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Governance by EU emissions trading: resistance or innovation in the oil industry?

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Abstract

Studies of the EU Emissions Trading System (ETS) abound. Much is known about the economic incentives they contain to promote abatement and innovation, and studies are focusing on the short-term aggregate effects at sector and system levels. Less, however, is known about how the EU ETS affects companies, including their strategies, long-term innovation plans, and deployment of low-carbon solutions. This article presents an analytical framework of how companies are likely respond to regulation like the EU ETS, subsequently applied to companies in the oil industry, represented by the major multinationals ExxonMobil and Shell. The analysis finds that these companies had quite different initial responses to the ETS, whereas their long-term strategic responses to carbon pricing show signs of convergence.

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Notes

  1. Aviation is included from 2012.

  2. The EU ETS applies to the 27 current EU member states. In addition, Norway, Iceland, and Lichtenstein have emissions trading systems linked to the EU ETS.

  3. A third perspective concerned with the social risk of environmental challenges is included in the FNI project, but excluded here due to space limitations. This perspective links regulatory response to corporate norm-guided behavior (e.g. Flohr et al. 2010), Corporate Social Responsibility (e.g. Barth and Wolff 2009) and the crowding-effect linked to environmental motivation (e.g. Frey and Stutzer 2007).

  4. This is a static perspective where everything except regulation is held constant.

  5. The reason is not necessarily a belief that profit maximization offers an accurate description of how all companies always will behave in the real world, but rather that the assumptions permit the development of parsimonious theory.

  6. The penalty is EUR 100 for each tonne of CO2 equivalent emitted by the installation for which the operator has not surrendered allowances. Payment of the penalty will not release the operator from the obligation to surrender the allowances required. The penalty for the first trading phase (2005–2007) was EUR 40 per tonne.

  7. A point of departure is Schumpeter’s (1934) definition of innovation as the discovery and commercial or industrial application of something new—a new product, process or method of production; a new market or source of supply; a new form of commercial, business, or financial organization. This definition is widely applied also by scholars of more specific “environmental innovation”.

  8. It is also conceivable that companies resist regulation in prospect but, once faced with it, come to the Porter Hypothesis view.

  9. The Porter Hypothesis has been tested in various ways. Here, we use the “weak” version: properly designed regulation tends to spur innovation. This version is weak in the sense that it does not say anything about whether the innovative activities are good or bad for company competitiveness. The “strong” version holds that innovation tends to offset any additional regulatory costs, making companies more competitive. There is also a “narrow” version that flexible regulatory policy give firms greater incentives to innovate and are thus better than prescriptive forms of regulation.

  10. Also international regimes like the UNFCCC and the Kyoto Protocol affect climate strategies (Skjærseth and Skodvin 2003).

  11. The notion of “organizational fields” holds that organizations adopt practices to adapt to changes that are considered proper, natural, or legitimate (DiMaggio and Powell 1991).

  12. Implementation theory, which focuses on institutional fit, emphasizes the critical role of the pre-existing institutional context in which new policy instruments such as emissions trading are introduced. Emissions trading is frequently implemented alongside existing national policy instruments, like carbon taxes and voluntary agreements (see Sorrel and Sijm 2003).

  13. These factors include company size, leadership, capital availability, human resource availability, ownership, regulatory risk, stakeholder influence, actions of other companies, and dynamic capabilities for innovation.

  14. Carbon intensity is determined by the relative importance of coal, oil, gas, renewable, and nuclear energy sources. Another factor affecting regulatory risk is exposure to international competition.

  15. This conflict may be aggravated by the 2009 EU Fuel Quality Directive, specifying the quality of petrol, diesel, and gas-oil. Other reasons for low efficiency include unplanned shutdowns requiring extra energy to re-start and drops in demand linked to the global financial crisis: installations have run below full production capacity, hence less efficiently (Shell Sustainability Report 2009).

  16. The company claims that it has stopped funding such organizations, but Greenpeace has challenged this claim (Webb 2007).

  17. According to the company, Exxon’s acceptance of the problem of human-induced climate change as a reality and responsibility for helping to find a solution was linked to better knowledge about the causes and consequences of climate change between the 2001 Third IPCC Assessment report and the Fourth Assessment report on climate change in 2007 (ExxonMobil 2007).

  18. Carbon capture is necessary for storage, but has mainly been used in various industrial contexts such as enhanced oil recovery.

  19. In November 2010, the Netherlands ended Shell’s CCS project in Barendrecht, mainly due to local opposition.

  20. In June 2010, the EU launched the first-ever European Industrial Initiatives (EII) comprising CCS, wind, solar (photovoltaics & concentrated solar power), and electricity grids.

  21. In 2009, Exxon bid $41 billion for XTO, the largest natural gas producer in the USA and a leader in the development of unconventional oil and gas supply. The merger was completed in 2010.

  22. For example, Shell responded to the widening Corporate Social Responsibility agenda before the introduction of the ETS by emphasizing the fight against corruption, support of the Universal Declaration of Human Rights, and collaboration with NGOs and international organizations (Skjærseth et al. 2004).

  23. Shell Media Releases, March 16, 2010, Royal Dutch Shell plc updates on strategy to improve performance and grow. http://www.shell.com/ (accessed 26 January 2012).

  24. Still, some diffusion has taken place. Switzerland, New Zealand, and the USA also have emissions trading systems. The USA has one system covering California and one regional system (Regional Greenhouse Gas Initiative, RGGI) covering nine eastern states. A Western Climate Initiative is under development, including California and four Canadian provinces. Emissions trading systems are also being developed in the Republic of Korea, Japan, and China (with pilot systems in several cities and provinces).

Abbreviations

ACCF:

American council for capital formation

BIR:

Business improvement review

CCS:

Carbon capture and storage

EII:

European industrial initiatives

EPTB:

Environmental products trading business

ET:

Emissions trading

ETS:

Emissions trading system

GEMS:

Global energy management system

IETA:

International emissions trading association

MRV:

Monitoring, reporting, and verification

NER:

New entrant’s reserve

STEPS:

Shell tradable emission permit system

ZEP:

Zero emissions fuel power plants

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Acknowledgments

The author is grateful for constructive comments from Per Ove Eikeland, Anne Raaum Christensen, Lars H. Gulbrandsen, Jørgen Wettestad, Steinar Andresen, Ron Mitchell and two anonymous reviewers.

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  1. Fridtjof Nansen Institute, Box 326, 1326, Lysaker, Norway

    Jon Birger Skjærseth

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Skjærseth, J.B. Governance by EU emissions trading: resistance or innovation in the oil industry?. Int Environ Agreements 13, 31–48 (2013). https://doi.org/10.1007/s10784-012-9201-2

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