From: Douglas Grandt answerthecall@mac.

com
Subject: Thoughts for a just transition from fossil fuels to carbon-free energy technologies
Date: August 30, 2018 at 8:52 PM
To: Katie Thomas katie_thomas@sanders.senate.gov
Cc: Sarah Vorpahl Sarah_Vorpahl@sanders.senate.gov

Katie,

Good to chat with you last week. Following are my thoughts …

How to get Off of Fossil Fuels in an equitable and just transition to carbon-free energy?

There are a lot of sound bites that evidence a preponderance of support to end oil. We on this side of the aisle
pretty much agree on the ultimate objective. There are so many hashtags that express our end goals and high
level solutions, given the urgency and necessity for aggressive action:

#KeepItInTheGround #ShutItDown #FossilFreeFast #Divest #PutAPriceOnIt #APriceOnCarbon #CarboniTax

#CarbonDividend #CarbonPricing #CarbonFeeAndDividend #CarbonDividends #FeeAndDividend
#PriceOnCarbon #PriceCarbon #BrownsLastChance #ClimateJustice #JustTransition #RiseForClimate
#ExxonKnew #ShellKnew #FossilFree #WeAreOutofTime and more.

However, very little, if any, consideration has been given to the economics of accomplishing the goal.

Citizens Climate Lobby (which I was associated with for 4 years until 2014) insists that a 100% rebate to all
qualified households will assure nobody is harmed by the rising prices (economy-wide) of an increasing
carbon fee. I believe there will be no dividend, and even if there is, it will taper off, which CCL conveniently
ignores. I believe premature shortages of fuel will likely increase prices and reduced production will reduce fee
revenues and dividends. The conventional wisdom is that reduced demand will reduce prices at the pump.
Nobody has modeled this—either scenario is mere speculation.

In addition to a handful of papers that undermine the concept of a single low price on carbon (e.g.,
Bit.ly/IOP25Aug15 and Bit.ly/FWW2016_BCrpt) supported by Bit.ly/FWW24Oct16, Bit.ly/FWW16Feb17 and
Bit.ly/FWW24Apr18, I have heard only three individuals verbalize what I have learned in my research:

Columbia University's Center on Global Energy Policy and the Niskanen Center panel
moderator Joseph Majkut stated "nobody really knows how an economy the size of the United
States is going to respond to a carbon price of this size or scope” and was endorsed by Noah
Kaufman, Ph.D. Research Scholar & Director of Carbon Tax Research Initiative SIPA Center
on Global Energy Policy Columbia University (at 1:18:00 to 1:23:00 on the archive at
Bit.ly/CGEPpanel23July18).

Nathaniel Keohane, Senior Vice President at Environmental Defense Fund, stated yesterday
on Arizona State University's "Bipartisan Conversation on Pricing Carbon Emissions" webinar
that we just don’t know what level of carbon fee will be effective (at 34:00 to 42:00 on the
Vimeo archive Bit.ly/ASU29Aug18).

I say "be careful what you wish for" and "we must not delude ourselves with wishful thinking," hence I have
concluded that the following inclusions must be part of any bill that hopes to be responsibly proposed and
enacted by Congress:

We don’t know whether government regulations or market supply-demand forces will ultimately drive oil & gas
producers and refiners out of business—let alone the peripheral support services and infrastructure, including
pipelines and retail sales of fuels and by-products. Whatever triggers the initial decisions to shut down
production, transportation and refining, we need to make sure that it is done in a responsible manner, causing
little or no harm to the economy, the stock markets, people's life savings, retirement nest eggs, pensions, etc.

Boards of Directors have a responsibility to exercise Fiduciary Duty to protect investors when the corporation
faces debt default, insolvency and bankruptcy. This eventuality will come to pass as electric vehicle or other
means of carbon-free transportation drive down the demand for fossil fuels. As refineries operate at declining
throughput, the profitability of those facilities will also decline. One physical characteristic of refineries is that
they only operate from maximum capacity down to about 70% of maximum.
What policies will Boards of Directors issue to operations management when shutting down refineries is
imminent? Will they act in the interest of shareholders (which includes officers, management and employees
of the corporation)? Or will they act in the Public and National Interest?

Before we get to the point of imminent refinery closures, we need to demand that the oil company executives
provide Congress and the Department of Commerce with their expert assessment as to what will be required
in terms of planning, execution, timeframe and risk.

My fear is that "day traders", institutional investors (pensions and superannuations) and "ma and pa" investors
will panic at the first sign of a decline in production, profits and share price. A negligible trend could precipitate
a panic sell-off of energy and related stocks which would cascade throughout the market in a disastrous
crash.

On the other hand, surprise closures of refineries could result in regional or widespread undersupply of
gasoline, diesel, kerosene, propane and other liquid fuels, causing severe disruption in business-as-usual
logistics and deliveries of groceries, supply chain items to industry and businesses. With factories closing for
want of raw materials, grocers lacking inventory replenishment for their shelves and refrigerator cases, fast
food and every conceivable consumer business running out of supplies … failure of the transportation sector
would wreak havoc on the social fabric of the nation, especially in densely populated urban centers.

Whatever the cause may be for premature and precipitous closures of refineries, we must be prepare for a
managed soft landing. It is not as though we can force an unprofitable business to stay in operation at a loss.
When a refinery reaches the minimum operating throughput, that is "all she wrote” as my father would say.
Once the operating threshold is reached, the machine will no longer function. Therefore, we need to prepare
for reallocation of declining feedstocks of crude from the most vulnerable refineries to those best suited to pick
up the slack. Shifting feedstock from one refinery to multiple other refineries will require planning and
coordination well in advance.

Who is best situated for making a plan like this? The refinery management themselves. I have come to the
conclusion that Congress and the Department of Commerce must hold hearings and have the CEOs testify
under oath how they would go about creating such a plan. How would they manage their finances, debt,
dividends and stock buy-back in order to prevent a panic in the market. This is not a short-term horizon
consideration, but needs careful thought and strategic planning to make sure annual earnings will cover
dividends, paying down debt, buying back shares in a quasi static manner and communication with investors
so the share value is maintained at a level that does not hurt investors, pensioners and superannuation funds.

We think we want divestment, but divestment taken to the extreme with a run on the market would disrupt
everybody’s way of life, not just the portfolios of the oil & gas officers, executives and employees.

If we hope that a price on carbon will result in declining demand for fossil fuels, or that electric vehicles and
alternate carbon-free liquid fuels are developed and that the use of fossil fuels declines in a managed way, we
had better investigate how various fuels and sectors will respond to a range of carbon prices. The work of one
group of researchers published in IOP Science on August 25, 2015 (Bit,ly/IOP25Aug15) suggests that the
present proposals for $30-$50/tCO2 rising at moderate annual increases will impact the shift from coal to
natural gas and renewables, but that is already happening without a carbon price. In order to effect shifts from
diesel, gasoline, kerosene and other liquid fuels to carbon-free energy and fuels will require prices orders of
magnitude higher than the present proposals for “a price on carbon” — hundreds to thousands of dollars per
ton of CO2 (refer to Figure 1 at Bit.ly/IOP25Aug15). Of course, the exponential rise in EV demand and
production may well displace gasoline and diesel even without a price on carbon.

To quote Messrs, Kaufman and Keohane, “we just don’t know.”

Now, once we have succeeded in winding down production and refining operations, the question is who will
pay for the dismantling and detoxifying of the facilities and worthless assets? “Worthless” because there will
be no market for obsolete equipment that had only one purpose that society has determined is going to be
extinct.

Whether we decide that a healthy climate for our children and grandchildren—and their progeny after them—
is a just cause, or that the volatility of large swings in global prices of petroleum crude and refined fuels
caused by market manipulations by the likes of OPEC and non-OPEC nations, sanctions that U.S. imposes on
renegade nations, closure of critical trade passages (Hormuz), or simply fluctuations in the exuberant drilling
and production renaissance hubris, swings from high price greed down to low price survival modes (manic
and production renaissance hubris, swings from high price greed down to low price survival modes (manic
and depression)—either way, the industry must clean up its own messes. Abandoned wells, pipelines,
processing and compression facilities, as well as idle refineries no longer needed must not be allowed to
remain on the landscape. They must be removed responsibly by the industry, whose earnings will decline in a
predictable and managed timeframe. Only the management of the oil & gas industry can plan for their own
demise and removal of the dead carcasses they birthed in our behalf.

The end of the era must be equitable and just. If we want to avoid catastrophic impacts on the economy and
society, the industry must plan and execute its own winding down in the Public and National Interest, not their
own proprietary interest.

I figure that Price/Earnings (P/E) Ratios are a quick predictor of the time to wind down to zero fossil fuel
production. For example, consider ExxonMobil’s P/E Ratio: Divide its $340bn current Market Capitalization by
its recently reported $20bn annual earnings. The P/E Ratio is 17. At 20bn per annum earnings, it would taker
17 years to buy-back all outstanding shares of stock. Howeber, with a straight line decline in earnings from
$20bn to zero, the average annual earnings for the remaining years of operation would be on the order of
$10bn—that would make it 34 years to buy-back all outstanding shares.

But, now consider its $40bn in debt to pay off, and costs to dismantle and detox 25 refineries globally (5 are in
the US) each with say $1-$2bn in “final expenses.” The grand total liability of buying back all shares and
paying all debt and detox expenses amounts to about $400bn. That would take about 40 years (plus or minus,
depending on the price of oil and extreme extraction expenses) to accomplish without imposing financial bail-
out burden on tax payers. The industry as a whole is probably 10 years longer due to its higher average P/E
Ratio.

Since 40-50 years runs counter to what science demands in order to achieve a 2.0°C or a 1.5°C limit on
global warming as called for by UNFCCC Conference of the Parties (COP), additional efforts will be required
to draw down CO2 from the atmosphere and out of the oceans. Much discussion and preliminary
demonstration facilities are under way by experts, engineers, scientist and entrepreneurs on GoogleGroups,
aimed at restoring a healthy climate of 300ppm atmospheric CO2. The task of removing tens and hundreds of
gigatons of carbon is daunting, but not impossible. The price to do that is not insignificant and options are
under considerable study at this moment.

I created charts that show the relative size of that effort for two simple scenarios: 30 years and 50 years. The
baseline is a CO2 decline curve that aligns with Dr. James E. Hansen et al (Bit.ly/HansenPLOS) and
published by the German Advisory Council on Global Change (Bit.ly/WBGU-2009 Figure 3.2-1) and is
essentially a “back of the envelope” illustration and can easily be refined if needed.

The Department of Commerce should create a trajectory for CO2 emissions reductions and drawdown, and
monitor actual performance against it (fuel-type-by-fuel-type and sector-by-sector in the case of emissions),
and respond with "course corrections” of the carbon price or other regulation that might be adopted in order to
keep the decline and drawdown on track. It may be that an “iron fist” approach necessarily be instituted to
assure reductions and drawdown measures achieve the required results.

We must require producers and refiners to submit endgame plans as soon as possible for "command and
control" by Department of Commerce. DOC must continuously monitor each oil & gas company’s financial
control" by Department of Commerce. DOC must continuously monitor each oil & gas company’s financial
health to make sure no operation is suspended prematurely and that facilities are shut down and dismanted
as planned. Zero tolerance and possible price controls are essential.

The Department of Commerce should continuously study the relationship between supply, demand, carbon
fee, geopolitical events and threats, OPEC and non-OPEC maneuvering, sanctions, and other relevant
variables to determine causality with global oil & gas prices. Oil & gas are national treasures, not to be left to
the laissez-fair decisions and self-interests of corporate executives and conflicted Boards of Directors. We the
People should be calling the shots, and there should be advisory civilian representatives sitting on the Boards
with legal mandates and veto power.

Best regards,
Doug Grandt
Putney, VT