Total Energy Consumed Part II

In my last post, I talked about some of the thought-provoking talks I saw at the Total Energy USA Conference in Houston. This time, I’d like to talk about the presentation I gave.

In a nutshell, I believe that even if a company is in the fossil fuels industry, it makes sense to support a tax on carbon. I made my case along several dimensions.

First, there is Mark Trexler’s concept of the “Social Tipping Point.” As global warming continues, we can expect an increase in the intensity and frequency of natural disasters (if anyone wants to debate the science behind anthropogenic global warming with me, I’ll do that in a future blog post). Eventually, public opinion will reach a tipping point; people will demand that something be done. The longer we wait – i.e., the longer we continue to do nothing about the underlying causes – the bigger the disasters will become. And the bigger the disaster that finally triggers the tipping point, the more draconian the public policy reactions and regulations are likely to be. Rather than wait for that to happen, why not start moving now toward a reasonable, gradually implemented solution that gives everyone – including energy companies – time to adapt?

Second, a number of new and not-so-new technologies become attractive with a carbon tax. Wind, solar, geothermal, and tidal power generation; carbon capture and sequestration; clean coal; even shale gas (natural gas is advantaged in the short- and medium-term by a tax on carbon). By capturing some of the costs associated with high-carbon fuels which have never been incorporated into the price of those fuels (“externalities” to economists), cleaner technologies can compete.

This approach is far better than subsidizing new technologies. Subsidies keep prices artificially low, thereby exacerbating the problem of energy waste. They also put government into the position of choosing winners and losers, which is never a good thing. Eliminating economic externalities, however, is a perfectly legitimate role for government to play.

It is entirely possible to implement a carbon tax in a revenue-neutral manner. Bob Inglis, a former Republican congressman from South Carolina and now the head of the Energy and Enterprise Institute, recommends offsetting a carbon tax with decreases in income tax. His reasoning is simple: we want less CO2 in the air and more income in our pockets; why not tax the former, and remove taxes from the latter? Patty Murray, a Democratic senator from Washington, has suggested giving the money raised through a carbon tax back to the people in the form of rebates. If they want to continue their current level of energy use, that’s their choice – but Sen. Murray suspects that most people would change their energy consumption habits pretty quickly. Even the conservative newspaper columnist Charles Krauthammer proposed a plan similar to Mr. Inglis’s a number of years back, although he hasn’t mentioned it much recently.

The title of the panel discussion on which I was participating was called, “Financial Planning for Energy Companies in Uncertain Times.” A carbon tax would definitely reduce uncertainty and allow for more robust planning by energy companies – including fossil fuel companies.

Ultimately, this is a risk management issue. We don’t insure our homes because we’re sure they’re going to burn down; we do it because we’re not sure they won’t. We don’t buy auto insurance because we’re sure we’re going to have an accident (unless we have a teenage driver in the house – then we’re sure); we do it because we’re not sure we won’t. Likewise, we shouldn’t postpone reducing the CO2 we’re putting into the atmosphere until we’re sure it’s going to result in widespread ecological and economic disaster; we should do it now because we have good evidence to indicate that it’s a real possibility, and we cannot be sure that it won’t happen. This was the logic President Reagan used when he supported the Montreal Protocol to ban ozone-destroying chlorofluorocarbons. That logic is every bit as valid today.

There will undoubtedly be those who feel that the best strategy for fossil fuel companies will be to fend off any movement toward change (including a carbon tax) for as long as possible. I would respectfully suggest that any company pursuing such an approach is headed for a “Kodak Moment” – and I’m not talking about a heartwarming picture of the family in front of the fireplace at Christmas. Kodak was an iconic company, THE company in the city of Rochester when I did my undergraduate work there so many years ago. When new digital photography technology came along, Kodak management took one look at the enormous investment (both capital and personnel) they had in the existing film technology, and talked themselves into believing that digital would never be more than a niche player in the world of photography. We all know how that ended.

As Larry Burns pointed out at the conference as he put forward the idea that energy and transportation are both ripe for disruption: the incumbents in a disrupted industry are rarely the winners.

Two blog posts ago, I talked about “referent power,” as defined by French and Raven back in 1959. Referent power has by far the strongest base of any type of power. It emerges when people are willing to do as you want and/or follow your lead, not because they’re afraid of you or because you are in a position to reward them, but out of respect for who you are and what you represent to them.

I believe that there is enormous referent power to be realized by any energy company that truly, honestly takes the lead on this matter – a company that leads the rest of us through the complexity, uncertainty, and disruptions of today to the sustainable energy of tomorrow.