Why do firms lobby the European Union individually?

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WHY DO FIRMS LOBBY THE EUROPEAN

UNION INDIVIDUALLY?

10 AUGUST 2018

Sara Salib

Student number: s1934295

Master thesis

University of Leiden

Supervisor: Dr. Fraussen

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Abstract

This thesis explains why oil firms lobby the European Union individually. Several oil firms decided to lobby individually regarding a recently proposed regulation despite being member of several associations that could have lobbied for them. This behavior can, according to the theory, be explained using several determinants, such as access, size and issue concern. This master thesis used these determinants to analyze their role in a specific case study. Regarding the first determinant, access, the results of this master thesis indicate that when a firm decides to lobby individually, it does not necessarily mean that they do so because they have (more) access to the decision-making process. Regarding the second determinant, size, large firms are more likely than small firms to lobby individually because they have the financial resources to do so. The last determinant, issue concern, does also play an important role. Firms that lobby collectively must share the same issue concerns. None of the observed firms in this analysis shares the same issue concerns as any of the associations of which they are a member. This is because some firms have formed issue niches so that their preferences will not overlap with other firms’ interests.

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Foreword

This thesis was written to fulfill the graduation requirements of the master program in economics and governance at Leiden University. I conducted this research from December 2017 to August 2018.

This thesis was written with the guidance of dr. Fraussen. I want to thank my supervisor for offering great support during this research.

I hope you will enjoy reading it.

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1. Introduction

1.1 Background

Lobbying is an important aspect of many firms’ competitive strategy (Timaniau & Wilts, 2006). It is an attempt to use the power of the government for private ends (Kim & Darnall, 2016). Government policies have significant impacts on the competitive environment of firms. Therefore, many firms expand their efforts to influence policy making (Hillman & Hitt, 1999). It involves private and public actors engaging and partnering in consensus-oriented decision-making (Kim & Darnall, 2016).

Firms have an incentive to engage in political activities when they can increase their revenues, avoid costs, advance their economic position, increases their bargaining power, hinder competitors’ progress or shape government decision-making so that the adopted policy measures have positive implications for their (long-term) performance. But this collaboration could also improve the possibility of adopting a policy that otherwise might not have been possible, avoiding conflict and enhancing access to knowledge and new insights from various partners (Kim & Darnall, 2016). Corporate political behavior developed as a reaction to high costs and the politicization of regulation failures and downstream implementation complexities. Such collaborative governance is especially suited to address complex social issues that cross jurisdictional boundaries (Kim & Darnall, 2016). Hillman and Hitt (1999) and Holzinger and Oliver (2008) argue that as the political environment becomes more and more complex and influential, firms that participate in politics are more likely to strengthen their competitive advantage than firms that do not participate in politics.

There are several ways in which firms try to influence policy making. Relatively little, however, is known about why firms chose a particular level of political participation. Therefore, this master thesis will focus on what drives firms to choose a particular level of participation. There are various levels of participation by which firms can influence decision-making. Firms could, for instance, signal their interests individually to a policy-maker or they could lobby collectively and represent their interests through an association (Timaniau & Wilts, 2006). Individual political lobbying is about the efforts of individual firms to influence public policy-making. Collective lobbying is about the cooperation of two or more firms that lobby political decision-makers together (Hillman & Hitt, 1999). Collective lobbying could also be achieved through an association. Businesses interest associations represent the interests of a distinct group. Members of business associations exchange resources with each other and with European institutions (Eising, 2007).

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Choosing the level of participation is an important choice that all firms have to make because the strategy they choose, will enhance their chances of success (Hojnacki, 1997). Also Hillman and Hitt (1999) argue that one of the most important decision for a firm is the level of participation because this decision will determine how much access they will have to the decision-making process.

Hillman and Hitt (1999) argue that the decision about the level of participation is related to the financial resources required at all levels. A disadvantage of individual political action is that all the costs will fall on the individual firm, while when you act collectively, the costs are shared among the participating firms. Pijnenburg (1998) provided a case study on the ad hoc coalition formation of firms and Coen (1997) indicates that the different routes for collective and individual European lobbying could be mutually reinforcing by stressing that the way in which these routes are used is influenced by cost considerations. Pijnenburg (1998) adds to this by indicating that a Eurogroup suited to European Union lobbying will first look at the kind of issue they have to deal with and, especially, to what extent the issue is internally divisive. When an issue does not lead to a split among its members, a Eurogroup can lobby effectively. Hojnacki (1997) states that when a group’s interest is narrow and when its potential members signal that they do not have much to contribute to a collective advocacy, the costs of joining an association will most likely outweigh the benefits. An advantage of individual political action is that firms could maintain their distinct identity and do not have to narrow, broaden or even adjust their opinion to fit into a large association. But when a firm is perceived to be pivotal to success and its members belong to a coalition, and when firms have significant interests or oppositions, the benefits of joining an association can be substantial. As part of a collective advocacy effort, firms that share the same values could share costs, information and skills. This thesis hypothesizes that firms will only participate collectively when this increases their chances of success. So when an organization wishes to include new members, it has to show the potential members that a collective participation has a greater chance of achieving beneficial objectives than the firm will have if it participated in politics individually (Hojnacki, 1997).

1.2 Research question and research method

The aim of this thesis is to contribute and to fill the gap in the scientific discussion by answering the following research question: Why do firms lobby the European Union individually?

To answer the research question, this master thesis will examine a particular case where firms have lobbied the European Union individually. The case is about the Decision of the the European

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Parliament and the Council 2015/1814 concerning the establishment and operation of a market stability reserve for the Union greenhouse emission trading scheme and amending Directive 2003/87/EC. More specifically, there will be looked at why in this case, oil firms have decided to lobby the European Union individually instead of collectively. In the next section on the relevance of my research, I clarify the focus on this case, and oil firms in particular, in further detail.

This research uses process tracing, which is mostly utilized for small-n interest group research. With process tracing, the key events, individual decisions and relationships that link causal conditions to outcomes are analyzed. This method explores the relationships between events in a chronological order and provides a summary of the events and actor behavior that will explain how oil firms lobby the European Union. The method of process tracing is complemented with data from an online consultation. The tracing process will start with the results of an online public consultation and will end with the Decision of the European Parliament and of the Council 2015/1814 concerning the establishment and operation of a market stability reserve for the Union greenhouse emission trading scheme and amending Directive 2003/87/EC. The analysis used three determinants—access, size and issue concern—to explain why firms have lobbied individually.

1.3 Relevance

Decision-makers at the European level work on regulations that affect more than 500 million citizens and almost each social and economic sector in the European Union (Koeppl, 2000). They have the ability to change the size of markets through government regulations and purchases, affecting the structure of the market through exit or entry barriers and antitrust legislation or to change the cost structure of firms through, for instance, new pollution standards. In a lot of industries, the success of business in the public policy arena is not less important than the success of businesses in the marketplace. Therefore, is it important for firms to develop a political strategy as a part of their overall strategy (Hillman & Hitt, 1999).

Even though Yoffie (1987) argues that most firms free ride and barely participate in politics, evidence shows that corporate political action is growing significantly. Decision-makers are regularly in contact with thousands of lobbyists, who present national, sectoral or private interest, since they are aware of the fact that the cooperation could benefit both parties (Koeppl, 2000).

The increasingly inescapable influence of the government on firms’ outcomes and activities and the fast-growing firm involvement in policy-making has created a growing scientific interest

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concerning why and how firms participate in politics (Holzinger & Oliver, 2008). This master will contribute to the ongoing scientific discussion by analyzing lobby behavior, in particular the level of participation.

The strategic behavior of oil firms is important to study because their behavior affects many segments of our society. National oil firms do not only act on the grounds of market principles, they also often have close relationships with national government. Therefore, they often share similar goals as the national government, e.g. wealth distribution, job creation or general economic development (Pirog, 2007). This study mainly focuses on the oil industry because of its enormous effect on the society and because they are particularly exposed to federal and international regulation. According to the Institutional Investor Group on Climate Change (2017), the energy industry is responsible for about 70% of the global greenhouse gas emissions. Nearly 60% of the energy emissions are a result of the oil industry. The oil industry is therefore very relevant to the case that will be discussed in this thesis about the Decision of the European Parliament and of the Council 2015/1814 concerning the establishment and operation of a market stability reserve for the Union greenhouse emission trading scheme and amending Directive 2003/87/EC. This case is important to look into because of the enormous impact it has on our society, such as global warming, human health and economic impacts (Cline, 1992).

1.4 Thesis structure

Chapter 2 presents the theoretical framework, which provides an overview of the existing literature on lobbying behavior, specifically regarding the level of participation. This theoretical framework clarifies why some firms decide to lobby individually and some collectively. At the end of the theoretical framework, the hypotheses are presented. Next, Chapter 3 describes the methods and research design used in this thesis. Chapter 4 follows with the analysis, which discusses the investigated regulation and its key players. This chapter also explains why the observed firms decided to lobby individually instead of collectively using the provided theory. Finally, Chapter 5 provides a conclusion, discusses this research’s limitations and gives suggestions for future research.

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2. Theoretical framework

Since government policies can have a significant impact on firms’ competitive environments, firms expand their efforts to affect decision-making. Firms compete with each other for political influence by spending a lot of energy, money and time on the production of political pressure (Becker, 1983). Much of the literature on corporate political action discusses several factors that firms the behavior of firms. The goal of this theoretical framework is to explain why firms decide to lobby individually instead of collectively. Firstly, it will explain what individual lobbying and collectively lobbying means. Then it will provide an overview of the determinants described in the literature that determine whether firms will lobby individually or collectively.

2.1 Level of participation

This research assumes that firms are rational actors—that will choose whether to lobby individually or collectively based on their assessment of which alternative maximizes their chances for success (Pijnenburg, 1998). Pijnenburg (1998), for example, explains why some firms are more skeptical towards collective political action. Reasons include insufficient resources. too many differences between member associations about lobbying approaches and too big of a distance between individual firms. Firms have the option to either participate individually or collectively. Both options will be discussed in this section.

2.1.1 Individual lobbying

Individual political action simply refers to the solitary efforts by individual firms through

individual participation in politics. In this case, firms do not wish to cooperate with other firms or through an association. An advantage of individual political action is that firms could maintain their distinct identity and do not have to narrow, broaden or even adjust their opinion to fit in a large association. One of the most important disadvantage of individual political action is the financial burden (Hillman & Hitt, 1999). Participation in collective action is not as resource-intensive as individual political action (Bouwen, 2002). This will be explained in more detail in section 2.2.1.

2.1.2 Collective lobbying

Collective political action deals with the cooperation and collaboration of two or more individual firms that lobby political decision-makers (Hillman & Hitt, 1999).Important avenues of collective forms of political action for firms are trade associations and coalitions (Rae & Walker, 2014). These avenues are explained in this section.

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Business associations

Businesses interest associations represent the interests of a distinct group. Many firms can be eligible to join an association. To a certain extent, the kinds of members an association has, represents the position that interest organizations assume. Members of business associations exchange resources with each other and with European institutions. The structure of the organization has a strong impact on the collective activity of associations; it separates the interests of the association’s members from those of non-members. The size of the association’s sector domain could have different effects on the degree of access to political institutions. A broad sector is more likely to enhance the importance of an association to policy-makers, but decrease its capacity for collective action. A narrower sector with fewer members can better pursue the interest of its members without internal compromise. However, even though its ability for collective action is high, an association with a narrower domain might not be very relevant for policy-makers (Eising, 2007).

In contrast, an association that represents a broader sector increases the number of members and policy problems that the association will have to deal with. This high heterogeneity of member interest could make collective activity harder. European institutions state that they prefer to work with broader associations. This is because it facilitates political reform. Also, they do not like to deal with a vast array of narrow claims (Eising, 2007).

Coalitions

Everyone intuitively recognizes what a coalition is, but it is hard to define. Some argue that all forms of collective action are a sort of coalition. The integration of organizations, such as business associations, differs widely and generally depends on the organization’s durability, formalization and autonomy (Pijnenburg, 1998).

The overall literature, for example Hojnacki (1997), Hillman and Hitt (1999), Timaniau and Wilts (2006), Mahoney (2007) and Holzinger and Oliver (2008), suggest that being part of a coalition is beneficial. The benefits can be summarized in two arguments. First, a coalition could signal to European institutions that a specific policy opinion is being supported by a large and varied group of firms (Hillman & Hitt, 1999). Policy-makers pay attention to policy proposals that have a broad support (Mayhew, 1974). In a political system where makers are elected, these policy-makers would like to be informed about whether a vote in favor of a legislation can prove to be detrimental to them in an election. When the majority of the public is not in favor of a proposal that a policy-maker supports, there could be consequences in future elections. The coalitions could also show how members have dealt with differences among other members before they

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approached European institutions; thus, their final position is one that has the support of the majority of the legislature and the public. Therefore, a coalition could get more political support for a policy proposal by showing that the majority of the coalition already supports this position.

Second, a coalition provides a framework for a more efficient use of resources. Finances are very important when it comes down to the complex multi-level structure of the European Union (Mahoney, 2007). When you work within a coalition, the financial burden of for example, having an own office in Brussels, could be avoided. Next to financial resources, also expertise and knowledge can be exchanged and used in a more efficient way.

Another advantage of working within a coalition is that it is less inhibited and has more room for maneuverability, or deviating from a well-trodden path (Pijnenburg, 1998). When an organization wishes to attract a new member to join the organization, it must show the firm that participating collectively holds a greater chance of achieving the objectives than the firm has when it participates individually.

Working within a coalition could also be very challenging. Working within a coalition could bring more instability and fragility. For example, the opting-out threshold is lower, and firms can dissolve their partnerships anytime, individually or collectively. A coalition has only one incentive that it could give to firms: a collective good, or their common interest, which is sometimes only temporary (Pijnenburg, 1998). Participating in a coalition also involves structuring, organizing and management functions. These functions can introduce all kinds of problems regarding the internal exchange of information, the decision-making procedures, the division of tasks and responsibilities, the availability of resources and many more. These transaction costs could be considerable

(Pijnenburg, 1998).

2.2 Determinants

Now that there has been explained what individual and collective participation is about, five determinants will be explained that define whether a firm will participate individually or collectively. To outline a conceptual understanding of a firm’s decision to join a coalition, it is necessary to identify the costs, benefits and expectations that will affect the firm’s assessment. Based on earlier studies, these include the following determinants.

2.2.1 Size

The first determinant is size. Rae and Walker (2014) argue that large firms are less likely to lobby collectively and instead lobby individually. An explanation for this is found in Bouwen (2002)

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and Chalmers (2013). They argue that large firms already possess the resources, knowledge and finances to lobby individually. Coen (1997) shows in his work how the decision on the level of participation is indeed being influenced by cost considerations. Large firms use more resources for planning and undertaking political action than smaller firms. This is in line with Barney’s (1991) resource-based view, which assumes that firms’ actions are based on their resources. Firms with many resources are likely to take individual political action, whereas firms with few resources are likely to use collective political action. Smaller firms have to rely on collective action in order to undertake political action at different levels. Participation in collective action is not as resource-intensive as individual political action (Bouwen, 2002).

Finances become more important when it comes down to the complex multi-level structure of the European Union. Only large firms possess enough resources to staff a representative office in Brussels. Because of this, those firms can develop direct lobbying strategies that involve political action at the national and European level. Smaller firms will have to depend on collective action to undertake political action at several levels. A solution for less resourceful firms could be interest representation by a third party. This way, the financial burden of having an office in Brussels could be avoided. Political participation is then only temporary and can be stopped anytime if the

circumstances require it. These benefits make interest representation by a third party beneficial for large firms as well (Bouwen, 2002).

2.2.2 Issue

A second determinant is whether other actors share their issue concerns. Collective lobbying needs member firms to agree on an appropriate political solution to a problem (Rae & Walker, 2014). Firms might perceive when key players are involved in a coalition that participating will be more likely to bring them success (Hojnacki, 1997). Because lobbying mainly focuses on a specific issue, it is easier to outline the common interest for the involved firms and concentrate all resources on this collective goal (Pijnenburg, 1998). But when participating collectively does not have much to offer a firm to increase its chances for policy success, it will most likely not participate (Hojnacki, 1997). Also, the absence of a common threat could also make firms prefer to participate individually instead of collectively (Rae & Walker, 2014).

Another determinant that coincides with issue concern is group character or issue niche. The kind of interest a firm represents could also affect the appeal of coalition formation. For some groups, the represented interests are mostly based on a tangible concern shared among the profession. When it comes to corporations, the represented interests are institutionally defined. Corporations mostly only advance their own interests and sometimes represent the interest of their employees.

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Also, the operational tactics that a firm uses represents an ideological concern that could be constrained by the general basic beliefs that characterize the organization. These firms would most likely be inhibited from forging coalitions because compromise among allies could weaken the major ideological value commitments of the firm (Hojnacki, 1997).

Scholars argue that the nature of the issue at stake could affect the extent of allied activity that is formed among firms (Hojnacki, 1997). Brown (1990) argues that some firms might form ‘issue niches.’ They do this to make their interests specific so they will not overlap with other firms’ interests. Hojnacki (1997) only partly agrees with this argument. Hojnacki notes that when a firm has a narrowly focused interest, it will most likely not cooperate with other firms. However, Hojnacki also argues that the interests of firms are not always narrow. The degree to which firms form ‘issue niches’ depends on the character of the policy proposal subject to debate and not on firms’ desire to explain or protect their identity. Also, according to Bernhagen and Mitchell (2009), firms will be more likely to lobby collectively, when the policy at stake has a specific private effect for the industry, rather than a business-wide effect. In this case, firms do not expect to receive a large part of the total benefit (Bernhagen & Mitchell, 2009).

In a crowded environment, competition for access and resources to decision-making is greater. Therefore, organizations will avoid collective participation to enhance their own reputation as advocates and separate themselves from other firms that represent the same interests. Also, firms that think that maintaining distinct identities is important will see participating collectively as costly to their existence (Hojnacki, 1997). When firms minimize niche overlap, they can signal that an alliance is only intended to advance short-term political interest and does not reflect a long-term change in a coalition’s focus (Heaney, 2004).

2.2.3 Access

A third determinant is dependent on the extent of access a firm has to the policy-making process. How much access a firm has, depends on their resources (Chalmers, 2012), experience (Hojnacki, 1997) and the kind of relation they have with European institutions (Figueiredo & Tiller, 2004).

Specific types of firms are more likely than others to participate collectively. Firms that have more and positive experiences of working individually or collectively with the European Union, will be more likely than other firms to do it again (Hojnacki, 1997). Also, firms that have more experience with influencing public policy individually have already more knowledge about the process that firms without such experience are unlikely to have. Whether a firm has a lot of experience depends

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on their approach. Firms that have more experience with influencing public policy are more likely to have a relational approach (Figueiredo & Tiller, 2004).

Firms with a relational approach pursue political strategies over the long run instead of issue-by-issue. Rather than monitoring public interest and being involved in only one specific issue, like in a transactional approach, firms that use a relational approach try to maintain relationships across issues and over time. They preserve these relationships carefully so that when an issue arises that affects their firm, the contacts and resources that are required to influence this policy will be in place. On the contrary, firms could also choose to adopt a political strategy only as a reaction to specific, salient issues. This is labeled as the transactional approach (Figueiredo & Tiller, 2004). In this approach, firms wait for the development of a relevant policy before creating a strategy that can affect this policy (Hillman & Hitt, 1999). The relational and transactional approaches differ when it comes to their scope and length of continued exchange and activity. A transactional approach is based on a short-term interaction and a relational approach is based on long-term close relationships. The relational approach is increasingly used by both domestic and multinational firms. The relational approach develops social capital that is embedded in a continued exchange relationship between parties. The relational approach is being used more and more in domestic and multinational firms. For example, the number of firms with an office in Brussels has increased. Having an office in Brussels implies that a firm is regularly concerned with government relations. (Hillman & Hitt, 1999). Another example is meetings with the European Commission on a regular basis. Chalmers (2013) provides support for the approach that more meetings will result in more

access to the decision-making process. Also do Potters and van Winden (1992) argue that more

personal visits will result in more favorable responses by legislators. They measure access by asking respondents how frequent the organization is in contact with the European Union. Measuring access this way, is consistent with other research on access.

Maintaining a close relationship and face-time with decision-makers are key prerequisites to influencing the policy-makers. The most important is the firms access to the right people. Access is about the exchange between firms and decision-makers. It is important to mention that the relation between the interests of businesses and the European Union is based on an exchange relation (Bouwen, 2001), which is inherently interactive (Chalmers, 2012). In an exchange relation, both parties need the cooperation and are therefore both interested in maintaining a stable relationship (Bouwen, 2001). It would be a mistake to think that business lobbying is a unidirectional activity of only private actors (Bouwen, 2001). It is also in the interest of the European Union to maintain a close relationship with private actors to make sure that they function optimally. However, this relation will only succeed if the exchange is reciprocal and both parties benefit from it. Members of the network expect mutuality in their exchanges of advantages

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and benefits. However, the benefits might not always be distributed equally between the involved parties (Baldwin, 1978).

2.2.4 Strength organized opposition

Another determinant, which is important in the decision of whether to participate collectively or individually, is the strength of the organized opposition. How much information a firm has about allies, plays an important role in its decision to lobby individually or collectively.

Firms that face greater competition will be expected to be more concerned and therefore more likely to lobby collectively in order to create more support for a specific issue. When the opposition is strong, firms will see more benefits in participating collectively. But sometimes the opposition is unorganized or weak. When the opposition does not have the resources and organization to engage in a strong fight, the organization’s opposition will not be of great concern and firms will not feel pressured to engage in collective political action (Hojnacki, 1997).

2.2.5 Domestic associational structure

The sixth and last determinant is the domestic associational structure. When there is no well-organized national trade association, firms undertake direct, individual lobby actions at the national and European levels. However, when there is a well-organized and strong trade association, firms are more likely to join this association (Bouwen 2011).

Another important domestic institutional condition that can affect the decision to lobby in the European Union is the extent to which firms are included in their national policy-making.

Bernhagen and Mitchell (2009) argue that this institutional factor points to a role for national differences in the system of interest intermediation. As they argue, these systems are either more corporatist or more pluralist. Highly corporatist systems are likely to focus on a more widely encompassing group to represent their interests and not have the institutionalized capacity to lobby individually. Firms that operate in a pluralist country, and thus do not have the associated representation opportunities that corporatist countries have, and that have developed the institutional capacity and knowledge to represent their own interest nationally are similarly active in European policy-making. Therefore, they are more likely to lobby individually instead of collectively.

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2.3 Hypotheses

The theoretical framework described several determinants that, according to the literature, determine whether a firm lobbies individually or collectively. However, because of a lack of data for the determinant strength of organized opposition, this determinant could not be examined. The determinant of domestic associational structure is not relevant in this analysis because all associations and oil firms operate on an international scale and are not dependent on the domestic associational structure. Therefore, in the analysis, three determinants are used: size, access and whether firms share the same issue concern. The following hypotheses were formulated and are tested in this thesis.

◼ The first hypothesis is: The likelihood of individual political action increases with the extent of access a firm has to the decision-making process. This is based on Chalmers’ (2012) argument that firms that already have a lot of access to the decision-making process, are less likely to lobby collectively

◼ The second hypothesis is: The likelihood of individual political action increases with firm size. This hypothesis is based on Rae and Walker (2014), Bouwen (2002) and Chalmers (2013) their argument that large firms are less likely to lobby collectively and instead lobby individually.

◼ The third and last hypothesis is: The likelihood of individual political action increases when firms do not share the same issue concern as the association of which they are a member. This hypothesis is mainly based on Hojnacki’s (1997) argument that firms will only participate in political collective action if they share the same issue concern as the association of which they are members.

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3. Research design

In this chapter, the research methods and data collection are discussed and the key concepts are operationalized.

3.1 Case selection

The European Emission Trading Scheme, also known as the EU ETS, established a functioning market infrastructure and a liquid market that produces a European wide carbon price signal. However, the report of the state of the European carbon market in 2012 emphasizes that the crisis has caused imbalances which have been emerging between demand and supply in the short term. These imbalances will create long-term negative effects. If these imbalances are not addressed, it will affect the ability of the EU ETS to meet the ETS future targets. Therefore, the Commission proposed six options. Stakeholders in the European carbon market were invited to comment on the structural options in the report ‘The state of the European carbon market in 2012’ through an online consultation. These options are:

A: Increase the target to 30%.

B: Permanent retirement of a number of allowances in the third phase. C: Early revision of the annual linear reduction factor.

D: Extension of the scope.

E: Limit access to international credits.

F: Discretionary price management mechanism.

Based on the results of this online consultation, a market stability reserve has been established. Therefore, this thesis focuses on the Decision of the European Parliament and of the Council 2015/1814 concerning the establishment and operation of a market stability reserve for the Union greenhouse emission trading scheme and amending Directive 2003/87/EC. In order to answer the research question, it is crucial that the four observed oil firms have lobbied individually while they could have lobbied collectively through a business association of which they are a member. This case is suitable for this research because during the online consultation of this case, all observed oil firms have indeed lobbied individually instead of collectively through an association.

Climate change is occurring and affects several industries. This master focuses only on the oil industry because they are particularly exposed to federal and international regulation. According to the Institutional Investor Group on Climate Change, the energy industry is responsible for about 70% of the global greenhouse gas emissions. About 60% of the energy emissions are a result of the oil industry. Therefore, the oil industry is more suitable to investigate in this case study than other

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types of industries that are less affected by this regulation such as the paper or food industry. The energy industry remains also highly relevant to this case because it is responsible for the other 40% of the energy emission. However, it was not achievable to also look into the energy industry within the given timeframe to write this master thesis. The observed oil firms that are analyzed are: Repsol, Shell, Statoil and Total. Also, in order to understand why the firms have not lobbied collectively through the associations of which they are members, all the associations these firms are members of (and participated in the online consultation), will be analyzed.

Only focusing on the oil industry makes this research more valid. Looking at other industries that are less or not concerned with this regulation, could have made the results of this research less accurate. This is because regardless of how large or small a firm is, if a firm is not concerned or exposed to a specific regulation, they will most likely not actively participate in the decision-making process. Therefore, this research decided only to focus on the firms that are the most exposed to the regulation, the oil industry.

Having a representative sample is a good way to accurately generalize something to a broader context. The observed oil firms do not perfectly contain a typical example for all types of firms in general because the sample size, the four firms, is not very large. Also, the size of the firm is not very representative because all four firms are large multinationals. Because this master thesis is a case study, generalization becomes only harder. However, based on earlier research (Hojnacki, 1997), the determinants are not specifically related to a specific industry and are therefore similar for different industries. This means that it is possible to generalize the results of this master thesis to large multinationals in other industries.

3.2 Research method and data collection

In order to explain firm behavior and decisions, this research uses a qualitative approach to analyze the perspective from the standpoint of firms. Qualitative research provides this research the

opportunity to evaluate the material with greater detail than quantitative research, for example, explanations for firm behavior becomes possible. Also, not all data are amenable to counting or measuring, such as the the independent variable issue concern, which makes qualitative research more appropriate than quantitative research. Qualitative research is appropriate for investigating small-N discussions, for investigating behavior on a specific topic, to understand experience or events from a specific perspective and the analysis of government documents, such as government reports and decisions (Hammarberg, Kirkman & Lacey, 2016).

This research used process tracing, which is mostly used for small-n interest group research. Process tracing analyzes the individual events, individual relationships and decisions that link

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conditions to outcomes. It explores the relationships between events in a chronological fashion and provides a summary of the events and actor behaviors that account for why firms lobby the European Union individually or collectively. The tracing process starts by analyzing the responses submitted by firms and associations during the online consultation and ends with the mentioned decision. This way, the whole decision-making process regarding the reform of the EU ETS, is traced.

The data for this analysis was collected from the Climate Action Commission’s ‘Online consultation on structural options to strengthen the European Emission Trading System’ of December 2012 to February 2013. The data draws on the responses submitted by individual oil firms and associations to one key online consultation, based on the state of the European carbon market in 2012. The responses are publicly available on the website of the European Commission.

3.3 Operationalization 3.3.1 Dependent variables

This thesis will not try to determine whether associations have more influence than other forms of interest representation. Instead, it examines what factors lead oil firms to decide to participate in politics individually instead of joining forces.

To explain why firms lobby individually, the alternative collective lobbying, should be taken into account. Therefore, the dependent variable is the type of lobby behavior and there are two types: collective lobbying and individual lobbying. Individual lobbying refers to the solitary efforts by individual firms through individual participation in the online consultation. On the other hand, collective lobbying refers to a trade association of firms that lobby decision-makers collectively or a coalition formation of firms that lobby together. However, in this case study, no coalitions have been formed. Therefore, there will only be looked at whether the firms participated in the online consultation by handing something in individually or collectively through an association.

3.3.2 Independent variables

In the theoretical framework several determinants are described in order to determine whether a firm lobbies individually or collectively, these determinants will be investigated in the analysis. The determinants are: size, issue concern, access, strength organized opposition and domestic associational structure. However, because of a lack of data, the determinant strength of organized opposition, could not be examined. The determinant of domestic associational structure is not relevant in this analysis because all firms operate on international scale and are not dependent on

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the domestic associational structure. Therefore, in the analysis, only three determinants are included: size, access and issue concern.

◼ The independent variable access will be measured by using Chalmer (2013) and Potters and van Winden (1992) their view. There will be looked at how many personal meetings the firms have had with the European Commission. According to the literature, access depends on experience and the kind of relationship firms have with the European

Commission. Chalmer’s measurement is suitable for this study not only because the data is accessible, but also because the measurement has previously been used in the literature to indicate how much access a firm has to the decision-making process. If a firm does not have much access, they could decide to lobby collectively and vice versa.

◼ The variable size was measured using the classification of Eurostat Statistics. The classification of Eurostat Statistics is the most representative for this study because it provides comparable statistical information at European level. According to Eurostat Statistics a firm is considered:

• Micro when it employs fewer than 10 people, • Small when it employs 10 to 49 people,

• Medium-sized when it employs 50 to 249 people, and • Large when it employs 250 or more people.

◼ The most common way to measure the independent variable issue concern is to look at to what extent to the firms share the same issue concern as the associations. Not sharing the same issue concern, explains why they have not lobbied collectively. Issue concern will be measured by looking at the percentage of common issue involvement between firms and the association of which they are a member (Heaney, 2004).

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4. Analysis

First, the regulation is explained. Second, general lobby behavior and memberships will be presented. Thirdly, all oil firms that lobbied through the online consultation individually and the associations they are members of and participated in the online consultation, are analyzed and their positions are identified. Finally, there will be analyzed why oil firms lobby individually instead of collectively.

4.1 Case description

Decision of the European Parliament and of the Council 2015/1814 concerning the establishment and operation of a market stability reserve for the Union greenhouse emission trading scheme and amending Directive 2003/87/EC.

The ETS is failing to promote low-carbon investment and innovation on a needed scale to achieve medium- and long-term climate objectives. Therefore, the ETS must change.

In the beginning of the third trading period, the EU Emission Trading System (ETS) experienced a large imbalance between the demand and supply of allowances, which caused a surplus of approximately 2 billion allowances that is expected to grow to more than 2.6 billion allowances in 2020. The EU ETS was implemented to cost-effectively reduce EU emissions. However, the large surplus reduces the incentives for low-carbon investment and thus negatively affects the cost-efficiency of the EU ETS. If these imbalances are not curbed, it will affect the ability of the EU ETS to meet its ETS target in future phases (European Commission, 2015).

A short-term solution to mitigate the effects of the surplus is to postpone the auctioning of 900 million allowances in the beginning of the third phase. In this context, the Commission also reaffirmed its promise to introduce options for action with a perspective to adopt more appropriate structural measures to strengthen the EU ETS during the third phase (European Commission, 2015).

Given the expectation that the surplus is long-lasting and structural the need for an intervention to strengthen the EU ETS is crucial to ensure a cost-efficient transition to a low-carbon economy. Therefore, the Commission provided an exhaustive list of six potential solutions for structural reform in November 2012. During the public consultation that followed, the establishment of a market stability reserve that could render the auction supply of emission allowances to be more flexible and increase shock resilience was established (European Commission, 2015).

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While an impact assessment showed that the establishment of a market stability reserve in phase three will provide advantages for the strength and cost-efficiency of the carbon market, postponement is expected to bring temporary relief in the coming years. Therefore, a proposal to have a market stability reserve at the beginning of the fourth period is to provide market participants with some lead-time to get used to the new reserve.

The reserve would function by triggering adjustments to the yearly annual auction volumes. In 2019, a number of allowances corresponding to 12% of the number of allowances in circulation, as described in the most recent publication of the total number of allowances in circulation by the Commission, will be deducted yearly from the auction volumes and placed in the reserve. In any year, a corresponding number of allowances must be released from the reserve to the member states in the same proportions and order with which they were placed in reserve and will be added to auction volumes if the relevant total number of allowances in circulation is less than 400 million (European Commission, 2015).

Also, Directive 2003/87/EC must be amended to make sure consistency and the smooth operation of the EU ETS. Especially the implementation of Directive 2003/87/EC can cause large volumes of allowances to be auctioned at the ending of each trading phase, this could undermine the market stability. To ensure market stability, the provision must be done for the auctioning of part of any big increase of supply at the ending of a trading phase in the first two years of the next period. The Commission will relook at Directive 2003/87/EC in relation to the unallocated allowances and come with a proposal to the European Parliament and Council with new options for future action (European Commission, 2015).

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4.2 Lobby behavior and memberships

Four oil firms lobbied the European Commission through the online consultation: Repsol, Statoil, Shell and Total. All four decided to lobby individually. However, the associations of which they are members also represented them by lobbying collectively through participation in the online consultation. No coalitions of firms have been formed. Table 1 shows which firm belongs to which member association.

Table 1. firms representation

All firms are members of Fuels Europe and IETA. This could be because both associations are highly related to the oil sector. Fuels Europe represents firms that operate in refineries in the European Union and IETA serves businesses in the carbon sector.

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4.3 Key players: background and positions

As has been explained in the previous section, four oil firms and several associations participated in the online consultation. This section provides a discussion of their positions. First, the firms are described, followed by the business associations of which these oil firms are members. It is important to analyze the associations of which these oil firms are members because it can explain why the firms have decided not to lobby collectively through these associations. The focus is on their opinions on the proposed options of the report, including a detailed discussion of their responses to the six options presented by the European Commission (provided they gave an opinion). Some firms and associations responded in more detail than others. Therefore, the length of the discussion depends on the length of their responses.

Repsol

Firm. Repsol is an oil and gas firm from Spain that operates across 37 countries with a team of over 25,000 people who work on the establishment of a sustainable future. They describe themselves as strongly committed to the fight against climate change. Repsol wants to rely on innovation and technology to act as a driver of change that will allow the firm to create a new energy model (https://www.repsol.com/en/index.cshtml).

Statement. Repsol is supporting the EU ETS as the main instrument of the European climate change policy. Repsol argues that it is not appropriate to intervene in the market within the 2013– 2020 period.

The firm commented on the options as follows:

- Option A. Repsol opposes the option to increase the European reduction target to 30% in 2020

because there is no global agreement that includes the main emitting countries, so this option increases the risk of loss of competitiveness.

- Option B. Repsol also opposes option B, the withdrawal of a number of rights in the third phase,

because it could have negative consequences for the market.

- Option C. Repsol believes this option will increase the risk of carbon leakage by reducing

allocations in the absence of a global agreement.

- Option D. Repsol does not think that it is necessary to extend the EU ETS to other sectors. The

cost will probably not compensate for the emissions obtained. Also, many sectors, such as transport, have already enacted other measures, such as the Fuel Quality Directive.

- Option E. Repsol argues that credits that originate in the least-developed countries should remain

valid beyond 2020. This is a good way to promote investment reduction in developing countries. - Option F. Repsol believes that discretionary measures will lead to a loss of flexibility in the

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Statoil

Firm. Statoil is a multinational oil and gas firm from Norway that is headquartered in Stavanger, Norway. Statoil is a totally integrated petroleum firm that operates in over 30 countries. It has been ranked by Forbes Magazine (2013) as the world’s 11th-largest oil and gas firm. Statoil has more than 20,000 employees (http://statoil.com).

Statement. Statoil states in its letter that the proposed structural measures do not address the period post-2020. It raises the concern that negotiations regarding the post-2020 framework and EU ETS reform are parallel but have unconnected paths.

Statoil illustrates its view on how to proceed with the EU ETS reform in the post-2020 framework. It argues that the first step should focus on short-term intervention. The current imbalances in the supply/demand equation poses a big threat to the credibility and merit of common- and market-based instruments in climate policy. Without short-term intervention, Statoil expects to observe additional overlapping policy measures that aim to address greenhouse gas emission reduction that will not be cost-efficient.

Statoil encourages the Commission to implement concrete legislative proposals for the post-2020 period. Statoil states that the following principles should be involved: a stable and predictable framework, linkages to international negotiations, cost efficiency by using marked-based mechanisms and targeted, publicly financed R&D, and market scaling support that should stimulate new energy technologies.

Lastly, Statoil argues that the lack of supply flexibility in the EU ETS post-2020 should be addressed (Statoil, 2013).

Statoil does not clearly respond to the proposed options. It does, however, mention that it favors option B, the measure of retiring a number of allowances in the third phase (Statoil, 2013).

Shell

Firm. Shell is a Dutch-British multinational and is one of the six largest independent oil and gas firms. Shell is also the most profitable firm in the Netherlands, with a revenue of 305 billion USD in 2017 (https://www.shell.com).

Statement. Shell states in its letter that it believes that the EU ETS is the most cost-efficient way to decarbonize while incentivizing investment in low carbon. A very important feature of the EU

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ETS is its credibility and a strengthened EU ETS. This will encourage other countries outside of Europe to implement compatible schemes. Like Total, Shell is concerned with the post-2020 phase. Shell argues that a clear energy and climate framework for 2030 is essential to implement a long-term framework that would guide investments along the transition towards a lower carbon energy system. The firm encourages an agreement on an overarching greenhouse gas emission reduction target by 2030. Against this framework, the Commission should adjust the linear reduction factor that is appropriate to deliver a robust carbon price to meet the objectives of the EU ETS. It also argues that the NER 300, which is the largest funding program of low carbon energy, should be a permanent funding program, which will support the development of low carbon technologies that would be needed to meet EU decarbonization objectives (Shell, 2013).

Shell’s opinions on the proposed options are:

- Option A. Shell does not favor option A. Shell argues that this option will require negotiations

and reopen a number of directives. Shell wants policy-makers to focus on options that will minimize changes to current policies.

- Option B. Shell favors retiring allowances in the third phase to remove the surplus generated

from earlier trading phases because of the economic recession and overlap of policies. It thinks that permanently retiring a certain number of allowances, combined, longer-term, with a floor price and a clear policy for 2030 is the most effective way to enhance the original goal of the EU ETS.

- Option C. Shell argues that if the European Union will agree to an economy-wide 2030

greenhouse gas emission reduction target, then the linear reduction factor could be revised earlier. - Option D. Shell opposes a change in the scope of the EU ETS because it argues that other sectors

will not properly fit into the EU ETS system.

- Option E. Shell has a neutral stance towards any future restrictions on international credits. But

only when the changes will be implemented in a transparent way and at the right time.

- Option F. In terms of discretionary price management, Shell prefers an auction reserve price.

Shell argues that this option can provide a long-term price signal and could provide firms with certainty over the return on investment (Shell, 2013).

Total

Firm. Total is the fourth-largest oil and gas firm in the world as well as the major integrated player in low carbon energies. Total’s ambition is to supply energy that will contribute to economic and social development (http://www.total.nl/total-in-nederland.html).

Statement. Total demands a stable and clearly defined policy for the longer term. This policy should provide and secure a competitive and sustainable energy sector. It argues that for climate

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change to be successful, the European reduction target should be included in an international, global effort. According to Total, the six proposed options do not address the problem of real structural policy measures. However, this is presently required to clarify the long-term ETS framework. Total is not in favor of any of the six options because they will only address a short-term regulatory intervention with uncertain effects and do not address the current need for clarification of a stable long-term energy and climate policy on the whole EU economy.

Total commented on the options as follows:

- Option A. Total argues that the European Union has already chosen not to increase its target

unilaterally without similar commitments from other developed countries.

- Option B. Total argues that without a clear, long-term policy, all short-term measures will not

work.

- Option C. This option is, according to Total, in contradiction with the European Union’s decision

not to unilaterally increase its commitments before 2020.

- Option D. Total sees too many difficulties when it comes to expansion into new sectors.

- Option E. Total does not support this option and argues that international credits will enhance

international participation that could facilitate more coordination.

- Option F. Total thinks that all discretionary price mechanisms contradict the fundamentals of the

ETS principles (Total, 2013).

IAOGP

Association and objectives. The International Association of Oil and Gas Producers (IAOGP) calls itself the voice of the global upstream industry. It represents firms and associations engaged in the exploration and production of oil and natural gas at the European and global levels. The IAOGP produces 40% of the world’s oil and gas. The goal of this association is to exchange views, data and information. It wants to improve the collection, analysis and dissemination of data on HSE performance between members (https://www.iogp.org).

Statement. IAOGP raises two main issues in its letter. First, it argues that the EU ETS does not address emissions after 2020. Second, the precise timetable of implementation of the options is not clear. It welcomes the Commission to devise a proposal that will address the whole economy in the post-2020 context. IAOGP assumes that a proposed measure must go through a political process and that it is most likely not possible to implement any new measure before the end of the third phase without any uncertainties. IAOGP thinks that the most effective approach would be to have a long-term trajectory of ETS cap for phase IV. A long-term plan would create more certainty and thus convince the market that a shortage will appear in time and the price will respond (IAOGP, 2013). IAOGP did not respond to the proposed options.

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CEFIC

Association and objectives. The European Chemical Industry Council (CEFIC) represents the voice of the chemical industry in Europe. It represents large, small and medium-sized chemical firms all across Europe. It interacts on behalf of its members with international and European institutions, non-governmental organizations, media and other involved stakeholders. Its main goal is to represent its members by generating and aggregating scientific knowledge that fosters the aim of the association in important areas and by providing needs-oriented services and expertise to its members (http://www.cefic.org).

Statements. CEFIC is supporting the ETS in its concept of carbon trading and consistent climate,

energy and industry policies that will allow it to grow innovatively, reward performance improvement and achieve agreed-upon targets in a cost-efficient way.

The six short-term options stated for pre-2020 are narrow, alleged choices only label differently the same counterproductive EU target inflation. CEFIC argues that increasing the EU GHG target by removing allowances cannot be a solution for structural EU policy flaws. The Commission repairs will increase regulatory risks for firms and will also increase their exposure to EU’s energy cost handicap. It also argues that the EU ETS should not be changed into an instrument that could increase the carbon price. CEFIC claims that too many policy objectives could weaken the efficiency of the EU ETS.

CEFIC thinks the six options that the Commission offers are incomplete. The options do not offer any real choices and they have no long-term perspective. When considering the current state of the carbon market, the European Commission does not look thoroughly at the complexities of existing European and national energy, industry and social policies, including their conflicting interactions and cost implications.

CEFIC responded to the options as follows:

- Option A. CEFIC opposes a unilateral increase of the European reduction targets without a

comparable commitment and burden around the globe.

- Option B. CEFIC argues that retiring allowances exceeds the current backloading proposal. Also,

it strictly opposes the idea of an intervention in the EU ETS in the third phase without a global climate agreement, because such a measure will only make the measures against carbon leakage worse without any environmental need.

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- Option C. CEFIC does not support an intervention in the ETS in the third phase without a global

climate agreement. This intervention would only worsen measures against carbon leakages. - Option D. CEFIC argues that including other sectors must be investigated in much more detail

because technologies and solutions for some sectors that aim at increasing energy and greenhouse gas emission efficiency already exist.

- Option E. CEFIC is not in favor of any measures that restrict credits. It argues that credits help

encourage global climate change. Also, credits could help limit local abatement risks and costs. - Option F. CEFIC states that this measure could be changing the EU ETS system entirely. With

the current system, the carbon price could be formed freely according to the predefined allowances and quantity, supply and demand at the most cost-efficient way. Such price-determining mechanisms will change the carbon market to a tax-like instrument that will be prone to political intervention. Also, there are no criteria for the right carbon price (CEFIC, 2013).

In addition to commenting on the proposed options, CEFIC also makes several recommendations. First, it argues that the EU ETS and emerging schemes will have to converge to enable an optimized globalization of a smart, cost-efficient policy. Second, it recommends an introduction of relative targets that are based on economic activity and dynamic allocations. Third, it advises the European Commission adopt a more improved coordination that avoids overlap, incoherent European and national targets and policy mixes after 2020. Fourth, it recommends the allocation of direct and indirect emissions on the same footing, considering a different policy approach for the power industry provided that carbon cost efficiency is safeguarded. Indirect, free allocations that are related to indirect carbon emissions for industrial power consumers would simplify the system. Fifth, it recommends that the New Entrants Reserve should be changed to the European Central Reserve Bank for Efficient Growth. Sixth, the proportionality of the EU ETS should be reconsidered accordingly. Seventh, a stable carbon leakage status should be achieved to secure competitiveness. Finally, it is open to discussing options that strive towards a carbon-efficient economy and also recommends a plan for a competitive carbon-efficient economy by 2015 through a transition where low-cost, competitive abatement technologies would be developed and brought into operation first and maintain competitiveness in all stages of the process (CEFIC, 2013).

IETA

Association and objectives. The International Emissions Trading Association is a nonprofit organization that serves businesses in the carbon sector. IETA is fully devoted to the development of an active, global greenhouse gas market that is consistent across national boundaries. Its aim is to enable businesses to engage in climate action that is consistent with the objectives of the United Nations Framework Convention on Climate Change (https://www.ieta.org).

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Statement. IETA begins by stating its main points. First, the EU ETS should be focused on a reaffirmed and clarified policy ambition to decarbonize the European economy. Second, the EU ETS shall stay the main pillar for cost-effectively delivering on that ambition, which will need managing interactions between the EU ETS and other policy mechanisms that impact EU ETS sectors’ emissions indirectly or directly. Third, enhancing the EU ETS resilience to shocks requires careful examination. Finally, the import of international credits in the EU ETS plays many important roles (IETA, 2013).

IETA’s long-term, overarching objective is that it endorses the EU’s 2050 vision for a low carbon economy and supports a binding, consistent, economy-wide greenhouse-gas emissions reduction target for 2030 and while making sure that the EU ETS stays the main pillar for realizing these targets cost-efficiently. IETA recommends that policy-makers reaffirm and clarify their visions of a low carbon economy by 2050 and agree on and provide legal basis for a 2030 target, which will provide clarity on the emissions reduction path for the EU economy, the ETS and the non-ETS sector (IETA, 2013).

IETA commented on the six proposed options as follows:

- Option A. IETA does not think that a 2020 target has be the main goal and demands a binding

2030 target that is consistent with the long-term decarbonization pathway.

- Option B. IETA states that withholding a certain volume of the third phase allowances as a

standalone measure is not its preferred option.

- Option C. According to IETA, this is a useful tool that will help reach a pre-defined target. IETA

argues that when the 2030 target is amended, the adjustment of the linear reduction factor will be very important. However, this adjustment must be planned properly to avoid market failures and to allow investors to get used to the changes in the ambition levels.

- Option D. IETA favors the extension of the scope of the EU ETS. However, IETA argues that

more research is required to make sure that policies that currently apply to other sectors and gases are less efficient that the EU ETS. Also, it must ensure that there is no overlap and that the issue of double regulation are addressed.

- Option E. IETA argues that the proposal needs more clarification because it merely links the

limit of international credit to the problem of oversupply while other factors are also involved. This link is invalid because of quantitative limits that are already in place. Qualitative and quantitative access to international credits have extensive policy implications and informed decisions can only be made while looking at the larger picture.

- Option F. Finally, IETA strongly opposes option F. IETA is strictly opposed to price-driven

Why do firms lobby the European Union individually?