Curb your enthusiasm for a carbon tax

Robert Eccles, Xingchao Gao and Shiva Rajgopal explore what a carbon tax could mean for National Oil Companies and future market dynamics

Urgent calls for a meaningful carbon tax continue to rise, although its likelihood remains uncertain.

While we recognise the benefits of such a tax, we think it is also important to be realistic about what it can and cannot do. In particular, we are dubious that it will ever be imposed on National Oil Companies (NOCs). We base this conclusion on an analysis of the impact of a $100 per ton of CO2 equivalent on the largest oil and gas companies in the world.

According to the Climate Accountability Institute, 12 of the world’s 20 biggest carbon emitters since 1965 are NOCs. The top 20 carbon emitters account for 35% of global emissions and around 58% come from the NOCs. Saudi Aramco leads, Russia’s Gazprom stands in second place, and the National Iranian Oil Company ranks five. Despite their contribution to worldwide emissions, most NOCs are tight lipped about ESG in general and carbon and climate disclosures, in particular.

Such a tax on private-sector oil & gas majors could simply open the market up, at least in the short term, for NOCs

We analyzed nine largest NOCs and six oil & gas majors in Europe and the US – see Table 1 for the results. It shows that a $100 per ton carbon tax would be devastating on nearly every NOC. Because of their importance to the states who own them, this suggests that such a tax would never be imposed. The only one that could survive it is Saudi Aramco, and the political situation there makes such a tax implausible.


Table 1: Summary Analysis  


We examined both quantitative and qualitative disclosures in these companies’ annual and, where available, sustainability reports. Some have published almost nothing (such as National Iranian Oil Company and Petróleos de Venezuela) related to emissions and climate responses. Saudi Aramco, the world’s biggest oil producer, floated in 2019, but has not published a sustainability report.

Of the nine largest state-owned oil & gas companies (by revenues), seven have not disclosed their scope 3 emissions, so we estimate them based on the oil and gas production. The two exceptions are Petrobras and Indian Oil Corporation.  

Inevitable questions related to comparability, consistency over time, and verifiability come to mind. For instance, Saudi Aramco discloses scope 1 and 2 emissions from assets over which it has operational control, but ExxonMobil discloses total emissions based on the proportion of an asset it owns. Some self-reported numbers raise questions, too. Can Aramco’s scope 1 carbon footprint really be as low as 49.1 million tons? This would make it almost the lowest emitter, despite being the largest producer.

Net-zero pledge 

NOCs account for over half the emissions of the top 20 biggest carbon emitters, so their carbon reduction plans, if any, are crucial in achieving carbon neutrality by 2050. The track record of NOCs committing to net zero targets is mixed. Only Sinopec, PetroChina, Petrobras and Petronas have set the goal of net-zero emissions by 2050. Sinopec and PetroChina have shared fewer details on how they plan to get there, while some of the other NOCs have set less ambitious, short-term targets by 2030 or 2035. Saudi Aramco, National Iranian Oil Company and Petróleos de Venezuela are yet to set any reduction targets or produce any detailed transition plans.

The probability of imposing a carbon tax on NOCs is low partly because these entities generate substantial fiscal revenues for the state and hence face lower regulatory pressure in their home countries. Oil and gas companies owned by non-state investors, such as large institutional asset managers, are under more pressure to reduce their carbon footprint and are more likely to be subject to a carbon tax. Consequently, they tend to report more detailed emissions reduction targets and commitments to invest in lower-carbon technologies.

Presence of a Chief Sustainability Officer 

We checked whether the role of Chief Sustainability Officer (CSO) existed in the senior management team of each firm, and found that the existence of such a position is highly associated with well-designed carbon reduction targets. Two of the nine largest state-owned oil & gas companies, Petrobras and Petronas, have appointed a CSO and also committed to net zero by 2050 with a clear transition plan.

Financial Impact of $100 per ton of CO2 Equivalent  

Our stress testing framework embeds a number of assumptions, and the key inputs include oil price ($75 per barrel roughly as of today, which is relatively high); oil and gas reserves yet to be exploited; annual production; carbon emissions; free cash flow and dividends payments; standardised measure of future cash flows (if not disclosed, we replace with current production costs and income tax rate, if upstream property plant and equipment or PPE is not disclosed, it is estimated, natural gas is translated to oil barrels equivalent for ease of aggregation). This analysis assumes that the price increase, on account of the carbon tax, is not passed on to the customer.

Comprehensive cost per barrel of oil 

Column 6 plots the estimated comprehensive cost of extracting a barrel of oil – including production and development costs, the balance in property plant and equipment cost of oil reserves per barrel, selling, general administration cost and income tax per barrel. Not surprisingly, the comprehensive cost of extracting a barrel of oil is cheapest for Aramco ($25.06 per barrel) and most expensive for Conoco Phillips (at $56.84 a barrel). Among the private oil and gas firms, only Total ($33.40) can compete.

Cash flows 

Column 7 of the table shows that several companies including Chevron, BP, Shell, Total, ConocoPhillips and Petrobras have enough annual cash flow to absorb carbon costs on scope 1 and 2 emissions. But the study suggests that ExxonMobil and most NOCs are not even viable when annual cash flows are considered.

To assess whether firms have enough equity to absorb the impact of a carbon tax on their oil and reserves (representing future cash flows), we assessed the sensitivity of firms’ balance sheets to a $100 a ton tax.  The comprehensive cost of producing a barrel of oil shown in Column 6 does not include the impact of a carbon tax.  It turns out a carbon tax for scope 3 emissions alone is roughly $43 per barrel of oil. Column 6 suggests, at an oil price of $75 a barrel, Aramco would report the highest profit – closer to $50 ($75-$25 cost).  The carbon tax for scope 3 emissions would reduce that profit to $7 a barrel ($50-$43). No other firm’s equity can survive a $100 carbon tax on its reserves.


Our analysis suggest that it is highly unlikely a meaningful carbon tax would ever be imposed on NOCs, so curbing their emissions will require other mechanisms. There is also the risk that such a tax on private-sector oil & gas majors will simply open the market up, at least in the short term, for NOCs until less expensive sources of energy are made easily available to their customers.

It is scarier to contemplate the game theoretic effects of such thinking. It is perhaps obvious that some oil will be left in the ground. Aramco and the other NOCs might even accelerate the production of oil now to grab market share and to ensure that they are not the ones left holding the most unexploited reserves come 2050. The other emerging difficulty is that a cut in oil and gas investment in the Western world will actually raise oil prices in the medium term and make the passage of a carbon tax a political impossibility even in the Western world.