BP’s recent journey points to the need for instruments that specifically affect profits, and in particular a reconsideration of the controversial price control tool: a climate-driven price cap on oil. Credit: Bigstock
  • Opinion by Philippe Benoit (Washington DC)
  • Interpress service

This kind of change highlights the importance of stronger market incentives to reduce emissions so that companies interested in carbon dioxide emissions see their financial interests in line with that course. BP’s recent journey points to the need for instruments that specifically affect profits, and in particular a reconsideration of the controversial price control tool: a climate-driven price cap on oil.

BP has consistently been a forward-leaning company among its colleagues in the climate area. Already in 2002, the then CEO Lord Browne renamed BP as it sought to “reinvent the energy industry: to move beyond petroleum.” But various economic pressures, incl Deepwater Horizon spill, thereafter moved the company away from its non-petroleum operations.

But in August 2020, BP was back with a strengthened pivot to the climate The company announced a series of ambitious low-carbon targets.” This included a 40% reduction in production and a tenfold increase in low-carbon investment over the next decade. BP also announced a pioneering target for Scope 3 emissions (namely emissions from industry and other consumers’ consumption of its products).

Unfortunately, BP has now reduced its climate ambition. In particular, rather than a 40% reduction in production by 2030, BP now expects only a 25% reduction. Significantly, this change has been made at one point of $28 billion in record corporate profits for BPrecord also seen by other oil companies, such as ExxonMobil and Shell.

These record gains – driven in part by high gas prices as a result of Russia’s invasion of Ukraine – also point to a major vulnerability to any market-driven climate action. With the lure of this kind of return from the traditional petroleum business, it is difficult to see or maintain financial motivation to move away.

Indeed, as BP made clear when they announced their ambitious 2022 climate targets: “bp is committed to delivering attractive returns to shareholders” — and petroleum, with its upside, is uniquely positioned to deliver the potential for high returns. As long as there are big profits to be made in oil, these companies will continue to be drawn to their petroleum operations, despite any stated desire to transition to renewable energy sources.

But this also points to what must be the focus of an effective oil climate policy: reducing its profitability. Over the years, think tanks, academics and others have presented carbon pricing as the most effective instrument to reduce emissions, but this discourse has failed to produce significant results in practice, especially when it comes to oil companies.

As emissions continue to rise and the carbon budget shrinks, it’s time to explore other solutions. One tool that deserves consideration – more precisely, reconsideration – is an oil price ceiling.

This “climate oil price cap” would be designed to increase the relative profitability and thus economic attractiveness of renewables by limiting the upside of oil activities specifically (something like ordinary profit tax that is determined at company level would not succeed). It would thereby support and encourage BP and other oil companies to transform themselves from a traditional petroleum company into an “integrated energy company” (BP’s own term of office), one that can generate significant profits from renewables and other low-carbon products relative to its petroleum business.

Oil price controls are of course not new and have a checkered history (e.g. President Nixon’s efforts in the United States 50 years ago). But the climate crisis poses a new threat that deserves to reconsider this instrument. Importantly, a price cap can also help energy importing developing countriesas well as vulnerable households there and elsewhereavoid the harmful effects of the high oil prices experienced in 2022 (another potential advantage over a unexpected profit tax ).

And there is now a precedent for this kind of concerted buying action, viz price ceiling on Russian oil agreed by the EU and the US. It is also a tool that has attracted renewed attention in other contexts, e.g reconsider the framework for gas prices to insulate American consumers from rising gasoline prices fueled by Russia’s invasion of Ukraine.

Any effort must take into account the lessons learned from the failed efforts of the past. For example, the cap should be set at a level sufficient to attract the desired supply – including to energy-importing developing countries – even if it precludes the kind of record profits the oil industry saw last year. It should also build on the experience with the current Russian price ceiling.

While there is admittedly insufficient support for aggressive climate policy today, the prospects for strong action are likely to increase over time. heat waves, floods and other extreme weather events wreak havoc exacerbated by climate change. This, in turn, can be expected to increase the willingness of politicians and decision-makers to be more ambitious down the road when it comes to climate action.

In anticipation of this changing landscape, creative alternatives beyond traditional carbon pricing mechanisms should be explored and presented to these policy makers by think tanks, academics and others.

In this regard, the combination of BP’s recent record profits and change in corporate policy points to the appropriateness of considering an oil price cap as a possible tool to combat climate change by improving the relative profitability of low-carbon investments.

Philippe Benoit has over 20 years of experience working with international energy, development and sustainability issues. He is currently head of research at Global Infrastructure Analytics and Sustainability 2050.

© Inter Press Service (2023) — All rights reservedOriginal source: Inter Press Service