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Carbon pricing is crucial when combatting climate change

Home / Hermes EOS Blog / Carbon pricing is crucial when combatting climate change

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To date, the efforts made by companies across many industries to combat climate change have been insufficient. It has therefore been clear for some time that public policy action is needed to accelerate those efforts. In the run-up to the UN Climate Change Conference in Paris at the end of 2015, Hermes EOS has been encouraging the bold public steps needed to help move the world towards a low-carbon economy.

In particular, there is a need for the introduction of carbon pricing – as widely as possible – internationally. This price should be meaningful and progressive to encourage switching from more polluting fossil fuels, such as coal, to cleaner fuels such as gas over time. Importantly, a price on carbon would also encourage energy efficiency and renewable energy. If governments could agree the setting of carbon reduction quotas by country, this would be a major step forward in intent. However, quotas are unlikely to be practical to allocate to industries, companies and individuals. A global carbon price is therefore required to ensure that the market for carbon is self-regulating.

Not turkeys voting for Christmas
Viewed through the lens of long-term investors, oil and gas companies advocating a carbon price are not like turkeys voting for Christmas. Because it is only through the implementation of carbon pricing mechanisms driving meaningful changes in the behaviour of oil and gas producers as well as consumers that the industry can survive in the long term. The dislocation from more dramatic and disruptive public policy action prompted by the failure to take sufficient action quickly enough is a far greater risk to the industry than that posed by a carbon price. Such a price will hasten the demise of coal in favour of gas and could also provide the incentive needed to enable carbon capture and storage (CCS) to be introduced widely into electricity generating and other energy-intensive industries. If CCS takes off, oil and gas companies will be well placed to help deploy and manage the infrastructure.

Encouraging commitments
The oil and gas industry has woken up to the fact that it needs to engage on climate change. We have been calling on the world’s oil and gas majors to be unequivocal on the need for a price on carbon. We are encouraged by those that have already made such a commitment. And one of the world’s leading energy companies is within a hair’s breadth of advocating a carbon price –  we have asked it to simply change just one word in its position. However, other companies are much quieter on the issue and we will need to push them further.

We are also engaging with the oil and gas industry’s trade associations. While some seem to avoid the discussion of carbon pricing, the leading body representing exploration and production companies internationally – the International Association of Oil and Gas Producers (IOGP) – again only needs to change a few words on its position statement for it to be unequivocally in favour of carbon pricing. We will seek to influence this change directly with the IOGP and through its members.

Making history
Leading players in the industry embracing such a change will help governments around the world to be braver in the commitments that they intend to make in Paris. And the CEOs of the companies that are boldest in their commitments to spur the oil and gas industry into embracing carbon pricing will be those remembered gratefully by history.

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Tim Goodman Tim Goodman is a director at Hermes EOS and sector lead for oil and gas. He is also responsible for Hermes EOS’ activities in North America. Previously, he worked in the insurance industry and held a number of senior operational management roles before acting as a company secretary in a UK-listed company. He is a member of the Institute of Chartered Secretaries and Administrators, having obtained the institute prize for the best overall performance when he qualified. Tim is a regular speaker on governance-related matters, a member of the US Council of Institutional Investors’ corporate governance advisory council and a former chair of the UK Quoted Companies Alliance corporate governance committee.
Read all articles by Tim Goodman

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