After a nearly four-year investigation which included the review of millions of documents and dozens of hours of depositions and testimony, the New York Attorney General’s (NYAG) lawsuit against ExxonMobil is set to begin on October 22nd. The trial is centered around claims from the NYAG that ExxonMobil misled investors about the company’s management of climate risk in regard to its business operations via its use of a proxy cost of carbon, though the NYAG’s investigation charted a meandering course to arrive at that allegation after changing its core legal theory several times.
Since the trial is years in the making, it is important to remember what this case is—and more importantly isn’t—about.
MYTH: This lawsuit is about #ExxonKnew.
FACT: Don’t believe the hype – this case is about accounting.
As we know, dating back to the 2012 La Jolla conference, activists have been working for years to bring forward lawsuits similar to those waged against tobacco companies in the 1990s to drain fossil fuel companies of billions of dollars in settlements and legal fees. Key to this strategy was getting a “sympathetic state attorney general” on board so he or she could investigate the energy companies. Through the process of discovery, this attorney general would have access to and could make public “key internal documents” that activists believed would embarrass the targeted companies and help build the case for litigation.
Turns out former New York Attorney General Eric Schneiderman was the “sympathetic” official they were looking for; he announced in November 2015 that his office was officially investigating ExxonMobil. Emails later showed that La Jolla participants and their deep-pocketed financial backers were actively recruiting Schneiderman to their cause. But after years of investigation and reviewing millions of documents, Schneiderman and his successors did not find any smoking gun suggesting ExxonMobil was hiding climate research or burying non-public information. So ultimately, after being told by New York Supreme Court Justice Barry Ostrager to bring charges or end their investigation, the NYAG was forced to settle on alleging that there were discrepancies relating to ExxonMobil’s accounting practices on certain projects.
No doubt the activists are more than a little disappointed by what was once the cornerstone of their campaign against ExxonMobil and other fossil fuel companies. Climate Week NYC was held in New York City a month before the trial was set to begin, and yet participants barely acknowledged that this lawsuit existed. Still, activists may be unable to help themselves once the trial begins, eager to insist that this case is about #ExxonKnew and climate change, either with willful disregard for reality or plain old ignorance.
MYTH: ExxonMobil told the public it was applying one public proxy cost of carbon while using a smaller, undisclosed figure in private calculations.
FACT: The NYAG is conflating two separate metrics, either believing or pretending that they are the same thing.
There is a distinct difference between ExxonMobil’s proxy cost of carbon and greenhouse gas costs of carbon (GHG costs), but throughout the NYAG’s complaint, these terms are used interchangeably. ExxonMobil publishes an annual Outlook for Energy report which, in 2014, said that the proxy cost of carbon may approach $80 per ton by 2040 in some geographies. First of all, this is not a flat number and is theoretical, as a globally accepted and applied cost of carbon doesn’t exist. The proxy cost figure is a metric used to predict how potential government policies addressing climate change could impact future global energy demand. It’s one metric of many that helps companies like ExxonMobil carry out corporate planning and project economics while considering the energy landscape from a macroeconomic level.
Meanwhile, GHG costs are a separate metric. These costs are microeconomic in nature and attempt to assess how current and future climate regulations may impact a given project or investment in a specific jurisdiction and are considered direct expenses. ExxonMobil has said that it uses these costs, when relevant and where appropriate, to help make decisions on capital allocation. The company has publicly described how it applies this metric, but does not publish specifics on what numbers are used when evaluating potential projects or investments, as that information is considered proprietary knowledge.
MYTH: ExxonMobil “repeatedly told investors” it was using a proxy cost of $80 per ton in Canada but “instructed” employees not to apply this public figure to oil sands projects in Alberta.
FACT: Alberta had an existing statutory cost on carbon, which ExxonMobil applied to the project instead of the proxy cost, which is a stand-in applied to places where an actual cost of carbon has not been implemented.
As mentioned above, ExxonMobil has said it applies GHG costs when and where applicable. In the Alberta example, ExxonMobil applied the GHG costs set by the government and considered existing regulations in its analysis. Instead of applying a made-up number based on its own predictions and inferences, ExxonMobil applied the GHG cost established by law.
The NYAG appears to think that ExxonMobil should ignore actual regulations that actually exist and instead apply a hypothetical proxy cost that the company has projected to be at the high range of what a cost of carbon may look like in two decades to every project it pursues.
MYTH: ExxonMobil did not apply a proxy cost of carbon to the transportation sector when predicting demand for oil and gas.
FACT: This is true. As in the Alberta case, ExxonMobil used existing regulations to guide this part of their accounting practices instead of relying on hypothetical numbers. When considering the transportation sector, the company used fuel economy standards prescribed by law under the Corporate Average Fuel Economy (CAFÉ) and other relevant metrics to determine how climate policies will impact demand.
MYTH: ExxonMobil told the public and its investors that it wouldn’t be impacted by a “two-degree” scenario, as outlined in the Paris Accord.
FACT: Limiting global warming to two degrees Celsius is a major part of achieving the Paris Accord, but that doesn’t change current demand for fossil fuels. ExxonMobil said that the two-degree scenario posed little risk to its 2017 proved reserves.
A major refrain of activists is that reserves will not be used in the future and will thus become “stranded” assets that will lose money for the company and, consequently, its shareholders.
According to government agencies like the U.S. Energy Information Administration and International Energy Agency, fossil fuels are projected to make up at least three-quarters of energy use in 2040 even under the most carbon-constrained scenarios.
As ExxonMobil has stated, “Over the coming decades, oil and natural gas will continue to play a critical role…. using the lowest liquids demand growth rate among the assessed 2°C scenarios, liquids demand would still be 53 million barrels per day in 2040.”
MYTH: ExxonMobil is standing in the way of progress on climate change.
FACT: ExxonMobil has invested $10 billion into the research and development of lower emission energy technologies. This includes scientific breakthroughs in algae-based biofuels, carbon sequestration, and cogeneration. The company publicly supports the Paris Agreement and the implementation of a carbon tax and has voluntarily reduced methane emissions throughout its production chain.
