James Smith: We need a worldwide carbon trade

The Business Interview: Shell may seem an unlikely climate campaigner, but their UK chairman is crossing his fingers for an international deal on CO2 emissions at Copenhagen
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The Independent Online

As one of the original "Seven Sisters" international oil giants, Royal Dutch Shell might seem a strange candidate for a front-row seat at the UN climate summit in Copenhagen in a few weeks' time. But James Smith, the company's UK chairman and a standard bearer for corporate environmentalism, sees no contradiction between big oil and a green future.

"Climate change will get tackled sooner or later – and if it's later, that will be bad," Mr Smith says, surveying the spectacular views over central London from a boardroom in the Shell Centre tower. "We will end up with climatic shocks, which will be bad for the environment, for society, and also for business."

This is no cosy tree-hugging. This is hard-nosed capitalism. "The sooner we can get the cost of carbon into the system we can frame good policies, hammer out international agreements, and scale up new technology," Mr Smith says. "The key thing for business is a level competitive playing field; if everything is done in a rush there can be no guarantee."

Mitigating climate change will be nothing short of a revolution for the oil industry and Shell is determined to be in the vanguard. Like arms manufacturers, oil majors have long had image problems. And since Shell pulled out of the London Array windfarm and announced it was reining back green investment, accusations of PR "greenwash" have been added to the chorus. Mr Smith rejects the charge. Rather, the move is a sign of the industry maturing, he says. "The reality is that all companies can't do everything, it is in their nature to have a strategy and choose what they are good at."

For Mr Smith, the climate challenge exemplifies the best of the oil and gas business. After studying physics at Aberdeen, a desire to travel led the young Mr Smith to chartered accountancy. There were spells at Ernst & Young and Arthur Andersen, but when Shell became a client in the early Eighties, he was hooked. What followed was decades in the oil industry, living and working all over the world.

"It is a great industry because of its multidisciplinary nature," he enthuses. "We have geologists, and pipeline engineers, drilling and production and petroleum people, and funding and marketing and HR and finance."

For Shell, a mature approach to climate change means sticking to large-scale process engineering and avoiding mass-manufacture – hence pulling out of windfarms, which need turbines, and solar power, which needs panels, and focusing efforts on biofuels and carbon capture and storage (CCS).

Having spent several hundred million dollars over three decades on a gasification process to improve the efficiency of coal, CCS was an obvious choice. "We had to be good at separating gases and liquids because that is what we do in a refinery," Mr Smith says. Biofuels is also a natural fit, and the company is convinced there is a big future. "Energy flows out of a petrol pump two-and-a-half times faster than out of a 13 amp plug, so there are challenges for electric cars," Mr Smith says. Shell already has six biofuels research programmes – including three in the UK – and five pre-commercial joint ventures, including one using corn stalks in Ottawa and another in Hawaii using marine algae. There is progress, but the technology is very new and enormously expensive. "Algae looks promising in test tubes, but the next phase is still only a 10-hectare site, when an operating plant would be nearer 15 square kilometres," Mr Smith says. "We are aiming for something close to petrol, but even if it works it will be 10 years before we can apply it at scale."

The controversial Canadian tar sands loom large over any talk from Shell of green energy. Lobby groups argue that the projects are bleeding dry local rivers, polluting and destroying vast swaths of forest, and using up unjustifiable amounts of energy to turn the sand into oil. There are environmental consequences, Mr Smith acknowledges, but says they are "not off the scale". Shell's research shows carbon emissions from the scheme from now to 2050 to be two parts per million. "That is not trivial, but it can be dealt with," Mr Smith says.

If the technology of climate change is a challenge, the economics are even worse: which is where Copenhagen comes in. What is required is nothing short of a change to the terms of trade for energy, and it will take all instruments available to a modern market economy to do it, says Mr Smith.

The biggest single factor is to put a price on carbon. But it is too late to rely on the free market. "If we had got the cost of carbon into the system 20 years ago, then by now the market would be taking care of things," Mr Smith says. "But we are now short of time so that alone won't do it." To get the new technologies in time needs launch aid – such as the UK Government's CCS competition – and also regulation. "Here's someone from business saying we need more regulations," Mr Smith laughs ruefully.

There are three main points at issue in Copenhagen. The first is to establish how to get to a reduction of global emissions by 50 per cent by 2050. Second is to fix which countries will cut how much. Third is to work out how to pay for it. Unsurprisingly, the third is the big one for businesses. European Union leaders recently said that by 2020 some €100bn (£90bn) per year will need to flow from the rich world to its fast-growing neighbours to pay for green infrastructure. Up to half could come from public purses, the rest from the private sector. Discussions at Copenhagen about how the process might work will be closely watched by the likes of Shell.

The most crucial talks are those on connecting carbon markets globally, on the extension of the Clean Development Mechanism – which allows companies subject to carbon emissions caps to offset emissions in one country with greener investments elsewhere – and on whether CCS will be included. "The emergence of a global carbon market would put a price on carbon that can then be put into businesses' investment decisions and consumers' buying decisions," Mr Smith says. "And if carbon credits are recognised internationally then that results in a flow of funds into the developing world."

The sooner agreements can be thrashed out, the better it is for business. "It comes back to the need for a level playing field," Mr Smith says. "If the private sector is buying credits on a properly competitive basis, then the system will be workable in industrial economic sense."

With even the oil majors on side, the only remaining hurdle is the politics.

James Smith: The road to the boardroom

2009 Appointed the chairman of the Cambridge Programme for Sustainability Leadership board, which runs seminars on climate and sustainability

2009: Appointed president of the Energy Institute

2004 to the present: UK chairman of Shell

1998 Head of Technology and Sustainable Development for Shell's global Chemicals division

1992 Took charge of Shell's business development sector in the Middle East

1989 Became head of finance for Brunei Shell

1983 Joined Shell, after working as a chartered accountant, for Ernst & Young and Arthur Andersen

* Studied physics at Aberdeen University. "I was interested in aeronomy and worried about global warming – and that was 1974," he says

* He is married with one son

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