Policy Matters

Mark Cohen, Professor of Management and Law, is a University Fellow with Washington, D.C.-based Resources for the Future (RFF), an independent, nonpartisan research institute focusing on environmental and natural resource economics policy issues. In 2010 he led an RFF research group that consulted with and wrote key position papers for the National Commission on the Deepwater Horizon Oil Spill and Offshore Drilling. He also serves as one of five members of Exxon Mobil’s External Citizenship Advisory Panel, providing strategic and objective advice on the company’s corporate citizenship activities.

What are some of your current research interests in energy?

Most of my recent research in the energy sector is related to deep-water drilling. Right after the BP spill, President Obama put a moratorium on drilling for six months and established a commission to advise him on several things—causes, how to prevent future spills and recommendations on opening up again. One task was looking at the role of risk and insurance. We looked at questions such as, “How do you determine the incentives for firms to prevent a small risk of a highly catastrophic spill?” Those types of spills are infrequent, but they can have disastrous consequences. One of our recommendations was the elimination of liability caps, but Congress did not act on that.

Another area of research is the role of inspections, monitoring and enforcement of spills. One of the questions we looked at was whether deep-water drilling is riskier than the shallow-water kind. Industry was saying it is no more dangerous and that there is no empirical evidence of higher risk. However, from our analysis of the data we concluded that it is riskier. It sounds like a simple question, but just establishing empirically that the risk is higher was important. Continuing research focuses on the role of inspections and monitoring on accidents, spills and noncompliance. RFF also has a big project about hydraulic fracturing—looking at public perceptions, risks and how they match up.

What kinds of issues are at the forefront of the energy business today?

Natural gas has really changed the landscape of the energy markets and in some sense slowed down the push toward alternatives. It has hurt solar and wind because natural gas prices have gone down so much. These new kinds of technologies to extract oil and gas bring with them new issues that are much more localized. Perceptions and fears become important.

How should the energy business address those perceptions and fears?

There’s got to be a much more informed discussion about what the risks are and what’s appropriate for companies to do. In the case of fracking, there’s been a call for disclosure of fracking fluids. Companies initially didn’t want to fully divulge what was in the fluids because they considered it proprietary. But they’ve got to be transparent, or it creates a perception that they’re hiding something. They have to figure out how to address societal concerns and navigate through them in an informed way.

On the teaching side of your academic work, what do you think business students need to understand about the energy sector?

The world is changing. We’re not doing away with traditional energy sources, and yet we’re expanding dramatically in different areas. In my class, we take a look at the entire energy sector both from the point of view of students interested in going into the field and also for students who are going to be consumers of energy in their businesses.

How should tomorrow’s leaders prepare themselves to meet future market demands in the energy sector?

It used to be that energy markets were more insulated. It was very much technology- and engineering-based. MBAs would come in on the finance side, with business plans, contracts, pricing market predictions, those sorts of things. Those kinds of standard finance and accounting tools are still needed, but what I think is changing is that, more and more, the energy sector needs to understand the external environment. Climate is just one issue.

What’s currently happening with renewable energy sources?

It’s going to be a long time before most energy sources are coming from renewables. It may be hundreds of years—or just 10, 20 or 30. A lot has to do with technological development and other factors we can’t predict, such as war. And if climate change gets really bad, really fast, societies may decide to tax carbon very aggressively. Or they might not. Those kinds of things can speed up technological change. Right now renewables are a very small portion of today’s portfolio. A big portion of growth will continue to be from oil and gas because of recent technological innovations. Nobody predicted that was going to happen. With these technological breakthroughs, gas prices plummeted, and alternatives now don’t look so good. But one of the interesting things I learned while serving on the Exxon Mobil citizenship panel is that, as they do their world energy outlook every year, they assume a price on carbon. They’re planning as if carbon will be taxed, and some people don’t realize that is a possible factor.

Corporate social responsibility has been a major research interest for you. What is its role in the energy sector?

Recent evidence is that firms that perform well also do well on the social metrics. It doesn’t hurt you, and it may help you. It’s at the very least a sign of good management. It could also be, in some cases, consumer- or public-driven. People vote with their feet. That whole issue has been around a long time. It’s not how or why you should be good. It’s how firms use corporate social responsibility in positive, strategic ways—whether it’s workers’ rights, safety, the environment or diversity. Voluntary social and environmental disclosures are starting to become more mainstream and almost a cost of doing business. You’ve got to do that if you want to be a leading firm. We are starting to move in the direction of disclosing more of these nonfinancial performance metrics. That is becoming more and more material to investors.

When it comes to the energy sector, companies who are looked upon as leaders take these kinds of issues really seriously because they know that they have to more and more. They put out sustainability reports, measure and manage against a lot of these social performance metrics. All the major oil companies know there are human rights issues in countries where they drill. There are issues about social welfare, issues about governance, even bribery. They have to make sure that they don’t get involved in those kinds of things, and they must maintain strong standards. They are making sure that there’s money and infrastructure built into the communities they go into. There are so many issues in the energy sector that have to deal with social responsibility.

What can the energy sector do to stay ahead of the curve on issues of social responsibility?

What big companies do nowadays is they try to be on top of the current issues, but even more than that, what leading companies are trying to do is figure out the emerging issue. It’s sometimes hard to know what those are, but there are signs. When you start to see some of the fringe nonprofit groups sort of raising questions in any form, you have to ask yourself, “Is that something I’m really going to have to worry about? I would have to really change some of my business operations, and how do I plan for that?” Government is just a reflection of people’s desires, so society’s norms become government regulation in the future.

Do you think it’s possible, given the recent technological breakthroughs and the push for less government regulation, for the United States to achieve energy independence?

It is important to understand that “energy independence” is somewhat of an elusive goal that isn’t even desirable. What we really want is “energy security,” which means that we are not beholden to threats from foreign sources of oil that might dry up due to war, boycotts, etc. Perhaps even more important, we don’t want to be in a position where our foreign policy is dictated by our need for foreign oil. Would we care if much of our oil came from Canada and Mexico—two good friends? So it is more about energy security.

On regulation itself, it is important to ask: What are the benefits and cost of every regulation that is currently in force (or being proposed)? Some regulations are clearly burdensome to industry but good for society. Burning high sulfur coal is just one example—the health risks to the public alone justified reducing pollution from coal-burning power plants. Similarly, high levels of carbon emissions from coal-burning power plants are not in the public interest. Of course, some regulations might impose social costs that outweigh their benefits. But the question should not be what is good for any one industry or, for that matter, what will increase jobs. Regulation of the coal industry not only has improved health but has also created jobs in the pollution control sector, as well as in the renewable energy sector. Thus, the question should be on balance, over the entire population: Do the winners from regulation outweigh the losers?