Linking fossil fuel sales to emissions reductions

Over 135 countries covering nearly 90 percent of global greenhouse gas emissions have now pledged to achieve net-zero emissions by mid-century or soon thereafter. That is certainly encouraging but a gap remains between country pledges and the emission reductions needed to limit warming to 1.5 degrees Celsius. More concerning is the much larger gap between the pledges countries have made and the policies they have implemented.

Analysis by the International Energy Administration concludes that full implementation of country pledges could limit global warming to 1.8 degrees — but without stronger policies and incentives, global warming will likely exceed 2.5 degrees and could approach 3 degrees. The gap between stated intentions and implemented policies could be narrowed considerably by linking fossil fuel sales to emission reductions. Here’s how that could work.

Fossil fuel producers would be required to steadily reduce net attributable emissions, including emissions from company operations and emissions attributable to fossil fuel sales, less emission reduction credits. The pace of required reductions in net emissions would be set consistent with the goals of the Paris Agreement. Historical production levels, less a reserve for new market entrants, could serve as the primary basis for the initial allocation of attributable emission allowances to fossil fuel producers and importers.

Fossil fuel companies would have multiple options for reducing net attributable emissions. They could steadily shift their product mix toward clean energy sources, not only wind and solar but also green hydrogen, green ammonia and other carbon neutral fuels, as well as advanced geothermal energy that utilizes technology developed by the oil and gas industry. Fossil fuel companies could also earn emission reduction credits from a wide range activities including plugging methane leaks, capturing carbon emissions or removing carbon from the atmosphere using direct air capture technologies or nature-based solutions. As has been the case with wind and solar, and now with batteries and electric vehicles, directing investment to clean fuels and emission reducing technologies will lead to cost reducing innovation and economies of scale.

To promote compliance, fossil fuel producers would be obligated to produce audited reports accounting for attributable emissions and emission reduction credits. Regulatory agencies would establish eligibility criteria as well as certification requirements for emission reduction credits and investigate any discrepancies between industry compliance reports and other sources of data. Companies found to be out of compliance would be required to pay a fine per ton of excess net emissions.

A policy linking fossil fuel sales to emission reductions could be implemented in the U.S., without further legislative authorization, under Section 115 of the Clean Air Act. Section 115 requires the Environmental Protection Agency (EPA) to regulate international pollutants when there is a finding of harm and reciprocal action from other countries. In the case of GHGs both conditions have been met. The Biden administration could initiate the process by instructing the EPA to develop a model rule that set targets for attributable emissions from total U.S. fossil fuel sales net of emission reduction credits awarded for eligible projects implemented anywhere in the country.  States that adopted the model rule would participate in that national program. States that opted out would be required to implement plans for achieving net-zero emissions at the state level.

Supporting a net-zero attributable emissions policy with expanded public research and development funding for clean fuels, carbon capture and atmospheric carbon dioxide removal, as well as additional incentives for private sector investment, would help clear the way for transformation of the industry. A border adjustment mechanism would ensure a level playing field while also providing a strong incentive for other countries to adopt similarly effective policies.

Establishing a timetable for fossil fuel producers to achieve net-zero emissions would remove a major source of uncertainty that has clouded the outlook for the industry. Calls for total divestment would be constructively redirected, and investors concerned about climate change would have a clear basis for engagement and investment selection. Fossil fuel producers that continued to meet required reductions in attributable emissions would remain candidates for investment, while those that were repeatedly out of compliance would be excluded.  

Like it or not, fossil fuels will remain an important part of the global energy mix for the foreseeable future. That prospect can be reconciled with the goal of limiting global warming to 1.5 degrees by linking fossil fuel sales to emissions reductions. Requiring fossil fuel companies to steadily reduce net attributable emissions would leverage continued demand for fossil fuels to accelerate the transition to a carbon neutral energy system.

Anthony Artuso is an executive scholar at the University Virginia’s Energy Transition Initiative and Darden School of Business.