direction. The climate deniers and right-wing “tea-party” activists in the US are successfully tapping into populist anger rooted in economic insecurity and a perception that policy elites are out of touch. A recent study from Northeastern University pointed out that unemployment amongst lower income households is now higher that at the depth of the Great Depression of the 1930s. The ideological machine of the tabloid press, talk radio, and Fox News has successfully woven climate change into a populist cultural politics that fuses anti-government, anti-tax sentiment with a reassertion of masculinity. The Superbowl ads for Dodge and Audi perfectly capture this spirit, explicitly connecting environmental concerns with submissiveness to nagging women and the overreaching intrusiveness of the “green police” nanny-state.

It is against this backdrop of shifting cultural politics that Scott Brown’s unlikely victory in Massachusetts and developments in the oil industry can be understood. Back in August 2009, I suggested that there were three possible ways to understand the oil industry’s pullback from renewables and increasing hostility to cap-and-trade:

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 preserve the value of their fossil fuel assets and capabilities. The reputational value of proactive corporate action on climate is declining along with public support for aggressive climate policies.

2. A sectoral struggle over implementation: From this perspective, the Carbon Compromise is still on, but the current battle is about 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 oil industry would receive just 2% of free allowances, while the electric power sector would receive 35%. The New York Times cited Gerry Waldron, the former staff director of the House select climate panel, arguing that groups like USCAP representing industries with different interests have a hard time finding common ground on the details of legislation. “They’re very effective at the framework level, at the 50,000-foot level,” Waldron added. “But when you get down to the messy business of making laws and the sausage making, it’s going to be hard to keep those people together.”

3. The Carbon Compromise was only a second best option: The preferred course for energy intense industries 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 shifting political winds and public sentiments have opened a window of opportunity to weaken or delay regulations for several years.

BP’s public statement regarding its exit from USCAP supports the second interpretation, that the oil industry is seeking a better deal rather than to kill carbon regulation outright:  ”We will continue to work for passage of federal legislation that . . . is environmentally effective, reduces emissions across the US economy in a measured and affordable way and which treats all energy consumers and producers in a fair and equitable manner. We don’t believe legislation currently pending in the Congress achieves these objectives.”

But the reality is that all three factors are playing something of a role, and business can sense the shifting winds, even if it cannot yet know the endgame. Just as the US Chamber of Commerce and its climate stance survived the exit of several high profile companies last year, so USCAP could survive the exit of three companies. Indeed, several new companies, including Honeywell, have joined USCAP in recent months. Yet surely BP’s action signals deeper tectonic shifts taking place in the cultural, economic and political spheres, with deeply unsettling implications for climate action and for the planet.

By David L. Levy

(This is an updated version of an earlier posting)

President Obama’s decision to speak at the COP-15 climate summit in Copenhagen in December 2009 cannot have been easy. Obama surely did not want to invest his shrinking political capital in backing the doomed international conference, but at the same time wanted to reassert US leadership after decades of denial and obstruction have cost it dearly in international credibility and influence. President Obama announced his decision to attend Copenhagen just as I was leaving the city after attending a conference on business education and climate change. Perhaps the President was inspired by our effort at Copenhagen Business School to infuse climate change into the business school curriculum, but I surmise that he had other strategic calculations.

Copenhagen was rebranded from a somewhat sleepy European capital to Hopenhagen,  the shiny new star on the global climate stage, showing off its clean tech sector with Vestas ads on every metro train. The conference I attended was, of course, also timed to cash in on the climate cachet of the city. I met a staff person from Copenhagen Capacity, whose organization is trying to attract clean tech investment to the region, and hoping for a boost from the media-grabbing climate conference. The city’s green credentials do not just rest on high tech renewables but on decidedly low-tech bicycles – Copenhagen is the biking capital of the Western world, with nearly 40% of commuters, many dressed in suits, pedaling to work through cold and rain. Whether they are motivated by environmental enthusiasm or the 200% tax on cars is hard to say.

Unfortunately, the Copenhagen brand is looking tarnished and, as the talks collapsed, many observers quickly renamed it Brokenhagen. The estimated 40,000 delegates, observers, and assorted groupies who descended on Copenhagen were unable to produce a binding treaty, despite the cost of more than $62 million borne by the Danish government, according to the Guardian in a special 10-page Copenhagen supplement. The Guardian noted that the delegates would emit more than 40,000 tons of CO2 during their travels and travails, which now looks like a rather bleak investment from a climate perspective. At least it must have been boom times for the retail carbon offset business.

Despite last minute by Obama and Chinese premier Wen Jiabao, the conference only generated a vague declaration of principles the Copenhagen Accord, which sets a goal of limiting global temperature rise to 2°C and recognizes that all nations need to work to that goal. A key part of the draft, a pledge to cut carbon emissions by 50% by 2050, was removed at the last minute, apparently under pressure from China. Yet even this watered down accord didn’t win broad endorsement (Click here for a Dr. Seuss-style satirical summary from the BBC).         

The Copenhagen debacle has been endlessly dissected and analyzed. Many blame the Chinese for thwarting an agreement, while some blame the US for lack of leadership and bullying developing countries. Both countries are wary of multilateral agreements that might infringe on sovereignty. The main stumbling block was the distribution of economic costs and benefits, with the axis of contention being the divide between rich and poor countries. Developing countries demanded emissions cuts in the industrialized world of around 40% below 1990 levels by 2020, while the “offers” were in the 15-25% range with various baselines (not to mention flexibility from offsets). Developing countries also argued that any new regime maintain the Kyoto principle that only industrialized Annex I countries have legally binding emissions targets, while the US and Europe demanded that a new agreement include binding and verifiable targets for the larger developing countries, especially China and India. China’s total GHG emissions edged past the US in 2008, to reach 6.1 GTonsC02e. Developing countries also demanded up to $200 billion a year in aid designated for mitigation and adaptation. Industrialized countries did finally promise short term funding of $30 billion over the next three years, mainly for adaptation in vulnerable developing countries, as well as longer term funding of around $100 billion a year from 2020.

Observers are not optimistic about the prospects for completing a binding treaty at COP-16 in Mexico at the end of this year. Most countries are filing their GHG targets by the Jan. 31 2010 deadline, though some are vague ranges. The problem is that country negotiators more closely resemble corporate managers concerned with “competitiveness” than adverse impacts from climate change. Moreover, the financial crisis has weakened national treasuries and resource constraints are stark. Fundamentally, collective action is very difficult when there are so many actors with divergent interests.

What might happen in the absence of a binding global deal? The failure to achieve a binding treaty could well send a negative signal that stalls momentum on climate action. The prospect of a strong global emissions agreement has provided the political and economic context for the beehive of climate activity in recent years, from carbon footprinting to voluntary offsets, from Walmart’s supply chain initiative to BP’s investments in renewables. According to the Financial Times, “The private sector investment needed to tackle climate change will not be made without a binding international deal on carbon emissions.” Lars Josefsson, chief executive of Vattenfall, a Swedish power company, and chairman of Combat Climate Change, a group of 60 large companies that includes BP, GE, and Unilever, stated that: “The necessary investments will only be made when you have a binding treaty and legislation. Of the money required to implement a deal, the vast majority – about 80% – will come from the private sector. That can only come when there is a stable legal framework….It is very important to get business more engaged, because they have the knowledge of the market economy and how investment decisions are made.” Wulf Bernotat, CEO of the power company Eon, has made it clear that accelerating emission reductions requires a strong global framework.

The more optimistic camp argues that the climate bandwagon will lumber on regardless. Just as a weak Kyoto, without the US or China, was not the primary motivator for a host of corporate, NGO and governmental initiatives, so a non-binding Copenhagen declaration of good intentions will have little relevance. Mat Hoffmann at the University of Toronto is researching how decentralized local initiatives can evolve into effective forms of governance even in the absence of global authority (see his blog). Climate change science remains a key driver; NASA just announced that 2000-2009 was the hottest decade on record. Action will continue to bubble up from a host of organizations, and business will pursue low-carbon investments because they recognize the longer term strategic dynamic and will be seeking profitable new markets and efficiencies. Concerns about the rise of China in clean energy technologies appear to be driving a new dynamic of competitive investments and incentives, as states strive for national competitiveness in the rapidly growing cleantech economy.

One positive sign is that the stalemate at Copenhagen did not appear to dent the value of cleantech shares. The chart below shows the value of PBD, a clean energy ETF from Powershares (in blue) over the last two years, through Jan. 12. 2010. It clearly tracks the NASDAQ closely (red line) but is also influenced by the price of oil (yellow line). The collapse of talks in Copenhagen at the end of December had no noticeable impact.

In the US, climate regulation is moving forward even without a national cap-and-trade system. The EPA has mandated that suppliers of fossil fuels, manufacturers of vehicles and facilities that emit 25,000 metric tons or more per year of CO2e are required to collect data and submit annual reports to EPA. The new rule, effective in 2010, will apply to nearly more than 12,000 facilities which account for about 85% of US emissions. The EPA also ruled in December 2009 that greenhouse gases pose a threat to human health, which enables the agency to use the Clean Air Act to regulate GHG emissions directly without legislation. This “endangerment finding” eases the path to stronger regulatory control of emissions from autos, power plants, buildings, appliances and factories. Finally,in late January, the Securities and Exchange Commission announced that publicly held companies should warn investors of any potential effects from climate change on their bottom lines.

Increasingly, business is realizing the dangers of the proliferation of multiple regulations, and standards emanating from various regions and states, and is lobbying for simple, transparent, predictable, and coordinated frameworks. General concern with the cost of carbon regulation has been replaced by fears of the compliance costs and uncertainties of trying to cope with a chaotic and fragmented climate regime. Energy intense business sectors are particularly concerned at the prospect of EPA regulation of GHGs – they would much prefer the flexibility and low carbon prices of a cap-and-trade regime. The Financial Times reported that large US-based companies are warning “that they will face a heavy regulatory burden should US Congress fail to pass climate change legislation,” as EPA and individual states develop a patchwork of regulations and measures. Peter Molinaro, head of government affairs at Dow Chemical, the largest US chemicals group, told the Financial Times that the proliferation of such initiatives would present “an enormous administrative burden” for companies that operate across different regimes. “Manufacturers are having enough trouble in this country competing with foreign companies,” Mr Molinaro said. “We’d be adding administrative and cost burden where we shouldn’t.”

The concerns regarding patchwork regulations are even more acute at the international level: Alison Taylor, vice-president of sustainability for the Americas at Siemens, the German engineering group, said businesses needed to know the price of carbon for planning reasons. “How do you have one price of carbon if you’ve got four or five different regimes?” she said. These concerns have played an important part in building corporate support for an international agreement and driving the recent defections from the US Chamber of Commerce. A string of high-profile companies including Coca Cola, GE, Microsoft, Cisco, DuPont, Johnson Controls and Nike tried to make the case at Copenhagen for a global agreement. But the business community is still far from reaching a consensus view, and the Chamber of Commerce and National Association of Manufacturers remain opposed to pending US climate legislation. Until mainstream business organizations become more coherent in their support, the prospects for meaningful national regulation in the US or for an international treaty remain dim.

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.