Carbon Tax Is Coming: Are you ready for opportunity…and chaos?
The US election is over. We have three vaccine candidates going through the approval process and being distributed to frontline workers. Some countries are finding better ways to live with the COVID-19 virus while others are struggling. History has shown after major world-altering events that structural changes happen to the global economy in ways that are difficult to predict. After the 1918 Spanish Flu, there was a flurry of medical innovation that created the Public Health systems and practices we have today. After the Great Depression, the importance of the Government and fiscal policy (spending and investment) was demonstrated to be an important part of market development. Barack Obama has shown this with the TARP (Troubled Asset Relief Program) Bill which was passed in 2008. In that bill between $90-150 billion dollars, out of a total of $800 billion dollars, went into innovation and development of clean energy technology. This investment has paid off dividends ten years later where solar and wind technology is cheaper than power generation from Coal, Oil, and even Natural Gas in most global markets. This investment also saved Tesla Motors which is the largest auto manufacturer in the world by market cap - larger than all the other car companies combined. We have the world before COVID-19 and the world after COVID-19. Predictions are dangerous and all models are wrong but some of them are useful. They help us imagine and make decisions today that will chart a course for the future.
Decisions being made today - policy matters
We cannot, even in these challenging times, forget we have another slow-moving disaster on our hands happening every day that is not in the media spotlight. We must reduce global warming of the planet to 1.5 degrees Celsius by 2030 and reach carbon neutrality by 2050, or face further significant damage to the global climate; making life uninhabitable for a significant number of countries on Earth. We have one Earth and no vaccine to solve this problem. One of the lessons from the COVID-19 virus is that “Science Matters”. We should listen to the scientists. They have been warning us for decades now. I am hopeful that we are seeing a realization that policy and science are both critical to solving this global challenge.
The US election will have huge consequences for the global energy industry. I have been reflecting on the US President-Elect Joe Biden and what his transition team has been saying to the media. “Personnel is Policy”. So, to get a sense of his priorities we can look at the people he has put in critical positions of power. One of the most powerful people in his cabinet and the one (in my personal view) that can have the greatest impact is Janet Yellen, Joe Biden’s Treasury Secretary. Why?
According to Bloomberg “Yellen understands the critical links between the country’s economic health and climate change,” said Andrew Steer, president of the World Resources Institute. As Treasury chief, “Yellen would have strong authority to bring climate risks and opportunities more centrally into U.S. economic and financial systems.” (Moshin and Dlouhy 2020)
I have been reading Yellen’s writing on Climate Action and in my research, I have identified that she is part of the Climate Leadership Council made up of titans of industry, business, economics, and policy. It includes the owner of Walmart, Chairman of the Tata Group of Companies, Nobel laureate Dr. Stephen Chu and many others that have advocated vigorously for a Carbon Tax. I am also looking at the policy direction within the European Union. Even the Oil and Gas majors have written to world governments (the US and European governments), all of them in favor of a Carbon Tax or some form of Carbon pricing. This is politically acceptable to both conservative politicians (an economic and market-driven mechanism) and liberally leaning political groups (impacts the behavior of companies and institutions to reduce Greenhouse gases and creates jobs).
What is a Carbon Tax? It is a price on pollution - people who pollute should pay. That has been a central philosophy surrounding Environmental legislation. But pay what? If we price GHG (Greenhouse Gas) pollution governments can charge a price for those who continue to pollute. Firms will not want to pay this price so they will change their strategy and invest in Low Carbon Technology. You can never get Economists to agree on anything but there are two concepts that seem, to me, to hold supreme. Firstly “incentives matter”. Secondly, if you want to discourage any behavior amongst market actors put a tax on it.
So back to the post-COVID-19 world - what can we expect? What can we model from the past that will be wrong for our future (predictions) but useful to help us make decisions? We know things will not be the same. We also have been reminded that science matters and we need to listen to the scientist. Climate change issues are accelerating and Climate Action is good politics. If Janet Yellen and the Biden administration pass Carbon Tax regulations and the European Union rules for a Carbon Border Tax or a general Carbon Tax (which they have signaled is coming) it means the energy business will now be incentivized to change to access these markets (this includes financing).
Trinidad and Tobago will need to find a place in the world that is coming. The Oil and Natural gas market will always be there, but it would be significantly smaller as years go by and increasingly difficult to navigate. This is not only a challenge but an opportunity to reinvent ourselves to diversify our industrial base. Let us get to work.
BA Geography, MBA Occupational Health and Safety, MSc Process Safety Management, MBA Sustainable Energy Management
"I am a lover of Economics, Energy, Stoic Philosophy, Crix and Milo in that order."