Working Paper Series no. 923: The Impossible Love of Fossil Fuel Companies for Carbon Taxes

Economists agree that carbon taxes are the most effective solution for climate change mitigation. But where do fossil fuel companies stand on carbon taxes? I analyse how the 100 largest oil and gas companies communicate on carbon taxes. Surprisingly, I find that 54% of companies that have a policy view on carbon taxes support them (78% for the 50 largest). This is puzzling as an effective carbon tax should reduce revenues and reserve value of fossil fuel companies. I present a conceptual trilemma model showing that fossil fuel companies’ existence is threatened by a carbon tax. To understand this paradox, I offer non-mutually exclusive reasons why fossil fuel companies might support carbon taxes. Oil and gas companies could use a carbon tax to get rid of the competition from coal, create a level playing field and remove regulatory uncertainty. Or they think that these taxes will not affect them because demand for oil and gas is inelastic or that international coordination will fail and lead to leakages. Finally, it could be that this is simply a communication exercise and that a carbon tax helps them shift the responsibility for climate change from fossil fuel companies to customers, voters and elected officials.

Economists rarely agree on issues, but on carbon taxes, they do. They agree so much that 3354 economists, including many Nobel Prize winners, recently signed an open letter supporting the introduction of a carbon tax. But what is more puzzling, is that fossil fuel companies seem to agree as well. Building up a new dataset, I find agreement rates as high as 78% when looking at the top 50 largest oil and gas companies who have expressed their opinion on the question. It is worth noting that only 60% of the largest companies and 56% of the smaller ones had a position on carbon taxes. Russian companies for example do not communicate on the topic while two third of Canadian companies do (Canada does have a carbon tax system in place). I ask why fossil fuel companies are so active promoting the introduction of carbon taxes? I offer a survey of the largest fossil fuel companies and analyse their take on carbon taxes in their different communications.
The paper first looks at a conceptual trilemma model of fossil fuel companies and carbon taxes (see figure below). The model informs that there are only three possible options. An effective carbon tax that reduces emissions but also reduces sales by fossil fuel companies. An ineffective carbon tax which is compatible with continued sales for fossil fuel companies. Or voluntary transition by fossil fuel companies into broader energy companies, which would reduce emissions and does not require a carbon tax. The model, as any conceptual model, has its limitations, but it informs the discussion.
Analysing the corporate communications of the 100 largest oil and gas companies, I then present some quantitative evidence of the current support from fossil fuel companies for carbon taxes. Finally, in the discussion part, I offer several non-mutually exclusive reasons why fossil fuel companies support carbon taxes, despite the trilemma framework showing it goes against their interests.
A carbon tax, economists argue, could increase the price of pollution (an externality) and create a market incentive to emit less CO2. But carbon taxes have been the best available solution for four decades now and have not been put in place in a way that mitigates climate change globally. There have been some regional taxes introduced in Canada, Denmark, Norway, Europe with the ETS system and South Africa, among many examples. The World Bank lists carbon taxes currently in place. To date, there are 73 carbon taxes implemented in various jurisdictions representing 23% of global emissions. Yet despite these taxes, global emissions have still been increasing according to the IPCC. That is not to say that the taxes have not reduced emissions, but in their current form and level, they are not enough to tackle the increase in global emissions, responsible for anthropogenic climate change.
Part of the issue lies in international coordination and the risk of carbon leakages. Economists are working on solutions to overcome these coordination problems. One recently discussed proposal is the introduction of carbon border taxes. These taxes would target imports from countries with no carbon taxes, therefore allowing for effective carbon taxes to be implemented, without excessively jeopardising EU trade competitiveness, even before international coordination on the issue is achieved. One promising example of such a border tax is the proposed European Carbon Border Adjustment Mechanism (CBAM) from the European Commission. The IMF is also currently working on a carbon floor framework that would allow countries of different income levels to have different carbon taxes.
But this paper does not delve into the political economy of carbon tax implementation. Instead it simply asks why fossil fuel companies (or oil and gas companies to be precise) have recently taken public positions in favour of carbon taxes. Why would bakers lobby for a tax on wheat? Here again the point is not to offer a definitive answer, but rather to present the fact of the relatively broad support and venture on some potential explanations.

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Working Paper Series no. 923: The Impossible Love of Fossil Fuel Companies for Carbon Taxes
  • Published on 09/12/2023
  • 47 pages
  • EN
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Updated on: 09/12/2023 10:38