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How two ExxonMobil and Sierra Club lawyers agreed on a carbon tax

<p>They both privately supported a carbon tax. Then they joined forces to launch firm that helps those interested in battling climate change.</p>

Climate experts David Bailey and David Bookbinder were once at odds with each other. They worked on opposite sides of the tracks — Bookbinder was chief climate counsel for the Sierra Club, and Bailey served as climate policy manager for ExxonMobil.  

"I was considered delusional for trying to work with him," Bookbinder recalls about when he first decided to sit down with Bailey.

Through a mutual respect for each other and an agreement about the way things work on Capitol Hill, they formed Element VI Consulting, a Washington, D.C.-based service that offers advice and insights to organizations interested in U.S. climate policy. United specifically over a carbon tax, Element VI offers carbon assessments, risk reduction via better information and solution design for those interested in tackling our nation's climate issues, which they believe can be resolved through a carbon tax.

Bill Shireman, CEO of nonprofit Future 500, sat down with these two odd bedfellows recently to find out how they overcame their perceived differences to work together to form Element VI.

Bill Shireman: How did you two first meet?

David Bailey: When David Bookbinder and I first met, we probably each regarded the other as sent by the devil. The script had our organizations in mutual contempt for a generation. I first started working for Mobil in the late 1980s. When Mobil and Exxon merged, I had just moved to the U.S. After a lot of other travels, I came to Washington, D.C., in 2007 to focus on international government relations. One of the big issues that we had begun to confront was climate change, not just as a regulatory issue, but increasingly as a business issue. Late in 2007 and 2008, the focus on climate change became so encompassing that I took on the issue full time.

Congress was focused on a cap and trade approach, first with the Waxman-Markey legislation in the House and then the proposed Kerry-Lieberman legislation in the Senate. Cap and trade is just not very effective — ExxonMobil decided that if a price on carbon was needed, a carbon tax shift was the way to achieve that. We realized that a number of people in the environmental movement agreed, but we knew that, in their minds, ExxonMobil is an icon of capitalism. It was clear to me that neither we nor anyone in the environmental movement would be willing to do anything together publicly, but we decided it might be beneficial to meet privately.

David Bookbinder: When we first met in 2007, Exxon had called for a carbon tax. I thought cap and trade was not going anywhere in Congress, so I reached out to David Bailey, who was their climate chief, to start talking about a carbon tax. My colleagues were universally critical and dismissive. They asked, "How can you trust them?" and told me, "They're just trying to talk about a carbon tax to derail Waxman-Markey." I was considered both disloyal and delusional for trying to work with him. Initially, there was a lot of suspicion. Bailey came with a phalanx of lawyers marching in behind him. Eventually, we found common ground when we realized that we actually agreed on the best approach to climate policy.

Bailey: When I walked into the room, I knew that I would be met with opposition, but once we started having a talk about policy, we came to agree. Going through all the issues and language, the cap and trade bill wasn't going to be effective or efficient for the business end of the industry. Turning our eye back towards a carbon tax, we both felt that a revenue neutral carbon tax would be more effective than the cap and trade bill, and after many months, we came to agreement on a detailed set of carbon tax principles.

Meanwhile, Obama's health care reform consumed all of his political capital, and cap and trade died on the Hill. The measure never even came to a vote in the Senate, which meant that a carbon tax wouldn't be seriously considered, either. We decided to bide our time.

Over the years, we were able to form a friendship based on our mutual respect. We shared the same pastimes and held very similar views on how things worked into Washington.

Bookbinder: Bailey and I seemed to click. What started as apprehension grew into a strong bond over many meetings and baseball games. Our views on climate are not halfway between ExxonMobil and the Sierra Club — we have one common view: how to deal with climate change as efficiently as possible.

Bailey: Having tremendous respect for each other's judgment, my background in the oil and gas industries and David Bookbinder's legal experience and environmental expertise, when I retired from Exxon, we decided to join forces and create a company whose purpose among other things was to read the realities of the political system, to predict if the polices will or will not work.

Shireman: What, exactly, does Element VI do?

Bookbinder: Our mission is to take two guys who really, really understand carbon from both sides of the divide and who agree as to the policy issues. We're out of the advocacy business. If you want to do X, we will tell you what we think will happen. If you do A, this is what will happen; if you do B, this is what will happen. We don't do lobbying — our goal is to help people understand the issues and find a common ground, the way that we did.

Shireman: You said that you're out of the advocacy business. With two such diverse backgrounds, who is it that you provide this advice to?

Bookbinder: We tell the truth, regardless of where you fall on the spectrum of interests asking us the questions. Our mission right now is to distribute accurate thinking about what is going on. We aren't in the business of advocating anymore — we're in the business of reading the realities of the political system: how things will or will not work, understanding the climate debate and where it is going, understanding the undergrowth of incentives and subsidies between the federal government and the energy industry, and approaching the issues from a business and public policy point of view.  

Bailey: We are good at reading the realities of the political system. While we believe that a carbon tax is the right way to go, we know enough about how the jungle works to know the best way through. We probably understand the undergrowth of federal incentives and subsidies and paraphernalia in energy better than anybody else.

Shireman: David Bookbinder, since leaving the Sierra Club in 2010, you have represented natural gas interests in a variety of federal regulatory matters. How would you respond to those who say that natural gas is damaging to the environment?

Bookbinder: From a climate perspective, natural gas is better than coal. From the environmental perspective, shifting to natural gas makes it more difficult to transition. The first is reducing carbon fast and getting people to accept that reducing carbon right now is important — renewables can't be done in as short of a timeframe. Second, the political power of coal needs to be broken in order to make climate progress. The third reason is the short-term environmental benefits of switching to gas are tremendous. Mining for coal, transporting it, the human cost (black lung numbers, brown lung, silicosis — the miners are still dying, so we can keep the lights on), coal washing, coal cleaning. And when you burn coal, you create huge amounts of pollution: toxics, particulates, coal ash. In contrast, gas has the problem of fracking, which is small compared to these things. You can hedge mightily against the fracking, but you can't solve coal ash and mountaintop removal.

Shireman: What, in your opinion, is the best approach to resolving climate issues?

Bailey: We need to keep focus on the primary agenda — a solution we can afford, not an ideological position that sacrifices either the environment or the economy or that cannot pass. A carbon tax is the best approach.

Shireman: Why do you think that a carbon tax is the best and most sustainable alternative?

Bailey: There are several desirable elements to it that make it sustainable. First, it is comprehensive. Cap and trade only covers a portion of the economy; regulations and standards are needed for the rest. Carbon tax reaches the millions of decisions in the whole economy that affect emissions, not just some of them.
Second, it is transparent. That became politically essential after the crisis in the financial sector. The supporters of Waxman-Markey spent a lot of time pretending that there was minimal cost associated with it. Not only was there a tremendous cost associated with it, but it would have also created extraordinary risk of manipulation.

Third, a carbon tax could be designed as a tax swap. We could use the most of the revenues to reduce other taxes in ways that promote the economy.

Fourth, we could include measures to protect trade exposed businesses, such as WTO compliant border adjustments.

Fifth, we could make adjustments to account for regional and income equity issues. The poor pay more for raw energy than the rich do, proportionate to their income, although it's closer to the same for the wealthy once finished goods are included.

Shireman: What does the future look like for a carbon tax?

Bookbinder: We think there is a 50 percent chance Congress will look at carbon tax seriously by 2016, and a 30 percent chance they'll pass one. They'll be looking for revenue stream, not for environmental benefit; it's hard to ignore $1.2 trillion in revenue.

Shireman: What is a ballpark estimate for how much a carbon tax will cost?

Bailey: The key is to start it slow and low, and increase it along an automatic forward path, to get it to the $25 to $30 per ton range before the end of the decade. When we looked at the science of climate and the numbers for cost, a carbon tax shift was the most logical decision. For any businessman to say that any tax is a good idea is paradoxical, but we need to do this, and the right way to do it is to do it as overtly and as transparently as possible, with as clear of an incentive as is possible.

Shireman: What potential roadblocks do you anticipate?

Bookbinder: The expectations that both sides of the debate hold. The environmental community needs to understand that we all turn on the lights and that oil companies are selling us the gasoline we demand, so be careful about the level of personal vituperation. On the corporate side, they have to understand that there are rational thinkers on the environmental side and that the caricature of environmentalists is counterproductive.

Bailey: Congress will only reach for a tax when they run out of alternatives. That will eventually happen. It seems to me there is no way around it. The question is: When?

It might happen when they reach a "Come to Jesus" moment on the deficit. That would be triggered when the deficit becomes a political imperative, due to rapidly rising interest rates or bond failures. When Congress comes to the point that it must choose between eliminating the mortgage interest deduction or establishing a carbon tax, it will choose the carbon tax. It's easier to admit to the voters that they must do something to save the country than it is to take away their home mortgage deduction.

More optimistically, though not yet as politically compelling: The country desperately needs corporate tax reform. We have the highest effective corporate tax rate in the developed world. That's really not a position compatible with a healthy growing economy. Congress needs to move to a lower rate and fewer exceptions, but if we go down that road, there are a bunch of sacred cows that need to be slaughtered. Congress won't want to do that. They will look for any way they can to avoid the really hard decisions. For example, Congress won't want to hurt domestic manufacturing. To preserve accelerated depreciation for the manufacturing sector, one way is to keep that deduction and pay for it with a carbon tax.

Finally, there is the very real cost of current regulation. EPA regulations are not costless. Encouraging renewables can be done with well-designed, sensible regulations. But it is hard and slow. Eventually, regulations end up costing way too much, and having way too little impact on carbon. Regulations impose what we call a phantom carbon tax that often doesn't actually curb carbon much. If you add too many subsidies in the mix, you end up spending a lot of money while not accomplishing the objective. Electric vehicles subsidies cost about $400 per ton of CO2 reduced.  We could cut 10 or 20 times as much carbon for every dollar if we did it with a tax.

Refinery image by TTstudio via Shutterstock.

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