Why would some of the world’s largest oil companies support a carbon tax? The very question sounds odd, almost like a riddle, akin to “Why does the pope support Martin Luther?” or “Why does the Communist Party support capitalism?”
Yet as often happens, the seemingly paradoxical has become reality. Recently, oil giants ExxonMobil, BP, Royal Dutch Shell and Total S.A. announced their support for a carbon tax plan put forward by the Climate Leadership Council. The CLC is one of a growing number of right-of-center groups that advocates for some form of carbon tax.
To make sense of all this, we have to remember that politics is about trade-offs. As Thomas Sowell wisely noted, the important question to ask when evaluating whether a policy proposal is good is “compared to what?” Nobody likes paying taxes, but compared to the likely alternatives, a properly structured carbon tax can have features that even an oil company could love.
To begin with, a carbon tax is better than regulation. For the past decade, regulatory restrictions on greenhouse gas emissions by the U.S. Environmental Protection Agency have loomed ominously over the oil and gas industry. And while the Trump administration has put some of those proposed restrictions on hold and is likely to roll back others, many companies still view some form of restriction on greenhouse-gas emissions ultimately to be inevitable. In fact, some energy companies already include an internal carbon price in planning and investment decisions.
If you want to lower greenhouse-gas emissions, a carbon tax is a more efficient and effective way to do it than top-down regulation. Carbon pricing allows companies and individuals to choose for themselves how best to reduce emissions, rather than having bureaucrats guess how best to do it and then order them to comply.
Carbon taxes are also better than litigation. A number of environmentalist groups and liberal attorneys general have threatened lawsuits against oil companies based on the harm caused by greenhouse emissions. Whatever the merits of these suits, their mere existence could be a major headache for the companies involved. If preemption of EPA regulation and litigation are included as part of a carbon tax deal, oil majors might find that an attractive trade.
Finally, a carbon tax is a better way to pay for broader tax reform than the chief alternative, a border-adjustment tax (BAT), which would effectively would impose a tariff on imports by making it impossible for companies to deduct their costs. This would make trade more costly, a big negative for companies that deal in a worldwide market like energy. A BAT also functions sort of like a value-added tax (VAT), which traditionally has aroused the hostility of conservatives.
Current proposals for corporate tax reform have included a BAT as a way to offset the lost revenue from lowered tax rates. Business groups and many conservatives understandably like the idea of lower tax rates, but find the BAT idea less appealing. In fact, a broad coalition has been campaigning vigorously against the idea, and some have even suggested that a carbon tax would be preferable to a BAT as part of a tax reform deal.
Once these factors are considered, the fact that oil companies support a carbon tax is much less counterintuitive. The good news is that the reasons an oil company might prefer a carbon tax to the available alternatives are all also reasons why it would be good for America as a whole. A properly structured carbon tax could reduce emissions at the lowest cost, provide regulatory certainty, and enable tax reform that would grow the economy while protecting the environment.
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