Carbon, Carbon Dioxide, And Big Oil

Summary

• San Francisco's and Oakland's climate lawsuit against Big Oil took another step forward last week.
• The Cities filed an amended complaint stating that, among other things, extractors of fossil carbon rather than emitters of carbon dioxide should pay for their climate change abatement programs.
• Given that the amended claim is now made under federal common law, the implications of a successful lawsuit are vast and go beyond just Big Oil companies.
• This article examines the Cities' arguments and considers some of their implications.

Last week saw an important development in San Francisco's and Oakland's ("the Cities") climate lawsuit against BP (BP), Chevron (CVX), ConocoPhillips (COP), Exxon Mobil (XOM), and Royal Dutch Shell (RDS.A)(RDS.B) when the Cities amended their complaint against the large integrated petroleum and natural gas producers. The Cities had originally sued the firms for "abatement" costs under California common law despite the national (and, indeed, international) aspects of global climate change. Federal district court judge William Alsup determined that the claims arose under federal common law, however, and the amended complaint reflects this decision.

What is interesting about the amended complaint (and notable for investors in the defendant firms) is why it claims that the companies should be held responsible for the Cities' climate change abatement costs. Specifically, it does not take issue with the fact that the companies produced greenhouse gas emissions, which they of course did in only limited quantities as extractors rather than combustors (defined here as those who cause the combustion) of fossil fuels. Rather, it faults the companies for extracting the fossil fuels that were ultimately combusted by other entities. In doing so, they claim, they "assisted in the creation of, contributed to, and/or maintained and continue to cause, create, assist in the creation of, contribute to and/or maintain global warming-induced sea level rise, a public nuisance [under federal common law] in Oakland."

In other words, by extracting petroleum and natural gas, the Cities believe that the Big Oil companies are responsible for the rising sea levels that are expected to inundate large amounts of land in the Bay area by 2100. There is just one problem: this contention ignores basic chemistry. Taken to its logical legal conclusion, every extractor (rather than burner) of fossil fuels is responsible for the Bay area's climate abatement costs regardless of whether or not this extraction actually contributed (or will contribute) to climate change.

A quick chemistry tutorial

Before proceeding it is important to consider the distinction between "carbon" and "carbon dioxide." In this context, "carbon" does not refer to the shorthand for carbon dioxide (as in "carbon tax", "carbon policy", "carbon litigation", etc.). It instead refers to the basic chemical element (and building block of life) with the carbon number 6. We will refer to it by its chemical symbol "C". Carbon can form carbon dioxide, primarily by oxidation during combustion, but it is not the same as carbon dioxide, not least because C is a solid at standard conditions.

When we refer to the types of fossil fuels that are produced by Big Oil, we are normally referring to fuels that are comprised of a combination of hydrogen and carbon and that take the form of liquids (petroleum) or gases (natural gas). These hydrocarbons do not, by their nature, contain oxygen (otherwise we would instead call them a form of biomass). Carbon dioxide, which we will refer to by its chemical formula "CO2", does contain oxygen. Carbon is stably-sequestered in fossil fuels. It is only when combusted in the presence of oxygen that it forms CO2. When released, this CO2 finds its way into the atmosphere where it contributes to the atmospheric CO2 concentration. Rising levels of this concentration (the planet passed 400 ppm a few years ago, while the 450 ppm threshold is commonly linked by many climate scientists to the onset of irreversible catastrophic climate change) are what is causing the planet to warm via the greenhouse effect and sea levels to rise as the ice caps melt.

Therein lies the importance of the distinction between C and CO2. With the exception of methane leakage, which is not the subject of the lawsuit and can therefore be set aside for the moment, fossil fuels cannot contribute to climate change if they are not combusted. Not all fossil fuels are combusted despite their name (think asphalt, petrochemicals, plastics, and the like). More importantly, though, the defendant companies do not usually combust the petroleum and natural gas that they extract. That is left to the combustors such as electric utilities, airlines, homeowners, and most drivers.

Who is responsible?

The Cities have two good reasons for pursuing the extractors rather than the combustors in court, one legal and one related to the public optics. Legally, as the defendant companies argued in a recent motion to dismiss, the Cities are unlikely to have recourse as it relates to the domestic production of greenhouse gas emissions since Congress has granted the executive branch via the U.S. Environmental Protection Agency [EPA] the responsibility for regulating these emissions, displacing federal common law in the process. This displacement has been upheld several times by various federal courts over the years and is probably a dead-end as far as the Cities' lawsuit is concerned.

Optically, going after the combustors is also problematic due to the identities of the individuals engaged in the act of combusting fossil fuels. Yes, large electric utilities consume large quantities of fossil fuels and emit large amounts of greenhouse gases in the process. More than a quarter of U.S. emissions come from the transportation sector, however. Suing Big Oil in a pro-environment state such as California is one matter as far as publicity is concerned. Suing bus drivers, commuters, travelers, and every other person that routinely burns diesel fuel, jet fuel, and gasoline is quite another.

Pursuing the extractors also allows the Cities to draw a comparison between Big Oil's contribution to both climate change and climate science, and the large damages levied by the courts against Big Tobacco in previous decades. The Cities' amended complaint makes explicit reference to this comparison multiple times, at one point stating that "[the] defendant [companies] promoted massive use of fossil fuels by misleading the public about global warming by emphasizing the uncertainties of climate science and through the use of paid denialist groups and individuals – a striking resemblance to Big Tobacco’s propaganda campaign to deceive the public about the adverse health effects of smoking."

A later section uses the title "Defendants borrowed the Big Tobacco playbook in order to promote their products." I have already discussed the critical differences between the past Big Tobacco lawsuits and the current lawsuit here, but the Cities' lawsuit essentially argues that, much as tobacco consumers were led astray regarding the risks of that product by tobacco producers, consumers of fossil fuels have been similarly deceived by Big Oil. This comparison suffers from an additional shortcoming in that tobacco does not need to be burned in order to be dangerous; witness the negative health effects associated with the use of smokeless tobacco, for example. The harm from fossil fuel consumption that the Cities are seeking abatement costs to offset, on the other hand, only results from the burning of the fuels in question. Other uses such as petrochemicals and plastics, where the C is never converted to CO2, cause no such damage and yet are considered to be damaging by the Cities due to the focus of their lawsuit on C rather than CO2.

Unintended consequences

It is this focus on C rather than CO2 that makes the Cities' lawsuit both unprecedented and, if successful, capable of reaching far beyond the mere extraction of fossil fuels. Consider the implications of this section from the Cities' amended complaint as it relates to the extraction of C rather than emission of CO2:

Defendants, both individually and collectively, are substantial contributors to the global warming-induced sea level rise and Plaintiffs’ attendant injuries and threatened injuries...Each Defendant’s past and ongoing conduct is a direct and proximate cause of Plaintiffs’ injuries and threatened injuries...Each Defendant has at all relevant times been aware, and continues to be aware, that the inevitable emissions of greenhouse gases from the fossil fuels it produces combines with the greenhouse gas emissions from fossil fuels produced by the other Defendants, among others, to result in dangerous levels of global warming with grave harms for coastal cities like Oakland...Defendants’ conduct constitutes a substantial and unreasonable interference with and obstruction of public rights and property, including, inter alia, the public rights to health, safety and welfare of Oakland residents and other citizens whose safety and lives are at risk from increased storm surge flooding and whose public and private property...is threatened with widespread damage from global warming-induced sea level rise, greater storm surges, and flooding...

Defendants are jointly and severally liable to Plaintiffs for committing a public nuisance. Plaintiffs seek an order of abatement requiring Defendants to fund a climate change adaptation program for Oakland consisting of the building of sea walls, raising the elevation of low-lying property and buildings and building such other infrastructure as is necessary for Oakland to adapt to climate change.

According to the Cities, then, the defendant companies should fund a "climate change adaptation program" because they (1) are substantial direct and proximate contributors to global warming that (2) know that the emissions from the fuels they produce, when combined with emissions caused by other entities, causes global warming, and (3) this global warming causes rising sea levels that negatively affect the Cities. The specific phrase "...produced by the other Defendants, among others" (emphasis added) is especially instructive: all emissions and, by extension, all fossil carbon producers, are ultimately responsible for the Cities' plight.

Big Oil companies are hardly the only extractors of fossil carbon, though. Indeed, petroleum, natural gas, and coal extractors are far from responsible for all greenhouse gas emissions. Agriculture is responsible for 9% of U.S. greenhouse gas emissions, and this number jumps to fully 24% of global greenhouse gas emissions. Are U.S. farmers who respond to increased demand by converting Conservation Reserve Program [CRP] land to productive cropland responsible for the resulting oxidation of sequestered soil C and release as CO2? After all, this increased demand has been driven in large part by the U.S. revised Renewable Fuel Standard which, among other things, has the stated goal of reducing the U.S. transportation sector's greenhouse gas emissions.

Or what about when the C in that same corn (at that point bound together with oxygen and hydrogen) is consumed by livestock, converted to methane, and then released via flatulence into the atmosphere as a particularly-potent greenhouse gas? After all if, as the Cities claim, the fossil fuel extractor is responsible for another entity's conversion of the fossil C to CO2, then couldn't the same be true for a deoxidation process that converts the biomass to a hydrocarbon (methane) when the result still contributes to global warming?

The U.S. forestry and logging industry could also meet the Cities' test for responsibility. Yes, the EPA categorizes that industry as an important carbon sink, yet many environmentalists have argued that converting woody biomass to electricity or fuels has the same effect on climate change as fossil fuel combustion. Since loggers produce C (in the form of biomass), and that C can be combusted to emit CO2, they could be captured by the Cities' test for determining who must pay into their abatement fund. The fact that much of the world's forest energy production is being driven by demand under the European Union's cap-and-trade program seemingly would not matter, given that the Cities' lawsuit makes no distinction between the extraction of petroleum and that of natural gas. Even individual households that throw away food (rich in C) that is deposited in a landfill that allows it to convert into methane that then leaks into the atmosphere could find themselves caught. And, since the Cities focus on both past and future extractors of C, the scope of relevant activities could be very wide indeed. The only other criteria that the Cities seem to require is that at some point in time these C extractors denied that climate change was occurring or played down its magnitude and/or likelihood.

The good news for the defendant companies, as well as all of the other extractors of C listed above, is that Judge Alsup seems to be aware of how quickly a decision in favor of the Cities could spin out of control. On March 27, he ordered plaintiffs and defendants to both answer four specific questions. Question #4 is especially pointed:

If plaintiffs’ theory is correct, why wouldn’t everyone involved in supplying carbon-based fuels (or in otherwise increasing carbon dioxide, e.g., deforestation) be liable upon a showing that they questioned the science of global warming or sponsored research intending to question it?

Briefing is scheduled for May 10. Interested investors should watch here for updates.

Analyst’s Disclosure: I am/we are long XLE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.