Tariffs in the Climate Bill

A number of people have written to ask why I haven’t commented on the climate bill. There are two reasons. First, the House and Senate versions are very different, so the final form may not resemble the version the House just passed. Second, I haven’t had the time to read through much of it.

There was one issue that I considered quite important, but I didn’t know whether it was in the bill. Jim Mulva was recently quoted as saying that the climate bill would impose higher taxes on domestic fuel versus imports. While we can agree that Mulva’s comments are self-serving, I also believe that most people would oppose a bill that shifts more of our fuel supply to imports.

While I know the goal here is to favor renewable energy, what happens if it can’t fill a void left if the new bill discourages domestic production? The void will be filled by imports. Prices will also rise, so some of the void will be filled by conservation. But in order to keep the playing field level, I really liked the idea proposed by Jeff Rubin: If you place a carbon tax on domestic production, you can place a carbon tariff on imports. This idea was discussed in my review of his book Why Your World Is About to Get a Whole Lot Smaller: Oil and the End of Globalization.

I hadn’t heard any discussion of this until today. From Steven Mufson of the Washington Post:

Obama Praises Climate Bill’s Progress but Opposes Its Tariffs

President Obama yesterday said that the House took an “extraordinary first step” by passing a climate bill on Friday, adding that he hoped it will “prod” action by the Senate and predicting that the legislation could make renewable energy “a driver of economic growth.”

But he said he hopes that Congress will strip out a clause that would impose a tariff in 2020 on imports from countries without systems for pricing or limiting carbon dioxide emissions.

Obama went on to suggest that there were other protections built in that will keep the playing field level. I would like to know what those are. I can understand how tariffs would do it (although enforcement raises some sticky questions). But I have heard enough double-speak on energy policy that I want to see the fine details of how the playing field will be kept level.

Make no mistake: This bill is a tax increase. That’s the basis for the political opposition. But I have long advocated a tax increase on fossil fuels to slow the rate at which we are using them up (and to make renewables more competitive). So I don’t oppose the bill on the basis that it is a tax increase. On the other hand I can’t say that I endorse it, because I haven’t read it. I certainly believe there are more efficient ways of raising carbon taxes than this. I still think – perhaps naively – that my proposal to tilt the tax code toward higher fossil fuel taxes and lower income taxes would be more attractive than this.

Mulva on Replacing Oil

My former CEO Jim Mulva spoke today at the National Summit in Detroit, and had some newsworthy comments. Bloomberg reported on his talk:

Conoco Chief Says Replacing Oil May Take a Century

June 16 (Bloomberg) — ConocoPhillips, the third-largest U.S. oil company, said it may take a century for the nation to replace fossil fuels with alternative energy sources.

I don’t know of too many people who think we have a century’s worth of oil left. Natural gas and coal? I also seriously doubt we have that much of either of those, especially allowing for economic growth. What I think this means – in any case – is that we have some potentially difficult times in front of us. However, Mulva went on to give his prescription for preempting some of those difficulties:

The country will need to develop its own oil and natural- gas deposits and continue importing petroleum while developing alternative supplies in the decades ahead, ConocoPhillips Chief Executive Officer Jim Mulva said today at the National Summit economic conference in Detroit. At the same time, he said, the nation will need to address climate change.

On the issue of climate change, Mulva thinks legislation is likely, but doesn’t want to see U.S. producers punished while foreign producers are left unscathed:

The U.S. needs policy that encourages investments in all types of energy and avoids hurting the economy by making the nation less competitive than countries with cheaper energy, Mulva said. Proposed climate legislation in Congress threatens to drive U.S. refiners out of business by imposing higher carbon costs on domestic fuel than on imports, he said.

That last bit is very important. If we do get climate legislation, we need to make sure that we aren’t providing a competitive advantage to countries who don’t care about emissions – while putting our domestic producers out of business. This was a major theme in Jeff Rubin’s book Why Your World Is About to Get a Whole Lot Smaller. Rubin argued that if we put a price on carbon emissions in the U.S. we can apply a carbon tariff on imports to level the playing field. Rubin argues that this will encourage efficiency from foreign producers of all things that are energy intensive, and it will ensure that the legislation doesn’t put U.S. firms out of business. (I reviewed Rubin’s book here).

Mulva went on to suggest that oil prices had gotten ahead of themselves. That story from Reuters:

Conoco CEO: oil prices ahead of fundamentals

“We have felt that an oil price between $70 and $80 (a barrel) is a good balance to promote investment, continue to replace reserves and keep production up, as well as a balance with respect to the cost to the consumer,” he told Reuters.

But Mulva also acknowledged the price run-up — expectations of a recovery drove crude prices to $73 a barrel last week, more than double their winter lows — was “stronger than we would have expected” and was “a little bit ahead of the actual supply and demand situation and inventory levels.”

I think “expectations” is the key word here. We do seem to have a little bit of a glut of oil (and natural gas) right now. In that respect, prices seem to be too high. But take this story from Fortune, where a majority of analysts believe that prices long-term are headed much higher:

Why oil is on the rise again

NEW YORK (Fortune) — Ask a group of oil analysts about the recent surge in crude costs and here’s the consensus answer you’ll get: Prices have run up too far, too fast and they aren’t supported by the fundamentals.

Ask them about where prices will be two years from now, however, and the majority will offer this prediction: A lot higher.

So if I am an investor – and I think oil prices will be “a lot higher” in two years – I am going to invest in oil and/or oil company stocks regardless of what the supply/demand situation looks like today. And when enough people do that, you have pressure on oil prices today, which is why I think we are back to $70 oil.

Full Disclosure: I own shares of ConocoPhillips and Petrobras.