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How to Interpret Big Oil's Support for a Carbon Tax

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Last week, several oil and gas majors supported a Republican-led council's plan to tax carbon emissions in a bid to fight global warming. ExxonMobil Corp. (XOM - Free Report) , together with peers Royal Dutch Shell plc (RDS.A - Free Report) , BP plc (BP - Free Report) and TOTAL SA (TOT - Free Report) announced that they are backing the idea to penalize carbon dioxide emissions as a way to combat the threat of climate change and returning the money to taxpayers in the form of a 'dividend'.

The Carbon Tax and Dividend Plan

The plan, unveiled by the Climate Leadership Council in February, calls for a bipartisan policy to fight global warming by imposing a fee of $40 per ton of carbon dioxide emitted and return the revenue collected to U.S. taxpayers as a monthly climate dividend. The tax is slated to rise over time, dampening demand for fossil fuels by making energy derived from them dearer. The ultimate aim is a quick transition toward renewable energy and other low-carbon solutions, while making them price competitive.  

Led by senior Republican statesmen James Baker III and George Schulz, the Climate Leadership Council's individual founding members include green energy proponents like former New York Mayor Michael Bloomberg, physicist Stephen Hawking, former Energy Secretary Steven Chu, businessman Vinod Khosla, and former Treasury secretary Lawrence Summers. The coalition is also endorsed by corporate giants like General Motors Company (GM - Free Report) , Unilever plc (UL - Free Report) , Johnson & Johnson (JNJ - Free Report) and PepsiCo Inc. (PEP - Free Report) . However, what stands out is the presence of some of the biggest energy companies joining the call advocating for a progressively rising carbon tax.

Environmentalists Scoff Energy Companies’ Support to the Plan

Green groups and climate campaigners have been quick to dismiss the proposal and the oil companies’ support of it as a scam and public relations gimmick aimed at shielding themselves from liabilities associated with previous emissions. In particular, environmentalists point to a clause within the new regulation that allows the energy explorers to escape legal consequences for the role they have played in fueling pollution and climate change. This is of particular interest to the likes of ExxonMobil – currently carrying a Zacks Rank #3 (Hold) – and Shell – both investigated for allegedly misleading investors on climate change. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some observers also argued that a carbon tax levy is part of the big natural gas producers' efforts to increase their market share of the commodity at the expense of coal. In fact, coal's carbon content per unit of energy is double that of natural gas and therefore under the planned environmental law, most coal-fired electric utilities will be asked to use more of less-emitting natural gas. Incidentally, natural gas accounts for a substantial portion of ExxonMobil, Shell, BP and TOTAL’s production and trading activities.     

Arguing that the years of ‘deception’ and ‘fraud’ cannot be shielded behind the garb of climate activism, critics are of the opinion that the tax is 'dead-on-arrival' in any case, with almost zero probability of the current Republican Congress passing it. With President Trump deciding to opt out of the Paris climate change accord and EPA head Scott Pruitt rolling back a number of regulations on climate change, enacting the nation’s first carbon tax plan remains highly unlikely.

Or Is There More to It Than Meets the Eye?

To be fair to the oil majors, they have admitted the ill-effects of carbon emissions and have publicly voiced their support for the Paris climate agreement.

Secretary of State and former ExxonMobil CEO Rex Tillerson had been a long advocate of a carbon tax as a way of addressing climate change concerns. Tillerson’s stand on climate change is opposed to that of Trump’s who supports the fossil fuel industry and is least concerned about climate change.

Even Europe’s largest energy company Shell has been vocal in its efforts to reduce operational carbon footprint. According to Royal Dutch Shell CEO Ben van Beurden, the transition to a carbon light regime will take time and government initiatives – including a carbon tax – will be required to discontinue using the most polluting sources of energy like coal and oil. Walking the talk, the Anglo-Dutch major, which is working hard to rebrand itself as a natural gas company, has pledged to increase its investment in renewable energy to $1 billion annually by 2020 though the amount is still negligible compared to its yearly capital expenditure of $25 billion.

Bottom Line

While one must admit that the fossil fuel companies’ motives in supporting the carbon tax plan is complicated to say the least, public trust deficit is the ‘biggest challenge’ facing them, which, in turn, could jeopardize their long-term future. Despite all ‘good intentions,’ lack of tangible developments toward cleaner fuels might irk stakeholders, as the societal acceptance of the current energy order continue to disappear.

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