Friday, February 23, 2007

Tiger by the tail pipe: Exxon re-thinks climate change

Herman Scheer has been a member of the German Parliament, since 1980. He is also President of EUROSOLAR - The European Association for Renewable Energy and General Chairman of the World Council for Renewable Energy (WCRE). Dr. Scheer is on a world wind tour of the United States to promote his latest book "Energy Autonomy: The Economic, Social and Technological Case for Renewable Energy".

A primary force behind Germany's emergence as a global leader in renewable energy development, Dr. Scheer is leery of enlisting the services of the corporate energy giants in restructuring our energy systems. Quoting Albert Einstein he reminds us that you can't solve serious problems with the same thinking that created them.

ExxonMobil's top executives on climate policy

14 February 2007

Ken Cohen, vice-president for public affairs and Sherri Stuewer, vice-president for safety, health and environment explain Exxon's position on climate change and lay down basic principles for a future US policy to reduce greenhouse gas emissions.
ExxonMobil has long been an outspoken critic of global warming science, questioning the scientific foundations behind human influence on climate change. But you recently appeared to soften you stance. Why is that? Has Exxon changed opinion on the issue?

Ken Cohen (KC): For some people our position on climate change does continue to be misunderstood. So let's take a step back and look at ExxonMobil. We are a high-tech product company, we are not viewed by many people in that way probably because they don't see gasoline as high-tech, but in fact we would argue that we are. What people don't see is the high tech nature of the process we go through to produce energy, get it into our refining systems and produce the fuel and other products that we make.

We have about 83,000 employees world-wide. Out of those, about 14,000 are scientists and engineers. And of that group, about 2,000 have a PHD. We are the industry leader in R&D. And for the last few years we have been spending over a billion dollars a year on R&D, that is basic R&D and bench R&D that is done out in our operating unit.

So when we come to an issue like climate change, we approach it as a scientist or engineer approaches it. We saw climate change as an issue over twenty years ago and we formed a group to follow it and to study it. The group is headed by and has been headed by an astrophysicist. He is backed up by another astrophysicist - the company employs paleo-climatologists.

We participate and have participated over the years in the IPCC process. Our scientists have been either lead author or co-author on forty different peer-reviewed papers that are part of the IPCC process. For example, the IPCC has recently issued the first of the three tranches of its fourth assessment report [AR4]. We participated in the preparation of the fourth assessment report we welcome it as an addition to the body of knowledge on climate change. And that is our approach to it.

Then the second part is dealing with risk. We deal with risk every day. For example, running our refining and petro-chemical operations or out in the exploration and development side, operating upstream in deep water - we deal with risk every day.

So when we approach a very complicated issue like climate change, we approach it both from understanding the science of the issue but also recognising that it is a complex issue. We are really talking about an issue of risk management - how do we deal with the risk posed by climate change.

We are not a denier; we understand that the climate is changing. I know a number of people like to label us that way but the fact is we're not. We are aware that the climate is changing that the earth has warmed on average about 0.6 degree Celsius over the last century. We are aware that many global ecosystems, especially in the polar areas, are showing signs of warming; that CO2 emissions have increased during the same time period and that - during the same time period - the emissions from fossil fuels and land use changes are one source of these emissions.

So that is our understanding of the issue. And we recognise that climate remains an extraordinarily complex area of study.

But the risks to society and ecosystems could prove to be significant so our view is that, despite the areas of uncertainty, we need to be developing and implementing strategies that address the risks, that keep in mind the central importance of energy to the world, that put us on a path to produce the energy the world needs, but that does it in a way that have lower emissions associated with its production.

Are you saying that you now accept that human intervention is the main source of global warming?

Sherri Stuewer (SS): There is no question that we understand the physics of the warming caused by CO2, and we welcome the discussion of what the in-depth link is between rising greenhouse gas emissions and the changes in the climate.

The development in the fourth-assessment report - the attempt to use probabilities to characterise the range of outcomes, which reflects the uncertainties that we have is a real positive step forward. We believe that you cannot make informed decisions about what to do from a policy standpoint unless you understand the risk and the probabilities that go behind it in our understandings.

And so from that standpoint, yes we are involved in this discussion of the link between rising greenhouse gas emissions and warming.

KC: Which brings us to the policy side - you know there are two debates that one can be participating in right now. One is: is climate change real? What is the cause? Call it the blame game or whatever you want. And the other discussion is: what we do about it?

We prefer to be involved in the second discussion, which is what do we do about climate change - what policies make sense to both produce the energy which the world absolutely has to have and do it in a way that starts us on a path to reduce emissions associated with the production and use of energy.

Can you actually separate these two questions? If you want to come up with solutions, you have to understand what the origin is. And if you think global warming is due to the sun's influence as some scientists believe, you will have to go for a different solution than those who believe it is caused by human intervention and the burning of fossil fuels….

KC: I would say this: Should we be on a path to do something about anthropogenic emission? The answer is yes.

SS: That does not mean that we believe everything we need to know about the contributions from anthropogenic emissions to climate change is known and what all the other contributions are.

But we do believe that the risk that rising greenhouse gas emissions are affecting the climate justifies action now. As you approach the policy debate, you cannot approach it without looking at what is cost-effective to do in light of that.

Where we are right now in the debate is looking at what are the policy options and how cost-effectively we can address the issue of reducing greenhouse gas emissions. But anything that you do that effectively puts a cost on carbon out in the economy has an impact on economic development. So we cannot approach this policy debate in an isolated manner.

KC: And I would say that science certainly has to inform the policy options that are selected. So selected policy options need to be able to be adjusted as we learn more on the science side. And they also need to be able to be adjusted as we see the economic impacts of those policies.

Some have said for instance that we need to stabilise CO2 emissions at 550 parts per million. But that is more of a political conclusion than a scientific conclusion. It may be that we'll learn that 550 ppm is not an aggressive enough target. It may be that science will tell us that the target needs to be something lower than 550 ppm.

So yes, the policies need to be adjusted. Or conversely, it could be that the anthropogenic contribution can be mitigated somehow by sinks or what have you as we learn more. So, what we are trying to convey is: we know enough now to say that we need to be on a path to start addressing anthropogenic emissions. But we also need to keep the science effort going and we need to keep in mind the economic impacts of the policies.

In a slide-show that you sent us before the interview, there was one referring to basic principles that you would like to see as part of a future climate change policy in the US. The first bullet point says "maximising the use of markets" and the second says "ensuring a uniform and predictable cost of carbon across the economy". That sounds very much like a cap-and-trade system in the way that is currently being implemented in the EU. Is it something that you favour?

KC: You basically have four approaches that are readily available to deal with anthropogenic emissions. One is product standards: tail-pipe emissions from automobiles for example, emissions from refrigerators, heating units, insulation standards for buildings, etc. So that is one area: all-around efficient use and production of energy.

Then you have the cap-and-trade approach and within that, you can have variations. You can have a downstream cap-and-trade system which focuses on large emitters of CO2 or you can have an upstream system where you focus on the providers of fuel - so oil-producers, gas-producers, coal-producers.

And then of course there is a carbon tax approach that applies across the broad range.

With that background on the four options, we are trying to compare those four different approaches to dealing with anthropogenic emissions.

We are believers in the market system as the most efficient allocator of resources. We believe for example that markets do a much better job of picking winners and losers on the technology side than governments. So we believe that when we design policies we need to harness the power of the market system as best as we can within the policy that we are designing.

The recent Stern report in the UK said climate change is the biggest market failure of all time. So you think Mr. Stern is wrong?

SS: We need to be clear about what we mean by "market". We think it is important to get a uniform and predictable cost for carbon across the economy and then let the markets pick the technologies that can deliver reductions at that cost as opposed to having governments trying to dictate particular technologies that may or may not be cost effective. So when we say "use the markets", we mean to use the market to pick the solutions that are cost-effective, not rely on the markets alone to handle this process.

KC: We are not saying, 'laissez-faire', just let the market operate. These points are all inter-related.

For example, the downstream cap-and-trade system of the type that Europe has put in place and that we are operating under (you know we have a big operation in Western Europe) - the designers would say that they are harnessing the power of the market system through the trading of greenhouse gas emissions allowances. That is one way to do that.

Then on the downstream cap-and-trade system, one could ask how efficient the system is in spreading the cost of carbon in a uniform and predictable way across the full spectrum of economic activity.

And that would be a good question to ask. Just take a look for example in the variations in the price of carbon over the lifetime of the EU trading system. Now, if you are in a business like ours, where you make long-term, very capital-intensive investments, you live with the economics of that investment, so the uniformity and predictability of the cost of carbon becomes an important criteria.

So you say that you are concerned about the European system and the current low price of carbon?

SS: The thing that makes it very difficult for us when we make investments under the European system is that the cost on a forward basis is far from predictable and the cost even on a near-term basis is volatile.

Setting a rationing scheme with caps is a very indirect way of trying to control the cost of the ration coupons that you have created in that system. And when you have that indirect link it inevitably results in volatility and uncertainty in the price.

So I have the situation where our businesses in Europe are coming and asking us what is the outlook in the long-term for the price of carbon to justify investment projects. And we really do not have a basis on which to give them an answer.

So, a system which has a clear, consistent, stable cost of carbon that is predictable over the long-term is much better at drawing in the investment necessary.

But would there not be more predictability if the US also had a cap-and-trade system, perhaps a better one than the one we have here in Europe?

SS: If you are setting a cap or a rationed amount of carbon, you are always in the process of guessing what demand will be because you're always looking at the size of the gap between demand and the rationed cap that determines the cost. And it is difficult to do that. We know in our own business that forecasting supply and demand is nearly impossible.

And so we are sympathetic with the fact that for governments to be attempting to guess what the demand is and set a rationed cap against that in order to influence the cost of carbon - that's a very indirect way of getting a stable cost out there. There are by contrast other policy options, which can be much more effective, at getting a uniform, stable costs across the economy.

Now clearly, the one that gives you the clearest number is the carbon tax. But there are other options though - if you look at the option of an upstream cap-and-trade system where there was a safety valve or a ceiling price on the carbon allowances. What that allows businesses to do with confidence is that they know at least what the upside would be on the cost of allowances over time.

So there are policy details that can make a tremendous difference to the principle of delivering a uniform and predictable cost of carbon.

So an upstream cap-and-trade system is something that you could eventually support if it was fitted with a price ceiling?

SS: The upstream system with a safety valve certainly comes closer to meeting our first principles than a downstream system. And one reason is that it applies to all fuels so it very efficiently goes across the whole economy. You don't have to fuss with how to bring in the airline industry for example because the costs are on the fuel.

And also, if you have a safety valve price it means that this price over time establishes a level of certainty. But I will tell you that the devil is always in the details on these things. Because I have looked at some of the details for the upstream proposals and that are knocking around Washington…

Yes, are there any of those that you prefer?

SS: There's a new one every day so it's hard to keep up! But I think that the devil is clearly in the details because you can take a policy which is conceptually effective and undermine that effectiveness by, for example, allocation processes that...

…We know that in Europe!

SS: Absolutely. Anything with an allocation process has a high risk of being gained in a political environment.

KC: A bill or legislation which is first introduced, we have had the situation many times where we came out opposing a bill initially and by the time it was changed we ended up supporting it. But more importantly, we would actually be in favour of a bill initially and by the time it got the vote it did not look anything like what we had originally supported and we ended up campaigning to defeat it.

Can you briefly describe how the upstream cap-and-trade system works?

SS: Let me contrast it to a downstream system. A downstream system cap-and-trade system, the limit on carbon is at the point of emission. So that the entities that are required to track their carbon and submit emissions allowances year-in are the people who actually are emitting - so it is the power plants, the large furnaces and that sort of thing.

An upstream system puts a limit on the carbon at the point that the fuel enters commerce. So it would be at the coal mine, at the output of natural gas processing plant or at a refinery where fuels are entering commercial trade.

And it is essentially a way of reducing dramatically the number of people that have to participate in the regulatory process because there are a whole lot fewer people who are making and selling fuels than are consuming them. So from an efficiency standpoint it is a big step forward. The second thing is that it helps meeting the principles that we have laid out here - it is a very easy way to get a price signal on carbon across the whole economy in a uniform way, as opposed to trying to say 'what am I going to do with the power industry? What am I going to do to the chemical industry?'.

But that would be targeting your kind of business more than anybody else's is that right?

KC: Yes it would.

So you are basically saying: "hit us!"

KC: Well, it depends on how you put it. Based on our principles, if we want to be as consistent across the board in sending a signal to the broadest sections of the economy that we are establishing a uniform cost of carbon then yes, that would be a more predictable way of doing it.

SS: If you ask me whether I am excited about ourselves being right in the middle of a process that puts a price on carbon, I might say that it might not be my first preference.

But we recognise that it is a more efficient way to get the cost out into the economy. And I'm going to put a big 'but' at the end of that sentence: If there is volatility in that cost, putting us in the middle is very difficult because our customers do not like volatility in the price of fuel, it makes it difficult for them to plan their monthly budgets if they don't know how much they are going to pay at the pump, and that is particularly ture in the United States where people tend to drive longer distances than in Europe and where there is less public transportation.

So volatility in carbon price is uncomfortable. That is why we talk about uniform and predictable, stable carbon costs. And you can get that with the safety valve, with a carbon tax that has a clear number that is stable over time. So putting us in the middle is something that we accept as a potential responsibility to make the system efficient in the economy. But putting us in the middle of a volatile system is a nightmare for us.

KC: Politicians now this very well, one of the elements on our first principles is not political attractiveness. You don't hear much discussion for example about a carbon tax. Yet most economists who look at this issue say that the most effective way to address carbon emissions would be with a carbon tax. But a carbon tax would have I think low political attractiveness because it is apparent to everyone who put the cost on and it is spread throughout the economy.

So you are not against the idea of a carbon tax?

KC: No, not at all. In fact, from an efficiency standpoint, from spreading the cost of carbon across the economy in an efficient and uniform and predictable way, as a way to maximise the use of markets, as someone who studied economics, yes I think that a carbon tax ought to be looked at with equal force as the other options.

Now, as we said before, the devil is in the details and there are a number of questions. Whether it is going to be a regressive tax? What would the rate of the tax be and making sure you don't exclude people from it; what is the revenue going to be used for; are we going to take out another regressive tax? Or are we going to take that money and use it for some other purpose? So there are major issues that would need to be address, but from an economist's standpoint and in fact, this is the favoured option.

Going back to Washington politics, how do you see developments in the next few years? Do you think that the US will have a cap-and-trade system or will there be something else?

KC: The first answer is easy- there is going to be a lot of legislative activity. Speaker of the House, Nancy Pelosi, has said that a climate change bill will be passed by July 4th of this year - she has gone on record saying that.

Now, what will the bill be? In our system, the House of Representatives passes a bill, the Senate then examines it and then, if there are differences, the two bodies need to get together in what we call a conference committee and develop what will actually be the bill that will be passed to the President for his or her signature.

And are there any senators with whom you've discussed your upstream cap-and trade-idea?

KC: Actually, we have been meeting people both in the House and the Senate, democrats and republicans, and had the same kind of conversation that we are having now.

SS: The thing that encourages me about the debate right now in Washington is that people are opening their minds to a broader array of policy options. We talked about the upstream system, Senator Liberman has a draft proposal out now which is in fact an upstream cap-and-trade system.

Again, there is devil in the detail there, but I think it is indicative of the fact that there is a broader discussion of options right now. And while there is no-one talking about a carbon tax, it seems kike every day there are editorials in the Washington papers saying that a carbon tax is the most effective and clear way to put a signal out into the economy.

KC: You know, we have to have some sort of humour as well. Given the view that many people have of ExxonMobil and our position on climate change, if we were to come out in favour of any one of these approaches and say that ExxonMobil favours option 'x', some people would immediately say that there's something wrong with that approach.

What we are doing is trying to be part of a broad discussion, that is a multi-industry, multi-sector discussion of policy options.

SS: We have been directly talking to legislators and their staff as an education process to make sure that they don't rush to select a policy but to encourage them to start an internal debate on this broader set of policies.

And one of the important things that is beginning to be discussed in Washington is that anything you do that effectively puts a cost on carbon increases the cost of energy to the average voter.

That average voter sees that cost increase in electric bills, he sees it at the pump, and it trickles through into all sorts of manufactured goods. And so there is a dawning recognition that policies that address the risks of climate change are regressive in that they fall most heavily on the poor and the middle class. And one of the struggles that I think is beginning to be embraced in Washington now is how do you deal with that? How do you deal with the regressive cost, or tax or cap that creates a regressive cost?

But you would say that a regressive cost is unavoidable, is that right?

KC: Yes. And obviously, we are more favourably disposed towards being direct and transparent in imposing that cost as opposed to being indirect and not transparent.

Moving on to future business, Exxon is very much focused today on oil extraction and refining. Are you currently planning to diversify your energy portfolio? We have seen French oil major Total recently saying they are considering getting into nuclear energy for example. Is Exxon also considering a similar diversification?

SS: You may not know this, but ExxonMobil had a solar business and we also had a nuclear business. And in fact we still control a strong patent portfolio in the nuclear area. So you never say never on getting back into those technologies.

Where we think that we can add value now in non-traditional fuels or alternative fuels, is not in implementing today's technologies, there is plenty of venture capital money out there chasing those opportunities right now. Where we think that we can add value is in research on new technologies that get over some of the hurdles that make the existing portfolio on renewables or alternative technologies either more costly or unattractive for some reason.

Let me give you an example. We have a programme at Stanford University. We have been very serious in that programme about trying to be way up the technology pipeline, looking at the high-risk, high-reward breakthrough technologies that could really make a difference in the cost of either alternative energies or in the cost of using fossil fuel energy much more efficiently and with lower greenhouse gas emissions.

And the reason we think that the focus should be way up the pipeline is that private industry can do the commercialisation of technologies that are ready. But for the size of this problem [global warming], we really need creative solutions and we are working that through Stanford.

We recognise that this is a small effort in the context of the whole problem. Governments can also help by doing the research far-up the pipeline to nurture those breakthrough ideas that can lead to viable technologies for the future.

But these breakthrough technologies will probably take decades before they become commercially viable…

SS: We are not saying that there isn't anything that you can do right now. There is tremendous potential right now for better deployment of the existing technology in the world.

If you look at the range of efficiency gains that can be made on various appliances and in buildings across the world, just rising to the best standards has tremendous potential to deliver improvements. Energy efficiency has a lot to offer in the near term but what we are trying to say is that efficiency and today's technology will not solve this problem for the long-term. We need more, we need new technologies.

KC: More specifically, when you talk about biofuels in the US right now, you are really talking about corn-based ethanol. We are the largest blender of ethanol in the United States, we account for about 12% of all ethanol blending. Our basic gasoline is what we call E3 to E10, that is 3% ethanol up to about 10% ethanol.

We could take about 3 times more of the corn ethanol production and blend that into our supply without any government programme. We would have the capacity to do so. But the issue then shifts. There is a mandate in the US right now to get to 7.5 billion gallons of ethanol in US gasoline supply by the year 2012. To do that will require 21% of the corn crop in the US. To get to the numbers that have recently been discussed - the 35 billion gallons -, you can't do it - and there is no technology that can get you there. The only way to get there would through technological and commercially feasible breakthroughs in cellulosic technology.

Are you currently investing in those so-called second generation biofuels? Can you tell us how much money you are putting into those technologies?

SS: The Stanford programme is looking at new yeast strains that will be effective on a broader range of sugars. Because when you are trying to turn cellulose into ethanol, you end up in the middle of that process with a bunch of different kinds of sugar and the existing ethanol conversion processes aren't effective on all those sugars.

Another project that is going on in Stanford is looking at a way to genetically modify crops so that they produce more cellulose so essentially trying to increase the yield per acre. Because ultimately it is the number of acres available and even the water available for cultivation that will limit the contribution of biofuels.

But I want to be clear: in our outlook for the next decades, we see biofuels, we see wind, we see solar growing very rapidly. But even with that rapid growth, they represent maybe 2% of the global energy supply by 2030. And it's not that they don't play an important role. It is that in the near term, we don't see them as a solution for reducing greenhouse gas emissions because the energy portfolio still has predominantly fossil fuels in it.

As a result, we're saying that, in addition to this portfolio, let's look at alternatives, let's look at things like C02 sequestration as a way to keep coal in the mix particularly as coal is going to be a large proportion of the energy growth in India and China.

Let's figure out a way to keep coal in the mix and to use it responsibly within a long-term framework for greenhouse gas emissions. That's part of the reason that we've joined the "C02 remove" project that is jointly sponsored by the EU. It is looking at monitoring and verification of C02 that's been injected. And one of the projects that "C02 remove" is going to be studying is the Sleipner project in the North Sea of which we are a part owner.

To translate this into hard cash, how much money do you expect to make from these new technologies?

KC: This is one of the biggest communication challenges that we face and that is conveying the enormous scale, scope and size of the energy business. The money one makes from biofuels right now are subsidised to be in that business. These fuels are going to be growing at very rapid rates but they are growing because they're receiving substantial subsidies.

Something hat has happened with nuclear too, by the way…

KC: Yes, they have. These fuels are being marketed today and there's plenty of cash available for investment in these fuels today but the contribution to the bottom line of a business of our size, scale and scope - you cannot find the contribution. That's why we are focusing on the R&D to make viable businesses that will stand on their own two feet. And we could scale up and be major players. ExxonMobil has the financial wherewithal to get into a business if we see it as viable. We have the technology platform if we see it as a long term winner.

But I think it's strange for some to want ExxonMobil to get into businesses that would require a government subsidy in order for it to appear profitable on the bottom line. I think our better role is to be participating in the R&D side looking for the breakthroughs that would make the technology platform robust enough so that these technologies can be scaled up across not just the developed world but also in the developing world, in India and China and being cost effective in doing so. So I have a hard time measuring one's commitment by looking at what is ExxonMobil's investment for example in a solar business or a nuclear business.

Last question: do you think that we can solve the twin challenge of climate change and energy security just by technology or do we also need changes in consumer behaviour?

SS: Putting a cost of carbon into the economy provides the incentive to change consumer behaviour. And I think that if you look at any of the academic studies that have looked at what it takes to reduce emissions over a century - all of those studies see a combination of energy efficiency, which means largely people changing their decisions about what car they buy or what kind of windows they put in their house - and it also means new technology. I don't think it's an either or I think it's a both.

Are you saying that you need gasoline prices in the US around the same level as in Europe?

KC: Well I can tell you as head of government relations that we learned that there is a price of gasoline that is referred to as being at "an unconstitutional level". When gasoline prices in the US got around 2.46 dollars a gallon here - boy oh boy! Let's just say we couldn't have won an election for much of anything. But as prices have receded back down to the range of 2 dollars a gallon, then all of a sudden, the human outcry that was associated with the price of gasoline calmed.

That's just a long way of saying that we have to do a lot of public education to do in this country around the price of gasoline. We've just gone through an election process where both parties made the price of gasoline an issue and it wasn't along the lines of raising the price of gasoline, the election issue was, we need to bring down the price of gasoline - that's just a fact.

No politician would win on a ticket arguing in favour of higher oil prices of course, not even in Europe…

KC: The other point to remember is that there are close to two billion people in the world who are striving to have what all of us take for granted. And we need them to have what we take for granted which is reliable, affordable energy and a lifestyle that resembles what you and I enjoy. Now how do we help them do that? What kind of technology will the developing world use to develop - we haven't discussed that but it is a really critical issue in the way we approach climate change.

Thank you very much for giving us this interview

KC: It's been an interesting discussion, thank you.


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