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Exxon's Giant Carbon Footprint Could Stoke More Profits
by David Sassoon - Feb 5th, 2008
We all know by now that Exxon reported the highest profits ever recorded by any company -- $40.6 billion. Sales were ten times that much, as reported by the NYT:
The company’s sales, more than $404 billion, exceeded the gross domestic product of 120 countries.
And like a leading nation-state, Exxon has a sizable carbon footprint, one the largest of any company in the world: 138 million tons of CO2 equivalent, emitted annually.
But here's the really astonishing thing: it turns out, Exxon's carbon footprint is not a source of risk or liability, but an asset that it can turn to profitable advantage.
So there arises two curious and important questions, one financial, the other moral.
- Is Exxon management acting in dereliction of its fiduciary duty to its shareholders? Its regressive carbon policy is leaving an asset fallow, while competitors, like BP, are reaping profits; and
- If a progressive carbon policy would be financially advantageous, why is Exxon not on the front lines advocating for policy changes that would not only help the company, but the entire world?
Let's break down Exxon's carbon footprint with the help of Mario Lopez-Alcala, a senior analyst with Innovest Strategic Value Advisors. Innovest has developed an analytical tool called Carbon Beta, which tracks what carbon means -- in terms of financial risk or opportunity -- to 2200 leading companies. I spoke with Mario over the phone, and he walked me through an analysis of Exxon's carbon position. It's counter-intuitive but it is a quantifiable fact: Exxon is sitting pretty.
Negligible Cost of Compliance
His data shows that Exxon's annual carbon footprint is 138 million tons of CO2 equivalent. The first question he asked was this: where are Exxon's operations located, and what are the local carbon regulations which would impact emissions under the Kyoto regime.
Turns out that under Kyoto, Exxon is responsible for abating only 9 million out of the 138 million tons of its carbon footprint -- about 6.9% of its absolute exposure. Mario arrived at this figure by compiling a weighted average of the emissions targets affecting all Exxon operations around the world.
His estimate for what it costs Exxon to abate those emissions, assuming it had to purchase carbon credits? About $1 billion a year. (He calculated net present value for the 2008-2012 Kyoto compliance period and applied a standard oil industry discount rate to arrive at the figure, based on an expected price of $28 per ton of carbon. He also had to add in to the calculation, abatement costs for reducing emissions to a baseline year.)
The $1 billion, though it sounds like a lot of money, represents only 1.6% of Exxon EBITDA -- a measurement of its impact on cash flow. To a company the size of Exxon, the impact is negligible.
I shared this fact with Byron Kennard of the Center for Small Business and the Environment. His astonished question:
So then what's the problem?
Profitable Mitigation Opportunity
There's also another aspect to Exxon's carbon footprint: the 129 million tons of emissions that it is not required to reduce. It is an enormous carbon asset in a world in which carbon has a price, and it presents a tangible opportunity for enhancing profitability -- even beyond $40.6 billion.
By reducing those emissions -- most simply through reduced flaring, co-generation, heat recuperation, and carbon capture and sequestration -- Exxon could reap profits from selling carbon credits it generates. Mario reports that BP is the leader in the sector in taking advantage of these opportunities, which are tangible and positive already.
But he has not figured the opportunity into his analysis of Exxon's position, because of the stance of its management. The company's "promotion of non-consensus" on climate science and its regressive carbon stance makes it unlikely the company will participate in carbon mitigation opportunities.
Mario pointed out that for Exxon, carbon is not really a cost but more of an investment opportunity.
Stands to reason. There's a new currency being trading in international markets, and Exxon has 129 millions tons of the stuff. What percentage of that could it reduce, and then sell as credits, to a hungry market? Perhaps shareholders should start asking.
Because an analysis of the numbers, through the lens of Innovest Carbon Beta, reveals that it would be more rational and financially advantageous (never mind moral) for Exxon to take a progressive position on carbon mitigation.
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