Delivering Technologies via Carbon Markets

Ladies and gentlemen, good morning.

Thank you for asking me to this distinguished gathering to talk about how the power of technology and markets can be harnessed to help solve one of the great challenges of our time: climate change. This is also an important speech for me personally. I've been chief executive of BP for a just over a month now and this is my first chance to speak publicly on a subject about which I feel very strongly.

We have here today two groups of people with special responsibilities as far as climate change is concerned: legislators and business people. And we, of course, are the ones who will actually do things to deal with this urgent problem, which, frankly, would benefit from less talk and more action. You will write the laws and create the framework. And we in business will do what we always do - endeavour to deliver solutions within the structures you create. I find this prospect both humbling and exciting.

From BP's perspective, the evidence that climate change is happening, and that it is manmade, is mounting all the time. As the UN's Intergovernmental Panel on Climate Change has found, the evidence is almost overwhelming. We could wait until the science is 100% certain, but BP believes that, as an energy company, it has a duty to act pre-emptively. When you balance the likely impacts of not taking action against the real opportunities that exist to take action, it is difficult to believe that humanity will not move towards a solution to climate change.

I am a geologist by education. I have some understanding of the science of climate change and the unprecedented impact human activities are now having on the natural environment. As a businessman, I see both the opportunity and a responsibility to take action. And we should remember that businesses like BP have a duty to their shareholders. Shareholders own our business - and their capital - often derived from hard earned savings and pension funds - is at risk. We have a duty to reward shareholders' investment and their trust. And by rewarding investors, we can deploy both financial and human capital to help meet the world's energy needs.

But profit is not our only motivation. We also recognise that in order to do business in the long term we must respect the broader needs of societies where we operate and be good corporate citizens. We are investing now in projects which will come to fruition in many years time. Many of our projects have life cycles of 30 or 40 years. Sustainability and thinking of the long term are part of BP's genetic makeup.

When it comes to climate change, what needs to be done falls into two categories: first, the sort of immediate things which companies like BP are already doing; and second, those actions which must be undertaken collectively, which are beyond the scope of any individual business, and which therefore need some sort of Government action to get underway.

Under the pioneering leadership of my predecessor John Browne, BP became the first major energy company to acknowledge the danger of climate change. I intend to build on what John achieved, by emphasising the implementation of our strategy and by determining what, practically, can be done?

Fossil fuels provide the energy which, in most economies, is used to produce clean water, food and shelter. They provide the heat, light and mobility necessary for social progress. Fossil fuels underpin any modern, vibrant, prosperous and growing society. And we should be realistic. All the scenarios I have seen rely on fossil fuels well into the future, even those which limit global warming.

At BP, we like to say we are moving Beyond Petroleum. Initially, I think some people saw this as just a slogan intended to change perceptions about BP. It was not, and is not, a denial of our core business. Rather, it was essentially about three things - producing more fossil fuels more efficiently today, making better use of fossil fuels and beginning the transition to a low carbon future. BP is proud to be in the oil and gas business. We, and our competitors, do a good job serving millions of customers every day, providing energy for the essential things of life.

Beyond Petroleum is an affirmation that BP aims to conduct its business on a sustainable basis, both today and for the long term. And here the most critical issue for us is climate change. Everyone in our industry must face up to the fact that fossil fuels are responsible for 60% of greenhouse gas emissions. So, increasingly, Beyond Petroleum is about concrete action, by making the right investments to prepare for a low carbon economy - one in which carbon emissions are restricted. BP believes global emissions should be held to an agreed long term goal, stabilising atmospheric concentrations of greenhouse gases in the range of 450-550ppm.

We have reduced the carbon emissions from our own operations ahead of target; we are investing $8 billion in alternative sources of energy, such as solar, wind and hydrogen power; we have pledged $500m to a new Biosciences Institute at the University of California at Berkeley and the University of Illinois Urbana-Champaign, in order to develop the next generation of biofuels; and we are planning the world's first hydrogen power plant at our Carson refinery in California.

Technology and its application are both improving fast. Let me give you a couple of examples. Through a partnership with Clipper Windpower of the US we are buying up to 2,250MW of advanced Liberty turbines. By scaling up both size and longevity, these machines represent a break-through in reducing the total cost of renewable energy. In solar, BP has teamed up with the California Institute of Technology to develop a new generation of solar cells. We are using silicon 'nanorods' that are 100 times thinner than a human hair and are packed tightly together in an array - like bristles in a brush.

As well as using new low carbon technologies it is also necessary to improve the efficiency of existing systems to reduce emissions. Although our original aim in 1998 of setting a target to reduce emissions 10% below 1990 levels was an environmental one, we quickly realised that it provided opportunities to reduce costs. We calculate that this has created nearly $2 billion of value for us in the last decade. As so often in business, you spend now and save later. In fact, much of the savings we achieved required very little investment at all.

Some of you are probably aware of the tremendous work started by Lars Josefsson at Vattenfall on the cost of climate mitigation. This analysis clearly demonstrates that the BP experience of creating value from efficiency is not unique. It suggests that in 2030 around 40% of the necessary emissions reductions will actually create value.

When it comes to the wider consideration of what we should collectively do about climate change, BP has a very firm point of view, which I hope you will share. We believe in markets.

We need to ensure that the costs of emissions of carbon dioxide and other greenhouse gases are included in the price we pay for everything - whether it be a television, a train journey, or switching on a light - all should reflect the cost of emissions in their price.

This can be achieved through a Cap and Trade system, taxation, or regulation.

The price mechanism, set by the interaction of supply and demand, is perhaps the most powerful economic force ever discovered by mankind. I believe that unlocking the ability of a competitive market to innovate and change behaviours will achieve the lowest cost solution to climate change.

There are those who would simply prefer a tax to be imposed on carbon use. That would certainly provide cost certainty. But it would not provide environmental certainty. And it is environmental certainty, in the form of targeted emissions reductions, which we need. Furthermore, a carbon tax would be extremely unpopular. And in any case, an old-fashioned, command and control approach would be a totally inappropriate and unworkable solution to a global problem like greenhouse gas emissions.

I believe more progress will be made if we integrate climate change into the strategic growth opportunities of societies and businesses, rather than having the prime focus on constraints to existing businesses and individuals. If consumers, businesses and Governments become aware of the cost of carbon, it will imbed itself in all their decisions and provide an extraordinary incentive for change.

The absolute requirement for carbon markets to work is for governments - and legislators like you all here today - to place a cap on all greenhouse gas emissions. This can then be divided up into tradeable permits in a so-called Cap and Trade system.

The Cap and Trade system has gained widespread acceptance - in theory at least - as an efficient method of imposing an economy wide carbon price. And it is already running with some success in the EU's Emissions Trading System. The price of carbon in the EU is now trading at over 15 euros a tonne for the Kyoto commitment period of 2008-2012.

But how would a global Cap and Trade system work? How could we develop a global trading system, as opposed to regional or local ones? How could there possibly be agreement between the 180-odd Governments of the world, without seriously intruding upon their sovereignty?

A global trading system should of course be our ultimate objective. But just because that is not achievable immediately, I believe we should not be deterred from starting on a regional basis now. In fact, I take great comfort from the history of financial markets in this regard. Nobody can doubt that financial markets are now global and that there is a global market in equities, commodities, futures, options, foreign exchange and bonds. Yet all these markets started off in individual countries, sometimes just in small localities, and grew up without the need for a single global currency.

For example, trading in shares began in Amsterdam and London in the seventeenth century, after legislators created for the first time corporations with no finite life. Until then, companies were typically wound up at the end of every project, such as the end of a ship's voyage. But once companies became permanent entities, investors were able to sell their shares and stock markets were born.

Trading in derivatives, the mechanism by which commodities like oil and wheat are bought and sold today, has a long history but actually began on a large scale in the American Mid-West when the Chicago Board of Trade was founded in 1848.

Yet technology is now so developed and there are so many opportunities for arbitrage, that all financial markets, including shares and derivatives, are now 24/7, interlinked and global. And the growth of markets has been accompanied by a huge expansion in the prosperity of the world, with resources, risks and opportunities allocated more efficiently than ever before.

A similar process is already happening in carbon trading. We might, of necessity, start with regional blocs in the US, Europe and Asia, but I believe that soon the market would do its work and a global price for carbon would emerge. Indeed, California under the leadership of Governor Schwarzenegger, has already announced its desire to link its forthcoming emissions trading system with the EU's.

The world should aim towards a global settlement to establish a strong post-Kyoto framework, to cover the period beyond 2012. But getting full agreement on that could take years and time is one thing we do not have. Of course, an agreement will ultimately be necessary. The work on an international, post-Kyoto framework should continue, but that must not preclude individual, bilateral or regional action. In fact, these are normally pre-requisites to effective international agreements.

However, we cannot rely solely on carbon trading markets, to provide sufficient incentive to develop new technology. So although I am generally against subsidies, I do believe there is a public good to be derived from bringing forward the development and deployment of low carbon technology.

I'm against subsidies for two reasons. First, it is very hard to see why taxpayers should support high cost emission reductions from new technology when lower cost reductions in emissions are offered via a Cap & Trade system. Secondly, I don't want BP to be hooked on subsidies - we think that companies which do depend on subsidies are rather vulnerable. When the subsidies dry up, as they inevitably do, such companies usually perish with them.

The purpose of any incentive should be to kick start the introduction of technologies - for example, wind, photo-voltaics and carbon capture and storage - to accelerate them, and to drive down their costs. But any incentive regime needs to be carefully designed and should be transitional in nature. We should steer away from the sort of fiscal regime which applies, for instance, in agriculture. We need to ensure that it does not have the perverse effect of driving up costs through encouraging inefficiency. Properly designed incentives should taper away over time, in order to encourage and speed up the normal cycle companies like BP go through. As a profit-making enterprise, we are quite used to introducing new techniques and then driving down their costs. That, for instance, is what we have done in deep water oil production, where costs have fallen by around 5% a year for over several decades.

Once low carbon technologies are proven, cheap and accepted, they will be adopted around the world. That is how markets work to disseminate knowledge, from oil exploration to computers, to mobile phones.

There is rightly a concern about incentives that pick winners. However, renewable technologies, such as wind and photo-voltaic solar, have grown fastest where there was explicit price support or quotas. For example, we know from our own experience the growth opportunities created by feed-in tariffs in Germany and Spain, or Renewable Portfolio Standards in many US states.

These are imperfect policies in many ways and I am sure better ones will emerge. But they are a start.

So let me summarise my view on transitionary incentives for new technology, in order to differentiate them from what I would consider to be unhelpful subsidies.

Firstly, in order to avoid dangerous interference in the climate, there is an urgent need for new technology, and this may initially require a higher carbon price than that provided by a Cap and Trade system.

Secondly, these new technologies will only have value if they can in the future compete on cost with other options, including fossil fuels when the real price of carbon is included.

Thirdly, it is therefore right that governments provide an additional incentive above this partial carbon price to support the development, deployment and diffusion of new technologies during the transition.

Fourthly, these transitions need to explicitly decrease over time, as companies compete to provide the technology at increasingly lower cost. In fact you might consider that the purpose of these transitional incentives is to purchase the public good of having the technology available at a competitive cost in the near future. Put simply the effect of transitional incentives is to drive down the cost of technology, so it can be used competitively in the future.

What role, you might ask, is there for legislators in all of this? The answer is that you have a very important role to create the framework on which a market for carbon will depend. Only you can create the arena for businesses to act in.

Only legislators can really decide the politically sensitive question of what is the appropriate level at which carbon emissions should be legally capped. And only legislators and politicians can pass the laws which will make that cap enforceable.

Any market must be underpinned by basic regulation if it is to work. And just as derivatives trading in Chicago only really took off once it became properly regulated by the Grain Futures Act in 1922, so Carbon Trading will only take off if you, the legislators, design and implement the appropriate regulations for it to work.

Legislators must also examine other regulations, which are already in place, but which achieve perverse effects. In some countries, for instance, effectively subsidising fossil fuel consumption. As some of you know, carbon capture and storage offshore is effectively illegal today.

Our objective should be to let markets, and companies, work their magic. I believe that a market for carbon will emerge over time. For mankind tends to act in it own interest and plainly we would all benefit if consumers paid the true cost of climate change via a carbon market, and consequently reduced their emissions.

The trouble is that public opinion, though changing rapidly, has not yet fully woken up to the threat of climate change. Given the risk of delay, legislators have an urgent task to perform in bringing that moment of realisation forward, by putting in place the necessary market infrastructure as soon as possible.

In conclusion, I would like to say:

Now is the time for us all to roll up our sleeves and take the necessary action on climate change
We already have the technology to make a difference and companies like BP are already making some progress
Well functioning markets are preferable to subsidies
If a market price for carbon is created, it will generate a cascade of incentives throughout the economy which will encourage massive emission reductions
Transitional incentives should be put in place, which will accelerate the cost reduction of new technology
And finally, global market is ultimately desirable, but we should push on with developing regional markets in the interim

I am an optimist; you have to be in business. Although the challenges of climate change are grave, they can be solved. Human ingenuity knows no bounds - and human kind will solve its biggest challenge to date. Thank you very much.

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