Climaterisk

Today, thanks to Exxon-Mobil the Wall Street Journal provided a lesson in simultaneously managing the regulatory and brand value risks of climate change. This is even more surprising since the company that has accomplished this feat has long looked at Climate Change Science with skepticism. Exxon-Mobil has had a change of heart, or at least as this article will explain, Exxon-Mobil has reevaluated it’s approach to regulatory risk management with regards to Climate Change and has managed to capture some good PR in the process

An escalating PR problem

In addition to drawing the ongoing ire of environmental groups for it’s repeated attacks on climate science, Exxon-Mobil has recently come under increased scrutiny after the Union of Concerned Scientists released a report stating that the company had spent large amounts of money to confuse the Climate Change debate, by using similar techniques as those used by the tobacco industry. The report was picked up by major news outlets with the report’s lead author Seth Schulman quoted as stating:

“ExxonMobil has, in a cynical and manipulative strategy, helped create a kind of echo chamber to amplify the views of a carefully selected group of spokespeople whose work has been largely discredited by the scientific community,”

“public opinion can be easily manipulated because science is complex, because people tend not to notice where their information comes from, and because the effects of global warming are just beginning to become visible.”

Regulators at the gates

Exxon-Mobil is facing a combination of regulatory threats:

1. Although Kyoto has not been ratified by the US, Exxon-Mobil’s international operations are still bound by it.
2. California introduced a broad greenhouse gas emission cap program last year and other states have said they will follow suit.
3. John McCain, Barrack Obama, and Joe Lieberman introduced a bill this week requiring that the US reduce emissions by 2% every year.

The big unknown for Exxon is which industries will be hardest hit by those regulations, and that debate is just beginning.

The Risk Management Play

At this juncture, the reality of Climate Change is irrelevant to decision processes that led Exxon-Mobil to this change of course. The regulations are coming, how do you minimize your exposure?

First you need a seat at the negotiating table. By reversing course on climate change and participating in discussions on potential solutions, Exxon-Mobil is positioning itself to influence the debate and is building credibility for future legislative debates.

Now that you have a seat at the table how do you influence negotiations in a way that shifts the regulatory burden to another industry? Exxon-Mobil decide on a combination economic and greater good argument:

“Exxon wants any regulation to be applied across “the broadest possible base” of the economy, said Jaime Spellings, Exxon’s general manager for corporate planning. Exxon says avoiding a ton of carbon-dioxide emissions is, with certain exceptions, less expensive in the power industry than in the transportation sector. Though solar energy remains expensive, reducing a ton of emissions by generating electricity from essentially carbon-free sources such as nuclear or wind energy is cheaper than reducing a ton of emissions through low-carbon transportation fuels such as ethanol.” Source, Wall Street Journal, Jan 11th, 2007

The argument is essentially that we should put the regulatory burden on sectors of the economy were we can get the largest amount of emission reduction at the lowest cost to society as whole (electricity production). It is by all accounts quite a reasonable proposal. It is also a proposal the benefits Exxon-Mobil handsomely. While the large majority (75%) of oil consumption in the US is used for transportation, only 3% is used for electricity production.