Dear Editor,
Reference is made to the report in SN of January 23, 2022, of a court case filed “against Guyana’s Environmental Protection Agency (EPA) to put a stop to flaring of gas offshore by ExxonMobil.” The University of Guyana GREEN Institute (UGGI) and I, in particular, are concerned about one specific implication of the text of your report, which apparently was based on a press release. According to your report, the litigants are challenging the EPA’s “decision to modify Esso’s permit to allow flaring,” contending that that decision was “irrational and unlawful … [and in breach of the EPA Act Cap 20:05 by purporting to allow Esso to flare in return for paying a fee.” While the litigants have every right to challenge any policy decision, such as the charge for flaring emissions above a “non-zero emissions” threshold, I do not agree that the permit was modified “to allow flaring … to allow Esso to flare in return for paying a fee.” In offering a clarification on this matter, I also note a comment in the Editorial of today’s SN, that the “variation [of the environmental permit] appears intended to enable the continued reckless flaring of gas during extraction operations for Liza-2 supposedly mitigated by the payment of a fee.”
But that fee, which is really a tax on the CO2 emissions released when gas is flared, is in the venerable tradition of so-called Pigouvian taxes on the external damage imposed on third parties, when markets produce unintended, negative, and often polluting by-products in the process of delivering benefits to market participants. [To be sure, there are other ways of dealing with pollution: There could be command-and-control systems that simply outlaw the polluting activity (though this might mean outlawing legitimate activities that unequivocally add benefits to society); there could be “Coasian” bargaining, in which one party is given a well-specified legal right, such as the right of third parties to enjoy a pollution-free state, and the parties bargain their way to a state that is acceptable to all; or there could be the emergence of a market for the pollutant itself, as we witness whenever the trade in scrap metal is re-opened after an embargo period. One might further note that the Coasian tradition, best suited when only a few people are involved, can appear as a cap-and-trade system when large numbers are involved, as with the European Emissions Trading Scheme (ETS).]
Pigouvian taxes work by having entities, such as EEPGL, bear the full economic cost of their activities; in this case by having the company internalise the costs of, or bear financial responsibility for, damages imposed on third parties by the act of producing and marketing crude oil. Before the EPA assessed the charge on flaring emissions, EEPGL only bore the costs directly associated with the extraction of crude oil. After the charge on flaring emissions, EEPGL would have had to bear financial responsibility for the damage being done by the CO2 released by flaring. When unit costs rise, as surely they would with a Pigouvian tax, firms are then made aware at the level of their bottom-line that they are producing both the goods and services that would be bought by consumers, and also the “externalities” that are being borne by everyone-at-large. Profit maximising firms would respond to the consequent decline in marginal profits by reducing production of (say) crude oil in order to avoid the charge assessed on the external damages; and provided that the charge is equal to the “marginal external cost,” then the firms profit maximising decision will coincide with the level of pollution that society is willing to tolerate.
Coming to these problems from the perspective of tort, or from a rejection of fossil fuels and/or oil companies, or even from a deep suspicion of incentives and how they work – all these will cause one to reject the EPA’s Pigouvian tax out-of-hand. I would not argue about any of these positions. But the basic point is that Pigouvian taxes absolutely do not constitute a licence to pollute, and may only be construed to do so, if the tax is ridiculously too low. Another contention might even be that when oil prices rise, then carbon taxes must also rise, if the tax is to do what it’s supposed to do. In any event, the foregoing discussion should be enough to dispel the view that the charge on flaring emissions was designed to allow EEPGL to flare (above the specified threshold).
The University of Guyana GREEN Institute (UGGI) (https://greeninstitute.gy/), of which I’m the Founding Director, is keen to offer this clarification because it (and I in particular) was directly involved in the design of the charge that is at issue. Indeed, subsequent to the submission of the UGGI’s Policy Brief “Towards a Green Petro-State: A Carbon Tax at the Wellhead in Guyana as a Measure to Reduce Pollution” to the EPA in June 2020, the agency wrote me formally, requesting assistance in designing a carbon tax on the flaring emissions in the Stabroek Block in November 2020. The UGGI is, first and foremost, a policy research institute which intends to be a National Centre of Excellence for rigorous discourse and public awareness on how learning-led development can lead to a Green Economy. It would require a complete volte-face and a wholesale abandonment of our mission for the UGGI to have designed a measure that allowed flaring emissions. What we have actually done however, is to have “brought carbon pricing to the Caribbean,” to quote from the experts we consulted when we were designing the charge on flaring emissions. For this, the UGGI is, and I am, especially proud.
Sincerely,
Thomas B Singh (PhD)
Director
University of Guyana GREEN
Institute