Yet I was skeptical regarding the business model. I know that intense competition and large scale production have been driving down solar prices in the last couple of years, but I’ve still been reading total installation costs of about $6-8 per peak watt (pW). Yet it seems that prices are now even lower than that. Solarbuzz, a solar consultancy, reports that average retail module prices in May 2010 have fallen to around $4/pW, but that the lowest cost multi-crystalline modules are now $1.74/pW retail, while mono-crystalline is $2.07/pW. Inverters, balance of system, and installation add another $2.50 to $3/pW. Installation on parking canopies rather than rooftops adds another $1/pW or so.

Even with total installed costs as low as $4.50 to $5, and a 30% credit on capital costs thanks to the generosity of US taxpayers, the numbers still didn’t add up. What makes Apogee’s business model possible is the value of solar renewable energy credits (SRECs). US states that enact renewable portfolio standards (RPS) have created local markets for renewable energy credits, allowing utilities to meet their requirements by buying RECs. In order to stimulate solar, a number of states have created “solar carve outs”, i.e. a separate standard for solar energy with its own SRECs, which have initial market prices in the 30-60c/kWh range – Massachusetts has set a floor price of 30c/kWh (astute readers will observe that SREC is an anagram of SERC, our very own center for Center for Sustainable Enterprise and Regional Competitiveness here at UMass-Boston).  

This is a massive subsidy indeed, and raises significant policy issues. Even for those who are fervent advocates of renewable energy, does it make sense to provide such huge subsidies to solar, when modest subsidies for land-based wind power of around 2-3c/kWh serve to make it grid competitive in many regions? Would the money be better spent on research and development, and the development of local workforce skills and business clusters? Subsidizing installation at the retail level will generate a few local jobs for developers, electricians and installers, but the panels will mostly be imported. There is a serious risk of consumer backlash when people realize the extent of the subsidies and the impact on their utility bills – just as the proposed cost of offshore wind power from Cape Wind has shocked even some of its supporters. Perhaps these subsidies are needed to jump start commercial scale installations and overcome industry inertia and perceived risks, but in themselves they also constitute a barrier to scaling up new renewables beyond a few percent of grid supply.

In return for discussing the business and economics of SRECs, I promised to give David Weinberg a chance to explain Apogee’s business pitch, so here it is:

Imagine that you’re a business owner or a University president in the Northeastern United States.  Over the past 10 years you’ve watched your cost of electricity soar 69%, and it could double in the next ten years.  Compete with China?  You can’t even compete with most states here at home.  Those high prices will crimp your growth and extinguish your profits.  In fact, if you stay in the northeast, you probably won’t survive another 10 years.

What if you could use solar energy to cut your energy bill 30-40%?  “No way”, you’d respond.  “Not enough sun” or “too expensive to install upfront”. New England averages 4.3 hours of sun per day, almost double that of Germany, the world leader in solar power. As to the upfront cost, what if it didn’t exist? If there is no upfront cost and the solar power costs 30-40% less than what you are currently paying, would that be attractive?

Apogee Solar is a solar energy developer in New Jersey, Massachusetts or Pennsylvania, who harnesses the power of Solar Renewable Energy Credits (SRECs) to lower your energy bill. An SREC is an energy tariff that is amortized over everyone’s bill, so it is a tiny part of the rate base.  Every megawatt of energy that your installed system produces earns me one credit.  I can then take that credit and sell it into the marketplace.  The sale of the credit is what allows me to finance your system with no upfront costs.

How much are SRECs worth?  That depends on where you are located.  New Jersey has a current price of around $650 per credit.  Massachusetts has set a yearly floor of $300 per credit.  Energy systems are designed so the credits depreciate over time.  A system that is 10 years old will generate SRECs that are less valuable than a system that is two years old.  What does that mean to energy prices?  In Massachusetts and New Jersey I can negotiate a starting electricity price of 9 cents/kWh, and in 15 years your price will still be below 13c/kWh. At the end of 15 years you own the system, so for the next 15 years your cost of power is free.

Solar installations are financed with what are called ‘Power Purchase Agreements’ (PPAs).  I like to call them solar mortgages, except that your property and assets remain free and clear.  The collateral for the financing are the generated SRECS.  Like any mortgage, only businesses or universities that are in good health will qualify. You might be wondering if you can finance an installation on your own to save even more money.  That depends on how much time and effort you want to spend.  Because of the variability of SREC prices, most commercial banks won’t finance them. Assuming that you could find financing, you would then have to identify the right solar modules, the right inverters, hire the right design firm, hire a really good union electrical installation firm, and then take your system through the local planning and zoning board for approval. After you have your system installed, you’d have to maintain it. Apogee brings together the whole package: finance, design, installation and maintenance. We save you money and help the planet.

by David L. Levy

The transition to a global low-carbon economy will require the large-scale mobilization of financial, technological, and organizational resources. With government coffers depleted by the recession and bailouts, the vast majority of these resources will have to come from the private sector (see Beyond Copenhagen). Understanding the decision processes behind corporate strategy is therefore essential. We need to know the factors that lead some companies to invest billions of dollars to develop new low-carbon products and technologies and which sectors they are choosing. In light of current concerns about green jobs and regional competitiveness, it’s also important to know how companies choose where to invest.

The Harbor at UMass-Boston

The Center for Sustainable Enterprise and Regional Competitiveness at the University of Massachusetts, Boston, is part of a new international comparative study of corporate climate strategies in energy intense industries, a project designed to tackle these important questions. The research is a collaboration among Oxford University’s Smith School for Enterprise and Environment, the University of Western Sydney, and UMass-Boston, and is funded by a AUD300,000 3-year award from the Australian Research Council under the National Competitive Grants program. We’ll be examining corporate strategies in several energy-intense sectors, including oil, utilities, automobiles, chemicals, and metals, in the US, Germany, the UK, and Australia. We will also be looking at the influence of governmental policies and NGO strategies on corporate strategies.

The importance of corporate strategies was made clear this week with the news of Exxon’s $41 billion acquisition of XTO, a major player in the US gas industry with substantial interests in unconventional shale sources (see The Economist on Exxon’s long term strategy). Private decisions to allocate large chunks of capital to a particular technology or fuel source have a significant impact on the direction of energy development and the trajectory of carbon emissions. Burning natural gas to generate electricity creates only half the CO₂ emissions of coal, so offers the prospect of large-scale reductions in greenhouse gas emissions in countries where coal still accounts for a large share of power, such as Australia, China, and the US. There has been considerable uncertainty regarding the technical difficulties, the costs, and the environmental impacts of recovering shale gas. For Joe Romm, shale gas is a game changer that will make it easy for the US to meet a 20% emission reduction target (and see this NYT piece). The environmental impact of deep drilling and injection of chemicals near groundwater resources is giving cause for concern, however. Tom Konrad thinks shale gas has been somewhat over-hyped.

The biggest energy deal of the year signals that Exxon, a very risk averse company, has enough confidence in shale gas for this investment, and assures that the company’s vast resources will be devoted to developing the technologies needed to recover gas in a cost effective manner – and perhaps to overcoming the environmental concerns. For Ed Crooks at the Financial Times, it’s also “a play on the likelihood that that the US will make further moves to curb greenhouse gases.” Exxon has long been the most powerful corporate opponent of mandatory emission curbs, so its encouraging to see the company look past the chaos and deadlock in Copenhagen. The other oil companies have also been increasing their gas investments, and climate change is not the only driver. As Crooks observes:

Getting XTO gives Exxon a powerful position in US “unconventional” gas, including shale gas, where it has not been one of the leaders in the revolution that has opened up the huge new source of US gas supplies. With many of the resource-rich countries around the world still making life difficult for foreign investors (viz Exxon’s travails in Russia and Venezuela), resources in a stable developed country are attractive, and in Exxon’s own back yard particularly so.

In addition to those attractions, however, an important part of the case for buying gas assets in the US today is the prospect that energy and climate change legislation will tilt the balance of the energy mix away from coal and towards gas for power generation.

In an earlier post, Back to Petroleum, I explored the US-European oil industry convergence on a compromise strategy of “hydrocarbon neutrality.” While retreating from heavy investments in renewables, the industry realizes that it can live with inevitable advent of carbon controls, in the form of a flexible regime with low carbon prices. This 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. Gas is the perfect medium-term play.

Exxon knows that its core expertise lies in geology, hydrocarbon chemistry, extraction technologies, and distribution, and the XTO acquisition allows it to extend these capabilities to a vast new market. Exxon has also joined the other oil companies in making more modest investments in biofuels. It announced in July 2009 a $600 million algae biofuels project with biotech company Synthetic Genomics. Biofuels clearly represent a better strategic fit than solar or wind, and though more risky than gas, promise to extend the age of liquid hydrocarbon fuels.

The corollary, of course, is that several decades of plentiful natural gas (and nuclear) might hurt investment in renewables and delay the era of zero-emission power. There have recently been setbacks with geothermal power, the only other prospect for short-term renewable (baseload) energy [see Tom Konrad's comment below].

Concerns about the future of the US clean energy sector were heightened last week when John Rudolf ran a New York Times article describing plans for a 600-megawatt $1.5 billion wind farm in West Texas. With construction set to begin in March 2010, the wind farm will use 240 2.5MW turbines manufactured by A-Power Energy Generation Systems in Shenyang, China, and the capital cost is mostly financed by Chinese banks. Though pitched as a “joint venture” among a consortium of Chinese and American companies, the US contribution is mostly limited to federal loan guarantees and cash subsidies from stimulus funds for about one-third of the total cost. The utility-scale wind farm will be operated by a Texan company, Cielo Wind Power, and the financing was arranged, in part, by the U.S. Renewable Energy Group, an American private equity company (see this Jan 2010 NYT update on China’s clean energy industry).

Clean energy has been pushed as a “win-win” solution to reduce greenhouse gas emissions while simultaneously stimulating a high-growth technology-based sector with a broad range of employment opportunities. Yet while the proposed wind farm will generate plenty of clean power, it is expected to create only about 300 temporary and 30 permanent jobs. Reaction to the proposal has been harsh, judging by the comments mentioned in a follow up piece. One captured the mood saying: “Why are U.S. stimulus funds being used to subsidize manufacturing jobs in China?”

It’s important to disentangle the issues here, as government subsidies have at least three goals: short term demand stimulus, emissions reductions, and longer-term creation of a competitive clean energy cluster. As a short term Keynsian economic stimulus for the US economy, this is clearly not a good use of funds, considering how much of the spending is “leaking” internationally. On the other hand, US firms are in line to benefit from stimulus spending in other countries, so we need to be wary of protectionist “Buy American” constraints to stimulus spending. As a mechanism for reducing carbon emissions, wind farms are a relatively effective way to spend money, in terms of cost per ton of carbon, certainly more so than the “cash for clunkers” program, which has been estimated to cost more than $200 per ton. If we take a view as global citizens concerned about the climate, then the location of jobs does not matter. Indeed, finding the lowest cost source for blades ensures the maximum carbon reduction per dollar expenditure.  

The creation of a competitive clean energy cluster in the US is an important longer-term policy goal. Clusters such as life-sciences in the Boston area and electronics/software in the San Jose/Silicon Valley region provide high-income employment opportunities and a strong tax-base. Clusters, by their nature, are enduring and “sticky” – businesses are willing to locate in high-cost regions to be close to customers, suppliers, specialized services, competitors, skilled labor, university research centers, and sector specific sources of capital. Clusters become self-sustaining economic ecosystems that stimulate innovation and enhance specialized skills and corporate capabilities. They are geographically bound not so much by the physical flows of components but by the dense human networks that enable rich information flows.

Once technologies stabilize to some degree, manufacturing becomes less “sticky” and easier to relocate to low-cost offshore sites in Asia (I did my PhD thesis on this topic, you can download my articles on international sourcing here and here). In the computer industry, the US has retained plenty of high-paying jobs in product management, design, software, finance, and marketing. In clean energy, however, production is moving astonishingly quickly to China even while there is still rapid technological evolution. This week, Evergreen Solar of Massachusetts announced that it would shift panel assembly to China, with the loss of about half of the 800 jobs at a new factory opened last year with $58 million of state aid. Of even more concern, the technological center of gravity might also be shifting. First Solar’s deal last month to build a 2 GW solar farm in Inner Mongolia is reported to include the construction of a manufacturing plant in China and the transfer of expertise, including First Solar’s unique cadmium/tellurium technology. China is perhaps intent on replicating in clean energy Japan’s earlier success in consumer electronics, which was built on the transfer of Western technologies during the 1960s and 1970s.

Intense price competition is part of the reason for the rapid move offshore. Product cycles are speeding up for clean energy, as for other sectors, resulting in a rapid commoditization and falling prices. This trend is reinforced by the recession and overcapacity. But China is also putting into place massive subsidies, in the form of feed-in tariffs for renewable power combined with grants and cheap finance for construction of projects and factories. In a reversal of tradition, the path for foreign companies is being smoothed with the elimination of bureaucratic red tape.

In this context, a new report from Deutsche Bank published October 2009 and reported in the Wall Street Journal makes for interesting reading. The report assesses country-level risk from the perspective of clean energy investors. The key conclusion is that:

Investors want TLC— transparency, longevity, and certainty –  in government energy policies. Countries that offer that—Australia, Brazil, China, France, Germany, and Japan—will attract capital. Countries that don’t—including the U.S. and the U.K.—will struggle….Investors will become increasingly concerned about regulatory risk and thus countries that deploy a transparent, long-lived, comprehensive and consistent set of policies will attract global capital.

The report analyzes more than 270 climate policies in more than 100 countries, and provides an aggregate risk rating of countries based on the strength of policies. The implication is that investors are looking to commit capital in countries with a strong commitment to addressing climate change. Echoing my own sentiments (see: Carbon Markets to Serve the Planet), the report favors clear mandates over weak and volatile price signals:

While emissions targets express an intention and carbon markets might deliver a price signal in the long-term, governments must strengthen underlying mandates and incentives immediately if capital is to be deployed to cover the gap, creating more investment and jobs.

Specifically, the report suggests that, to be effective, policies must:

• Be Transparent, Long-term and exhibit Certainty through consistent, secure and predictable, payment mechanisms

• Introduce incentives that decrease over time as technologies move towards market competitiveness;

• Eliminate non-economic barriers (grid access, administrative obstacles, lack of information, social acceptance)

• Provide fair and open access to distribution channels (e.g. transmission grid);

• Be enforceable.

The Deutsche Bank report’s focus on mandates and subsidies misses other important aspects of competitiveness suggested by the cluster approach, such as labor force skills, infrastructure, and research and development activity. Not surprisingly, the US, UK and Canada do not fare well on the report’s risk rating, but have nevertheless attracted significant clean energy capital. The report attributes this to the large size of their capital and energy markets overall, and the existence of state level incentives in the US and Canada. To this list should be added the high technological sophistication of these countries in clean energy and related sectors, both in the university and corporate sectors.

It’s ironic that the Deutsche Bank report recommends stronger climate policies to attract investment capital at the same time as some are raising concerns that putting a price on carbon in the US will drive jobs overseas (see this recent WRI report). Yet building a dynamic regional clean energy cluster requires more than subsidizing power generation or putting a price on carbon. Denmark was able to build a wind industry by being a first-mover in creating large scale demand that stimulated the emergence of a local industry with strong research, design and production capabilities. But countries that only subsidize demand, now that clean energy is more mature and global, might find that the money only sucks in imports and perhaps some final assembly from firms headquartered elsewhere.

Dr. Renato J. Orsato is Senior Research Fellow at INSEAD Social Innovation Centre, France. He has been a researcher, educator, and consultant for the past 15 years.

Review by David L. Levy

From time to time I’ll be reviewing books related to business and climate change that might be useful for academics and businesspeople. There are quite a few more general books on environmental management and business sustainability (Stead and Stead’s Management for a Small Planet is a classic, now in its 3^rd edition). However, there are very few books that focus on climate change right now, though this market is likely to take off as climate change goes mainstream in business and colleges offer more courses on the subject.

Dr. Orsato’s Sustainability Strategies: When Does it Pay to be Green? is not about climate change per se, but its focus on business strategy was intriguing and close to my own interests. The frameworks offered are directly applicable to clean energy markets, and there is a chapter on eco-efficiency, with a section on carbon credits, and a chapter with an extended discussion of the auto industry.

Too many writers gush effusively about the profits to be made by being green. While preaching about “win-win” opportunities has served a useful role in creating a positive, even enthusiastic attitude toward clean energy investments among some businesspeople, investors, and policymakers, it does not always make for sharp, critical analysis. Dr. Orsato makes clear in the first chapter of his refreshingly cogent and dispassionate book that it’s not easy being green. There is always some low-lying fruit around, but once the easy picking is gone, the hard task is to craft a longer term sustainable strategy that has both economic and environmental benefits. Orsato observes “the scope for win-win scenarios is narrower than many wish them to be. Out of the vast array of actions taken by firms, only a few will be profitable, generate competitive advantage or create new market spaces.”

Managers have to take strategy seriously if they want to pursue green goals, as it can be difficult to appropriate or “monetize” public benefits, and competition can quickly erode competitive advantages. Orsato illustrates this point with a mini-case on how Tetra Pak tried to increase the recyclability of its retail drinks containers, which contain many thin layers of different materials, from metals to plastics and paper. The problem was that neither its direct customers, large food and drinks companies, nor final consumers are very concerned about recycling issues. Tetra was only able to justify its investment in expensive plasma technology based on the value of the aluminum it could extract and recycle.  

Strategy is about finding, exploiting, and defending sources of competitive advantage. Orsato gives us a brief review of the two major concepts of strategy, Porter’s positioning school and the Resource Based View (RBV). For Porter, competitive advantage (i.e. above normal profits, or economic rents) derives from marketplace positioning, in terms of pricing, branding, and product features. To endure over time, this competitive advantage would have to be protected by market structures such as barriers to entry or economies of scale. From this perspective, a number of firms in the same sector or business cluster can enjoy above normal profits. The RBV, by contrast, sees competitive advantage more as a firm-level package of unique resources and capabilities that take a long time to acquire and are difficult to copy. This perspective emphasizes internal processes and organizational competencies rather than external market structures.

Orsato draws from both schools of strategy to give a framework for thinking about sustainability strategy, a classic business-school 2×2 matrix for competing in existing markets. Orsato also offers a fifth strategy, the Blue Ocean or Sustainable Value Innovation (SVI) boldly go where no business has gone before approach. The book is structured around five chapters that go into more detail for each strategy.

Orsato is wary of the first strategy, eco-efficiency based on lowering costs in internal operations. He notes that efficient management of costs and risks is really a part of operational effectiveness, not strategy. Everyone will soon be doing it, so it becomes a license to operate rather than a longer term source of value. I would point out, however, that companies like Walmart and Toyota have developed long term strategic advantages from their systemic “lean production” approach to reducing costs (and improving logistics, quality). In metals, chemicals, cement, and other industries there is probably room for reducing energy and materials costs based on proprietary technologies and processes.

The chapter on Beyond Compliance strategies delves into how companies can spin their investments in greening internal processes into external reputational advantage. Orsato suggests that businesses can do this by joining Green Clubs, for example, signing up to voluntary industry/NGO standards such as GRI, ISO14000, CDP, or joining a more exclusive club such as Ceres’ BICEP or Pew’s BELC. Firms can reap value in terms of brand and reputation, as well as influencing standards and regulations, though Orsato suggests that the primary value is defensive, in deflecting criticism and antagonistic campaigns, and deterring regulation. For a more detailed view of Green Clubs, I’d recommend The Voluntary Environmentalists by Aseem Prakesh and Matthew Potoski. They discuss, for example, how club joiners might be the dirtiest companies looking to gain a free ride from club membership, or clean companies looking for recognition but without new commitments.

Eco-branding, the third strategy, is based on differentiation in the final product market. The chapter dwells on various types of eco-labels, such as the FSC labels on wood products or carbon labels, though Orsato acknowledges that there are significant methodological problems in developing reliable and meaningful labels, and consumers are confused or indifferent. Stephen Stokes has similarly argued in Sticker Shock that developing these labels can be extremely expensive, add little value for consumers, and not be the best source of process-level information for management to cut costs (back to strategy 1). In general, Stokes points out that it’s hard to build green brands at the product level, aside from notable exceptions such as Toyota’s Prius.

A significant gap in this chapter is that there is little discussion of differentiation strategies for products with obvious green credentials, from hybrid cars to compact fluorescent bulbs to advanced batteries. A123’s recent very successful IPO points to the capital market premium currently available for well differentiated products in the low-carbon space, though the long-term leadership of lithium batteries for storage, and of any particular lithium company, is highly questionable. Tom Konrad has written one of the best analyses of the storage sector one of the best analyses of the storage sector explaining his skepticism. My point here is that serious strategic analysis at the sector or company level requires very detailed consideration of technologies, costs, regulations, commercialization trajectories, and other factors. The strategic frameworks in Orsato’s book are a useful starting point, but are too generic for investors and industry specialists.

The chapter on environmental cost leadership discusses, amongst other examples, how Brazilian biofuels have established a strategic advantage over corn-based ethanol, though their exclusion from the US market by tariff barriers should probably have received more attention as a demonstration of the importance of non-market strategy. Similarly, Boeing and Airbus are competing to provide the lowest operating cost planes to airlines, though contracts are frequently influenced by national political factors.

The most provocative chapter is that on Blue Ocean strategies, or what Orsato terms Sustainable Value Innovation (SVI) in a rare spasm of consultantspeak. The point of SVI is to avoid competition by sailing into clear blue ocean, entirely new market spaces. For Orsato, SVI redefines the boundaries of an industry, often crossing public-private lines. It’s a systems-level strategy that “requires changes in both the nature and technology of products and in the logic by which systems of production and consumption are organized.” Sounds like a very tall order, and indeed it is.

Within the context of a case study of the auto industry, Orsato illustrates the concept by arguing that the three main current paths to low-carbon transportation, small light cars, biofuels, and hybrids, are not SVI. They represent marginal, incremental improvements to products that compete within the same parameters as existing products. Instead, Orsato examines SVI using the examples of Zipcar, Velib cycles, and Shai Agassi’s Better Place project to provide a replaceable battery infrastructure for pure electric vehicles. These companies provide mobility services and leverage government to overcome system level obstacles. For consumers who might balk at the high cost of EV cars, a battery leasing service packaged with a regional information system to assist drivers could represent a market transformation, and one with built in barriers to entry to protect the first mover. While these ventures clearly represent radical restructuring of markets, I suspect that these opportunities are very few, and that blue oceans can be infested with sharks. And where is there really any market space devoid of competition? Consumers will still compare the price and convenience of Velib versus the metro, Zipcar versus car ownership.

Overall, I found the book reasonably well written and accessible, without too much jargon, and the case studies are well chosen. It provides useful frameworks, but is far from a “how to” manual. The grounding in strategy provides a firm basis for the frameworks offered in the book, though I was looking for a deeper and more extended discussion of strategic insights in relation to clean energy. For example, auto companies struggling with the question of how much to invest in hybrids and EVs have to consider not just the marketplace but the extent to which their own “core competencies” lie in vehicle, design, and assembly, and not just a specific drivechain modality. Similarly, the RBV school of strategy suggests that oil companies might find that their core competencies extend better to biofuels than wind or solar, explaining the recent pullback by BP and Shell (see Back to Petroleum?). Nevertheless, there is no clear answer to the question of whether oil companies can, in fact, develop new competencies in clean energy over years of investment and organic growth, or whether they should wait, as Exxon seems to be doing, for technology risk to decline and then seek to acquire clean energy assets in the capital markets. In the meantime, this is one of the best books available on strategic management of sustainability.

The Uncertain Policy Environment

With negotiations currently under way for a successor to the Kyoto Protocol, progress is slow and business faces considerable uncertainty. Although the US under the new Obama administration has shown commitment to reaching an agreement at Copenhagen in December 2009, there are many unresolved issues on the table. These include the level of the emission reduction targets for the US and other industrialized countries; the introduction of emission reduction targets for emerging economies such as Brazil, China and India; the future shape of emission trading schemes and the relationship between them; and the transfer of money and technology to less-developed countries. The credit crisis and current economic recession have also affected the current setting for business and climate change in various ways, shifting the terms of the debate and highlighting tensions at the business-climate change interface.

The economic recession

The economic recession has reduced economic activity, especially industrial production, leading to lower greenhouse gas emissions and making it easier for companies and governments to reach their GHG targets. The Netherlands, for example, recently reported that it expected to be able to meet its Kyoto target in 2011. At the same time, this has reduced prices for carbon permits and other tradable emissions rights, lowering incentives for longer term investments in low-carbon technologies. Still, prices have been recovering recently within the European Trading Scheme (ETS) and trading activity for carbon permits has increased by more than 50% in the first quarter of 2009 (compared to the last one of 2008). Overall, however, the emissions market is not yet mature and the outcomes of the negotiations for the post-2012 regime will decide its future shape and viability. Current carbon prices are rather volatile and too low to provide sufficient incentives to change behavior in a more climate-friendly direction.

The economic slowdown has put downward pressure on oil prices, making the search for alternatives less attractive. One silver lining is that it has lowered investments in tar sands, which are energy-intense in extraction and processing. More problematic has been the loss of incentives to develop renewables, which has been reinforced by the credit crisis and the difficulty in raising venture capital. In the US, for example, clean tech venture capital investment fell from $1 billion in the last three months of 2008 to $154 million in the first quarter of 2009. Companies in Europe report similar problems; the Dutch company Econcern, for example, has gone bankrupt and the Danish wind company Vestas announced a lay off of 10% of its workforce.

There has also been a sharp decline in interest in biofuels. Corn-based ethanol had been growing rapidly in the US, supported by heavy subsidies, while sugar-based ethanol in Brazil had also been booming prior to the recession. The US ethanol industry has now gone from boom to bust and even the strong Brazilian producers have been severely hurt, leading to bankruptcies and a wave of consolidation.

The high oil price was one of the drivers of sales of hybrid vehicles and smaller, more fuel-efficient cars in the US, as gasoline prices peaked above $4 per gallon. Car sales overall have dropped due to the economic recession, despite a temporary boost in the US (and other countries, particularly Germany) from the ‘cash for clunkers’ program, although hybrids have suffered surprisingly little compared with the overall market. Hybrid sales are being stimulated by preferential tax measures. In the Netherlands, for example, hybrids receive favourable tax treatment, especially for leased vehicles, which influences corporate purchases. In the first eight months of 2008, sales via leasing of Toyota Prius cars in the Netherlands increased by 550% compared to the same period in 2007 (for the Honda Civic hybrid, the figure was slightly over 300%). In 2009, the Honda Civic hybrid became the country’s most leased car.

Green Bailouts

The fiscal measures adopted by governments in the face of the 2008 financial collapse were painted various shades of green. Table 1 gives an overview of the ‘green’ share in the bail-outs by ten countries and the European Union as estimated by HSBC in early August 2009.

The table shows that South Korea stands out for the high percentage of its green bail-out, followed by the EU and China, whereas Italy and Spain have the lowest share. The green label needs to be treated cautiously, however, as definitions are vague. Moreover, these are only promises of funds; in the US, some targeted recipients, such as the wind energy sector, have seen no money so far.

Innovating for climate change

In view of the importance of transport, fuels and energy use for the economy, key sectors for reducing emissions are automobiles, oil, and electric power. These are prime targets of policy measures and also provide good illustrations of the trade-offs we face in moving towards a low-carbon economy. A key strategic issue facing managers is whether their businesses should focus on exploiting existing know-how and technologies or on developing new products and markets that represent a departure from the current energy infrastructure.

In most cases, there is not just one best ‘solution’. For example, if companies want to invest in renewables they still have various options, ranging from more mature to much less well-developed technologies. Most mature are hydropower, biomass co-firing, wind, solar thermal and geothermal technologies, which in the best circumstances are approaching cost-competitiveness with conventional sources. Offshore wind and solar PV are emerging technologies that are not yet cost-competitive. And there are renewable technologies that are still in the R&D phase – e.g. specific forms of solar power, ocean energy and advanced biofuels – which completely lack market penetration and largely depend on public subsidies for further development.

The specific balance of risks and returns differs by company but also depends on the sector and its level of technological dynamism. This can be illustrated by pointing at the difference in R&D patterns between power generation and the automotive industry. R&D intensity in power generation has been notoriously low, due the fact that innovation involves massive capital investments combined with limited opportunities for product differentiation. Car companies, on the other hand, operate in a much more dynamic technological environment and therefore face greater pressure to develop alternative drive-train technologies, such as hybrids, electric and fuel cell vehicles.

In addition to technology, new market development needs to be considered. Companies can develop niche markets that allow companies more opportunity to experiment, or undertake incremental changes and transitional technologies. The auto industry illustrates both approaches. The fuel cell vehicle has long been viewed as the ultimate winner because it followed the route of niche development. Since the 1960s, fuel cells have been used for power in several market niches, such as space travel and the US army and navy. However, they have demonstrated the typical problems of niche development as well: it has been difficult to move beyond the niche into mainstream markets due to cost and scaling issues, and the resources needed to move across niche markets. Transition technologies, on the other hand, may become dominant themselves and then become barriers to further change. A case in point is the success of hybrid cars such as the Toyota Prius, which might have serious consequences for the further development of pure electric or fuel cell vehicles.

An example of a technology that allows companies to extend existing technologies and know how is carbon capture and storage (CCS), popular among oil, coal and electricity companies. CCS gives carbon-intensive companies the opportunity to show proactivity on climate change, while concurrently continuing their core business activities – this has also been a source of criticism. Transition technologies also play a role in the oil & gas industry, where gas can replace coal in power generation, and liquefied gas can substitute for gasoline in transportation.

Climate change is a problem demanding solutions that extend beyond the reach of any single company. How far are companies willing to go in collaborating with others? This is a tough question, especially when there are also competitive dimensions to the relationship. Various types of cooperation can be noted. One is by several competitors together with smaller niche players that own a specific technology, as has happened often in the car industry (e.g. Ford and Daimler with Ballard for fuel cells). A drawback of this structure is that companies share the technology with a close competitor. Cooperation with companies from other sectors avoids this problem: Dow Chemical and General Motor’s joint work on the development of fuel cells, each for a different purpose, is a good example.

In some cases more systemic, infrastructure-related collaborations are required. For example, to commercialise the fuel cell vehicle, the auto industry needs the chemical and oil industries to supply the hydrogen and distribution system necessary to attract prospective customers. This necessitates major breakthroughs which could actually threaten the fossil-fuel suppliers. As the car industry cannot supply the hydrogen itself, it faces a major chicken-and-egg problem: oil companies will not scale up their hydrogen activities until car companies come with more affordable fuel cell vehicles, while car companies will only launch such models if there is a hydrogen infrastructure. A somewhat comparable problem exists regarding plug-in hybrids or electric cars, which need electricity networks capable of meeting peak power demand. Two partnerships – between Toyota and EDF and between Daimler and RWE – were announced last year, both with the aim to develop a recharging infrastructure in selected locations. For more widespread use, there must also be a sufficient number of charging points and places to exchange batteries, requiring cooperation with local authorities and electricity grid operators. In the Netherlands, such a partnership was recently formed with the goal of ten thousand charging points in public spaces in the coming years.

These systemic issues require determined policy efforts to break the deadlock and escape the current “carbon lock-in”. These policy initiatives needs to take into account not just the technological options but also competitive, strategic, and market considerations. The key challenge for the coming year is to develop a comprehensive approach that simultaneously addresses the economic slowdown and the climate crisis.

Sources and Further Reading

Dyerson, R. & Pilkington, A. (2005). Gales of creative destruction and the opportunistic incumbent: The case of electric vehicles in California. Technology Analysis & Strategic Management, 17(4), 391-408.

Harvey, F. (2009). Healthy rebound for clean energy. Financial Times, 18 August.

Hekkert, M. & Van den Hoed, R. (2004). Competing technologies and the struggle towards a new dominant design. The emergence of the hybrid vehicle at the expense of the fuel cell vehicle? Greener Management International, 47(Autumn), 29-43.

Kolk, A. & Pinkse, J. (2008). A perspective on multinational enterprises and climate change. Learning from an ‘inconvenient truth’?. Journal of International Business Studies, 39(8), 1359-1378.

Neuhoff, K. (2005). Large-scale deployment of renewables for electricity generation. Oxford Review of Economic Policy, 21(1), 88-110.

Raven, R. (2007). Niche accumulation and hybridisation strategies in transition processes towards a sustainable energy system: an assessment of differences and pitfalls. Energy Policy, 35, 2390-2400.

Romm, J. (2006). The car and fuel of the future. Energy Policy, 34, 2609-2614.

Sandén, B.A. & Azar, C. (2005). Near-term technology policies for long-term climate targets – economy wide versus technology specific approaches. Energy Policy, 33, 1557-1576.

Unruh, G.C. (2000). Understanding carbon lock-in. Energy Policy, 28, 817-830.

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.

by David L. Levy

BP and Shell, the two giant British (and British-Dutch) oil companies, are both making a major strategic retreat from alternative energy and refocusing on their core oil and gas businesses. Ed Crooks has recently provided an insightful analysis of BP’s Back to Petroleum strategy in the Financial Times (also see also The Guardian and New York Times). This is big news indeed. A global transition to a low-carbon economy requires the large scale mobilization of financial, technological, and organizational resources that are concentrated in the hands of multinational corporations like BP and Shell. The nine largest integrated oil majors made a record $128 billion in profits in 2007 on revenues of $1.6 trillion, according to this Congressional report. BP alone will invest $20 billion in capital spending in 2009, though less than 5% of this is designated for renewables. Shell’s capital spending is budgeted at $31 billion for 2009, also largely for oil and gas. By comparison, total venture capital investments in clean tech reached only about $8 billion globally in 2008, up from $6 billion in 2007.

If we want to leverage business resources to address climate change, then it’s essential to understand the thinking and decision processes behind corporate strategy. We need to know why some companies are willing to invest billions of dollars to develop new low-carbon technologies and markets, while others invest in the status quo, protecting their core products while engaging in political strategies to block carbon regulation. About ten years ago, as BP began breaking from the climate-denial position of the industry, I became intrigued by the divergence in climate strategies between the more proactive European oil majors and their more conservative US counterparts.

Many people think that business strategy is a rational, objective affair based on calculation and modeling, yet the trans-Atlantic divide had no simple explanation based on the economics of the industry; in fact, the oil majors on both sides of the “pond” had similar global profiles in terms of their oil and gas mix and their regional presence. Together with my colleague Dr. Ans Kolk from the University of Amsterdam Business School, we interviewed senior managers from four oil companies to try to understand what was going on. The insights we uncovered on the behavioral nature of strategy are highly relevant today as BP heads Back to Petroleum, and might just help policymakers figure out how to nudge companies in the right direction (see our academic paper on this).

In July 2000, the British oil company BP launched its famous Beyond Petroleum rebranding and advertising campaign, with a commitment to invest substantial sums in solar and wind energy. This was not just an exercise in public relations; BP had been demonstrating leadership on climate change for several years before that. In a landmark speech in May 1997, BP’s CEO John Browne became the first chief executive of a major oil company to acknowledge the case for precautionary action on climate change, despite scientific uncertainty. The same year, BP left the Global Climate Coalition, the major industry association at the time opposing greenhouse emission controls, initiating a splintering of what had been a rock solid industry coalition. In 1997 BP also established a partnership with Environmental Defense to develop an internal carbon trading scheme and joined the Pew Center for Global Climate Change, which advocates for early action on the issue. In 1998 the company committed to reduce internal emissions by 10% by 2010, even while output was expected to grow 50%. BP followed through with substantial investments in low-carbon energy, creating a separate alternative energy division in 2005 with investments in wind, solar, biofuels, and carbon capture and storage (CCS) rising to a peak of $1.4 billion in 2008.

Exxon, by contrast, has been the standard-bearer of the US oil industry’s fidelity to hydrocarbons. During the late 1990s, Exxon led the industry charge against the mandatory emission controls required by the Kyoto Protocol, culminating in President Bush’s withdrawal from the treaty in March 2001. Exxon, often working through industry associations and think tanks, aggressively challenged the science of climate change and warned against the dire economic consequences of regulating carbon. At the same time, Exxon invested heavily to enhance its technological leadership in oil exploration and extraction and to secure its position as the lowest cost producer. It has also invested modestly in operational energy efficiency, fuel cells, and CCS.

In our interviews with oil industry executives, we found that though European and American oil companies faced similar global market conditions, they viewed the market through very different lenses; the futures they perceived were powerfully shaped by their experiences and national context. Business strategy involves charting a course through an uncertain future, and at the turn of the millennium, climate change presented a host of uncertainties regarding the unfolding state of climate science, the regulatory response, technological developments, public pressures, and competitor reactions. These uncertainties served to expand the “gray zone” of strategic scenarios; will fossil-fuel based businesses go the way of horse-powered transportation? Or will fears of global warming fade as quickly as earlier concerns of a new ice age?

The imagined future in which BP and Shell plotted their strategy was one in which mandatory emission controls were inevitable, carbon would carry a price-tag, and renewables would grow rapidly. Shell was sensitized to the power of public pressure following the Brent Spar incident in 1991 and its controversial involvement in the conflict in the oil-rich Niger delta of Nigeria. This concern fed directly into Shell’s elaborate planning process, which encouraged diverse perspectives; one long-term scenarios was labeled ‘People Power’. BP managers also expressed sensitivity to the growing environmental awareness of the European public, exemplified by the mad-cow scare of the late 1990s and the resolve of policymakers to take strong precautionary action against genetically modified foods in the face of unknown risks.

Exxon’s strategy was crafted for a very different future, one in which fossil fuels continued to power the global economy, mandatory emission controls were stuck in political quagmire, and the public demanded cheap fuels rather than worry about the environment. Exxon’s strategy certainly made sense from the perspective of the mostly American managers who staffed the corporate offices in Texas and New York, just as BP and Shell’s strategy made sense to the European managers based in London and The Hague. Yet these companies were operating in the same global markets.

Until I actually visited Exxon and interviewed their managers, I had assumed that the company’s campaign against the dominant IPCC interpretation of climate science was purely strategic – a means to defeat regulations that they saw hurting the company’s interests. After the interviews (and many others with other companies), I became convinced that the managers really believed the position that climate science was not yet sufficiently convincing to put the fossil fuel industry, and indeed, the American way of life, at risk. Partly this illustrates the psychological phenomenon of minimizing cognitive dissonance: people (and organizations) shape their perceptions of reality to reduce internal conflicts. But personal and organizational factors are also important at Exxon. Brian Flannery, a respected atmospheric scientist and himself a climate skeptic, led Exxon’s climate strategy team. Moreover, Exxon’s strategy process was highly centralized, leaving little room for consideration of alternative scenarios. Shell and BP, by contrast, lacked internal expertise in climate science, and so relied on outside scientists who tended to be closer to the mainstream IPCC view.

Exxon also took to heart the key lesson of business strategy taught in every MBA program: stick to your “core competencies”, those things you do better than competitors. The company had lost money when it had tried to diversify in the first energy crisis in the 1970s. One manager said “we have learnt from the experiment with diversification that businesses such as office products, with rapid product cycles and very different technologies, require competencies that Exxon lacks.” Exxon understood that its core expertise lay in geology, hydrocarbon chemistry, extraction technologies, and distribution, and it has invested to enhance its capacity in these technologies. Though Exxon eschewed biofuels for many years, in July 2009 it announced a $600 million algae biofuels project with biotech company Synthetic Genomics. Biofuels clearly represent a better strategic fit than solar or wind, and promise to extend the age of liquid hydrocarbon fuels.

BP and Shell managers were not ignorant of the principles of strategy, but saw the risks differently. They appreciated that companies cannot reinvent themselves overnight. If the they had deep pockets and several decades to adjust to a low-carbon future, then it was better to begin investing now to build the necessary expertise organically, over time. They intended to remain focused on their core oil and gas business for many years, so these modest investments in alternatives were something of a hedging strategy. The risks of doing nothing, in technological and political terms, seemed greater. In any case, strategy is more art than science; plenty of companies have successfully transformed themselves, from film to digital photography, and from transistor radios to high-definition televisions, though many have certainly failed. Perhaps the question is one of execution.

Even as we were trying to explain these divergent strategies, we sensed that there was likely to be convergence within the oil industry. The oil companies were rapidly internationalizing their senior management teams, broadening the perspectives brought to the climate strategy process. Their managers were also interacting more frequently at climate-related conferences and industry associations, leading to the emergence of shared perspectives on the climate issue. Notably, senior managers realized that climate change was not such a mortal threat after all; coal might be doomed, but liquid fuels for transportation would be hard to replace and natural gas for power would boom in the coming decades. Rapidly growing demand in developing countries would offset the impact of energy efficiency and alternative fuels. Crucially, the emerging international regime to control GHG emissions is looking weak, with carbon prices too low to have much impact on the oil industry. Prices above $30/ton CO2, equivalent to about 30 cents per gallon of gasoline, are politically implausible in the US for the foreseeable future.

Making money in renewables is turning out to be difficult, despite the rapid growth of solar and wind markets (before the 2008 crash). The multiple competing solar technologies, from thin film to crystalline to organics, raise the risk of backing the wrong horse. Solar thermal is beginning to look like a better bet now than solar PV for grid scale power, though both are still far from commercial viability without subsidies or very high carbon prices. The leading global companies, such as Q-Cells in solar and Vestas in wind, are independent, innovative, and focused. Solar PV requires expertise in silicon semiconductors, so it’s not surprising electronics firms such as Sharp and Kyocera are among the top manufacturers. Wind energy demands expertise in materials science and aerofoil design, perhaps explaining GE’s strategic thinking in entering this market.

Now, in the summer of 2009, strategic convergence in the oil industry is almost complete. BP is shutting the Alternative Energy office it had set up in County Hall, London and merging the division back into its corporate HQ. It is cutting investment in alternative energy by 30-60% this year and has closed some of its solar PV facilities, moving production to Chinese subcontractors. Most tellingly, Vivienne Cox, who had headed the alternative energy business since 2004, left BP at the end of June. Shell has divested much of its solar capacity in the last couple of years and has pulled out of a major UK offshore wind project. Just last month, the company announced that it would freeze its research and spending on wind and solar. Both companies have invested heavily in oil from Canadian tar sands, and are focusing their alternative energy efforts, like Exxon, on biofuels. Meanwhile, Exxon is no longer campaigning against climate science and recently began pushing for a carbon tax in preference to a cap-and-trade system.

The oil industry appears to be converging on a strategy of “hydrocarbon neutrality” – it no longer needs to pay the political price of fighting mandatory emission controls, but neither is it running to embrace renewables. It is still too soon to say if this is the “correct” strategy from the companies’ point of view; climate change is not going away as a strategic driver, and longer term, renewables markets look more attractive than the mature oil industry. But whether or not this is good corporate strategy, it’s not good news for the earth. The industry is a powerful player in our societal response to climate change, and not just in terms of its political influence over states. The decisions private companies take about how to spend their vast technological, financial, and human resources have a profound impact on our planetary commons. Back to Peteroleum means that, for now, these resources are prolonging the fossil fuel age rather than fueling a systemic transition to a low-carbon future.

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Afterword:

My colleagues Andy Crane and Dirk Matten note in their excellent blog post that smaller companies will pick up the clean energy torch for now, but the big oil companies might jump back in and buy the successful ones later as the issue matures.