High Cost of Climate Earns Exxon Rare Environmental Win

Photographer: Jock Fistick/Bloomberg

An ExxonMobil refinery in Rotterdam. Close

An ExxonMobil refinery in Rotterdam.

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Photographer: Jock Fistick/Bloomberg

An ExxonMobil refinery in Rotterdam.

For years, Exxon Mobil has walked around with an environmentalist target on its chest. So it was news when the world’s biggest oil company by market value agreed to share its plans for dealing with climate change. A look at what we already know about Exxon’s climate strategy shows why disclosure may be a savvy move.

The chart below shows how companies estimate the future cost of carbon pollution. Right now, few countries outside Europe regulate it. That’s changing and is likely to intensify in the lead-up to key UN climate negotiations in 2015. Some companies use a so-called shadow price to anticipate the future cost from climate policy when planning new projects. Of 30 U.S. companies that use a shadow carbon price, Exxon’s is among the most aggressive.

Data Source:&nbsp;Carbon Disclosure Project, Bloomberg<br>

Data Source: Carbon Disclosure Project, Bloomberg

Exxon’s shadow price of $60 per ton of CO2 pollution is more than seven times the current cost of carbon permits in the EU cap-and-trade system and is 62 percent higher than the White House’s estimate of the social cost of carbon pollution. While investors might fault Exxon for not doing enough to prepare for the future, it’s hard to argue that it’s not taking the climate threat seriously, at least on paper.

“The company is out front on this issue now,” said Dallas Burtraw, who studies cap-and-trade programs and is associate director of the Center for Climate and Electricity Policy at Resources for the Future in Washington. “They benefit because in the minds of investors who also place a higher probability on climate policy, the company becomes a preferred investment.”

Read More: Exxon Mobil Agrees to Report on Plans for Low-Carbon Future

The longer the global community waits to address climate change, the more invasive future climate policies may need to be. The risk is that oil and coal companies worth more than $7 trillion may be sinking billions of dollars into projects that will never make sense to finish.

Exxon is the first U.S. oil-and-gas major to commit to reporting on its risk of stranded assets due to climate change, a step that may pressure competitors to do the same. About ten energy companies are awaiting votes on shareholder resolutions similar to the one that triggered Exxon's agreement to report its climate data.

Exxon has the world’s second-largest stockpile of carbon embedded in oil and gas, after Russia’s Gazprom. According to Bloomberg’s Carbon Risk Valuation Tool, Exxon’s share price could be worth 45 percent less in a carbon-stranding scenario where prices decline 5 percent a year from 2020.

Data Source: Bloomberg Industries

Data Source: Bloomberg Industries

Adding to its carbon risk, Exxon has expanded its reserves each year for the past two decades. However, many of Exxon’s more-recent investments have been in natural gas, which pollutes less CO2 than oil when burned and is considered by some to be a bridge fuel to renewable energy. The company also spends about $6 billion a year on projects to reduce emissions.

“It may be that the company stands to benefit from more transparency,” Burtraw wrote in an e-mail. “But it could simply be that it places a relatively higher probability on climate policy and anticipates this is emerging among investors.”

More from Tom Randall:

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