Shell: cap-and-trade is "a good thing"

Shell has today launched an impassioned defence of emissions cap-and-trade schemes, arguing that despite the falling price of carbon within the EU's scheme and growing calls for alternative carbon management mechanisms such as carbon taxes, cap-and-trade schemes remain the most effective way of cutting emissions.

Speaking at a roundtable event at the company's UK headquarters, senior executives insisted that the EU emissions trading scheme (ETS) was working, had already driven investments in low carbon technologies and offered the most efficient and flexible means of cutting emissions.

Despite being at the core of President Obama's climate change strategy, cap-and-trade schemes have faced criticism in recent weeks after the price of credits in the EU ETS scheme fell to a record low of €8 (£7), prompting some market watchers to predict that fluctuations in the price of carbon would make it harder for firms to justify investments in low carbon technologies.

Their concerns were echoed by oil giant ExxonMobil, which last month argued that it would rather see a US carbon tax than a cap-and-trade scheme as it would give the company certainty over precisely how much carbon will cost in the future.

In a shift in the company's previously tough stance on climate change legislation, Exxon's chief executive Rex Tillerson, said that while "it is hard to speak favourably about any new tax", a carbon tax represents "a more direct, a more transparent and a more effective approach" than cap-and-trade mechanisms.

But speaking earlier today, James Smith, chairman of Shell UK, dismissed the case for a carbon tax, arguing that unlike cap-and-trade schemes there would be no guarantee that environmental objectives would be met.

"The cap in a cap-and-schemes trade ensures that the environmental objective is met – it works and it is already proven that it works," he said, adding that any government setting a carbon tax would face the difficult challenge of setting the right price. "Set it too low and you won't meet the environmental objectives, too high and you cut off economic activity," he warned.

Smith's comments were echoed by David Hone, group climate change advisor at Shell, who argued that the recent drop in the price of EU carbon allowances (EUAs) was not an indication that the scheme was failing.

He said that even if a continuing drop in industrial output pushes the price down still further, the environmental objective of a 1.74 per cent per annum reduction in carbon emissions still would have been met, albeit primarily as a result of recession rather than investment in cleaner technologies. "The cap is sacrosanct," he said. "It's just that there is flexibility in how you get there. "

However, some commentators, including the chairman of the government's sustainable development commission Jonathon Porritt, have argued that without a clear long-term carbon price, firms can not work out how long it will take an investment in a low carbon technology to prove profitable. They argue the government should set a floor price for carbon to ensure firms know the minimum they will have to pay to cover their carbon emissions each year.

But Hone argued that attempts to set floor or ceiling prices on commodities invariably distort markets, adding that the EU's commitment to reduce the cap by 1.74 per cent a year up to 2020 and beyond meant there was sufficient certainty that carbon prices would steadily rise in the long term.

He also argued that the ETS was driving investment in low carbon technologies, including within Shell.

"If you stood in Shell in 2004, the number of people involved in carbon m itigation was in the ones or twos; now there's a whole army managing projects and developing a project pipeline," he said, adding that proposals for a carbon capture and storage plant at refinery in the Netherlands were now at a very advanced phase. "We would not be doing that if we did not feel there was a future in this carbon constrained world."

The ETS is also informing the way the company operates on a day-to-day basis, according to Hone, whereby every facility has developed a carbon cost abatement curve whereby once the price of carbon reaches a certain level, the economic case for different emission reduction methods is made and investment authorised.

Shell's insistence that it is making long-term investment decisions based on the assumption that the EU scheme will be followed by an increasingly global market in which the price of carbon inexorably increases, will likely draw short shrift from environmental campaigners who have repeatedly criticised the company’s plans to exploit carbon intensive tar sands in Canada.

But Hone insisted that the view that carbon would be constrained had been factored into the decision to exploit tar sands, and as such the company was investigating enhancing the efficiency of unconventional oil operations and examining the feasibility of carbon capture technologies at such sites.