Oil and power industries’ responses to EU emissions trading: laggards or low-carbon leaders?

ABSTRACT

How have petroleum and power companies and their European industry associations responded to the EU emissions trading system (ETS)? Responses can be political, directed externally towards the initiation and reforms of the EU ETS itself, or internally and market-based, directed at low-carbon solutions. Proactive response strategies shape companies’ leadership potential. Variation in responses is explained by two models that differ in assumptions about corporate behaviour as well as the wider multilevel regulatory context in which companies operate. Responses are found to have converged within the two industries, with reactive companies following the proactive ones. Secondly, responses between the two industries increasingly diverge, with the power industry becoming much more proactive than the petroleum industry. The main explanation is found in the differing relevance of the two models and the wider regulatory context, particularly differing exposure to international competition and weak international climate agreements.

KEYWORDS:

• Climate policy
• EU ETS
• oil industry
• power industry
• corporate strategies
• leadership

Acknowledgments

We are grateful for helpful comments and suggestions from the anonymous reviewers and from Duncan Liefferink and other participants at a workshop on ‘Pioneers and Leaders in Polycentric Climate Governance’ at the University of Hull in September 2016, organised in the framework of the INOGOV Cost Action Network. This work was supported by the Research Council of Norway (Centre for International Climate and Energy Policy, CICEP) and Nordic Innovation (New Nordic Ways to Green Growth, NOWAGG). The usual disclaimer applies.

Interviews

Chris Beddoes, European Petroleum Industry Association, Europia (15 September 2011, personal).

David Hone, Shell Climate Change Advisor (29 June 2011, phone).

Hans van der Loo, Head European Union Liaison, Shell International (13 April 2011, personal).

Ingvild Skare, Environmental Advisor, ExxonMobil Exploration and Production Norway AS (2 March 2011, phone).

Norbert Herlakian, ExxonMobil, R&S Climate Change Advisor, EMEA Biofuels Venture Mgr. Brussels (12 April 2011, personal).

Jesse Scott, Head of Unit Environment & Sustainable Development Policy, Eurelectric (26 April 2012, personal).

John Scowcroft, Head of Unit Environment and Sustainable Development, Eurelectric (17 November 2010, personal).

Susanne Nies, Head of Unit Energy Policy & Generation, Eurelectric (23 April 2012, personal)

Trym Edvardson, Environmental Discipline Specialist, Shell Upstream International Europe (22 February 2011, phone).

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. We have used interviews as background information.

2. The EU ETS is a mandatory system that will entail costs for all installations/companies included compared to a situation without the EU ETS. We therefore rule out ‘indifference’ and assume that all actors will respond in one way or another.

3. A more drastic response would be relocating production to other countries with less stringent climate policies.

4. For the EU ETS, the cap on emissions and price on CO₂ will charge a company for previous free production of by-products and add administrative costs, diverting capital away from other investments.

5. Space does not permit a systematic analysis of lobby activities over time.

6. Non-compliance is not considered a relevant choice, as penalties were set significantly higher than the market price for allowances.

7. The EU introduced a special benchmark regime: free allowances for the most energy-efficient installations.

8. The EU adopted the Market Stability Reserve in 2015, aimed at creating a better balance between supply and demand of allowances and improving resilience to economic fluctuations/shocks. The revised ETS Directive also introduced a gradual ‘invalidation’ of surplus allowances from 2024, opportunities for unilateral cancellation of allowances and a more stringent cap of emissions (2.2% annual linear reduction factor as against the current 1.74%).

9. The company argues that Paris is good for gas and business. In 2010, Exxon merged with the US-based XTO Energy, becoming one of the largest gas producers in the world.