WASHINGTON, Mar 13 (IPS) – BP, the oil company that previously brought us Beyond Petroleum and more recently strong corporate climate goals, has announced a return to focus on its traditional oil production business. With the inevitable lure of recent high oil profits, has BP rebranded itself as ‘Back to Oil’?
This kind of shift underscores the importance of stronger market incentives to reduce emissions so that companies interested in decarbonizing see their financial interests aligned with that direction. BP’s latest journey points to the need for tools that affect profits in particular, and in particular for a review of a controversial price control tool, the oil climate price cap.
BP has consistently been a progressive company on climate among its peers. Back in 2002, then CEO Lord Browne rebranded BP as it sought to “reinvent the energy business; go beyond oil.” However, various financial pressures, including the Deepwater Horizon spill, later drove the company away from its non-oil business.
But in August 2020, BP returned with a strengthened climate stance as the company announced a set of ambitious low-carbon targets. This included a 40% drop in production and a 10-fold increase in low-carbon investment over the next decade. BP also announced a breakthrough target for scope 3 emissions (specifically emissions from the consumption of its products by industry and other consumers).
Unfortunately, BP has now scaled back its climate ambitions. Significantly, from a 40% drop in production by 2030, BP now expects a reduction of just 25%. Notably, this shift came at a time of record corporate profits for BP of $28 billion, a record also seen by other oil majors such as ExxonMobil and Shell.
These record gains, driven in part by high gas prices caused by Russia’s invasion of Ukraine, also point to a major vulnerability to market climate efforts. With the lure of this kind of return from the traditional oil business, it’s hard to see or maintain financial incentives to leave.
Indeed, as BP made clear in announcing its ambitious 2022 climate targets; “bp is committed to delivering attractive returns to shareholders” and oil, on its upside, is uniquely positioned to deliver high return potential. As long as there are big profits to be made from oil, these companies will continue to be involved in their oil activities, despite their stated desire to switch to renewables.
However, this also points to what should be the focus of an effective oil climate policy, reducing its profitability. Over the years, think tanks, academics and others have promoted carbon pricing as the most effective tool to reduce emissions, but this discourse has failed to deliver 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 attention, or rather review, is the oil price cap.
This “climate oil price cap” is designed to increase the relative profitability and thus financial attractiveness of renewables by limiting the boom in oil activity (something a conventional windfall tax imposed at the corporate level will not do). In doing so, it will support and encourage BP and other oil companies to transform themselves from a traditional oil company into an “integrated energy company” (BP’s own term) that can make significant profits from renewables and other low-carbon products relative to its oil. to the activity.
Oil price controls are certainly not new and have a checkered history (eg President Nixon’s efforts in the US 50 years ago). But the climate emergency represents a new threat that deserves a revision of this tool. Importantly, a price cap could also help energy-importing developing countries, as well as vulnerable households there and elsewhere, avoid the damaging effects of higher oil prices in 2022 (another potential advantage over a windfall tax).
And now there is a precedent for this kind of concerted action by buyers, namely the EU-US price cap on Russian oil. It’s also a tool that has drawn renewed attention in other contexts, including reimagining the framework for regulating gas prices to insulate U.S. consumers from rising gasoline prices caused by Russia’s incursion into Ukraine.
Any effort must take into account the lessons of past failed efforts. For example, the cap must be set at a level sufficient to attract the desired supply, including energy-importing developing countries, even as it excludes the record profits the oil industry saw last year. It should also build on the experience of Russia’s current price cap.
While there is certainly not enough support for aggressive climate policies today, the prospect of strong action is likely to grow over time as heat waves, floods, and other extreme weather events wreak havoc due to climate change. This in turn can be expected to increase the willingness of politicians and policy makers to be more ambitious towards climate action.
In anticipation of this changing landscape, creative options beyond traditional carbon pricing mechanisms need to be explored and put before these decision makers by think tanks, academics and others.
In this regard, BP’s recent record profits and change in corporate policy point to the feasibility 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 on international energy, development and sustainability issues. He is currently a Research Director Global Infrastructure Analysis and Sustainability 2050.
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