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The Gigantic Hole in ExxonMobil's Doughnut

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ExxonMobil, in negotiations with shareholder activists that led to withdrawal of their shareholder proposals, agreed to report to shareholders on climate change. On March 31, 2014, ExxonMobil released two lengthy reports, one titled "Energy and Carbon -- Managing the Risks" and the other titled "Energy and Climate." There is much overlap. The first, which is discussed below, most directly responds to the possibility, first identified by the Carbon Tracker Initiative in London, and subsequently being given growing attention by investment analysts and the financial press, as well as the IEA, the IPCC and the United Nations, that there is a gross mispricing of fossil fuel assets on the balance sheets of the top 200 public fossil fuel companies. The mispricing results from the fact that only a fraction of those total proved reserves, say between 20 percent to 40 percent, can be allowed to be burned if the world's governments hold fast to their declared goal of not permitting a temperature rise of more than 2 degrees C from preindustrial times. Carbon Tracker called these unburnable assets "stranded" and the label stuck.

ExxonMobil rejects this possibility. "[W]e are confident that none of our hydrocarbon reserves are now or will become stranded." Beyond that, ExxonMobil is confident that future reserves, which it intends to discover and develop in quantities at least equal to current proved reserves, will also be unrestricted by government action. "Further, the company does not believe current investments in new reserves are exposed to the risk of stranded assets, given the rising global need for energy... " Carbon Tracker reports that the top 200 in 2012 expended a total of $674 billion in capital seeking more fossil fuels to put on their books, each of them surely as confident then as ExxonMobil is today that not a pound of these new hydrocarbons will become stranded.

With this report, ExxonMobil has thrown down the gauntlet after slapping it hard across the collective face of humanity. I hope scientists the world around will deconstruct the edifice ExxonMobil has erected. For example, scientists need to tell us, since ExxonMobil doesn't, what will happen to the planet and its people if, as ExxonMobil confidently predicts, the world's carbon emissions profile closely approximates the IPCC's intermediate RCP 4.5 emissions profile pathway.

I hope lawyers too will study ExxonMobil's report because it is an artful exercise in legal writing designed to confuse and mislead. Of course, it is a report to shareholders, and therefore requires the care and completeness of matters material to the subject that is customary in such communications by a SEC registrant. What makes the report artful is the materiality and gigantic size of what's entirely missing in its 22 pages -- so basic to the matter at hand that it's easy to overlook.

Here's the hole in the doughnut. Exxon attacks the "low-carbon scenario" as totally unrealistic because of the increase it would entail in cost to consumers for energy. Thus, for the CO2 stablization pathway holding at the level governments have set to keep below the 2 degree point of danger, ExxonMobil claims that by 2030 the average American household would face an added CO2 cost of almost $2,350 per year for energy. Diving into the weeds, the report offers a chart showing additional costs to the average American household under various emission pathways, showing for each that cost's percentage of median pre-tax income.

Given the specificity of data offered by ExxonMobil, and the total absence of even a suggestion that its numbers are gross of the costs Americans would incur if ExxonMobil's pathway were permitted to occur, there is a powerful, and surely intentional, impression created by the report that the numbers tell the whole story.

Even if Exxon's estimates are accurate, they are gross figures. The net cost, if any, to the planet and its people of reversing carbon emissions is not in the report, nor is there even mention, on any of the 22 pages, of any of the external costs to the planet from allowing ExxonMobil to avoid any restriction on burning its proved reserves plus all the new hydrocarbons it projects will be added to its balance sheet. This is a huge omission, and it arises in a variety of ways in many places in the text, turning the report into a repeating example of materially misleading disclosure through half-truth.

This is not the first instance of a profit-seeking enterprise deliberately misleading the public, including its consumers and investors. ExxonMobil follows the well-trod path of the tobacco and lead companies in speaking only of the benefits of its products and denying even the existence of the adverse effects those products have on those who use them. It is extraordinary in reading this report, which purports to address the issues in a complete, professional way, to discover it omits any mention of damage to the planet and its people in the many ways documented by science that will result from a future in which, as ExxonMobil claims, "none of our hydrocarbon reserves are now or will become stranded."

The timing of ExxonMobil's release is ironic, given its enormous omission, in view of the fact that on March 29, 2014, the IPCC issued a new report titled "Climate Change 2014: Impacts, Adaptation, and Vulnerability." This report contains a description of key risks from climate change, given the globe's present trajectory of increasing carbon emissions, year after year. Included are catastrophic risks of death, injury, ill-health and disrupted livelihood, extreme weather events, mortality and morbidity, food insecurity, loss of rural livelihood and loss of marine and coastal ecosystems. But, of course, this report is just the latest in a series of increasingly alarming accounts of the future -- which we now know from ExxonMobil's report is the future it has built its current business plan around.

In its report, the choice of language is telling. For example, governmental restrictions on carbon emissions are repeatedly referred to as restrictions that "artificially constrain" the burning of fossil fuels, as if such restrictions are wholly detached from any earth-bound reality. This report is an artifice, a magnificent one that, on reflection, by reason of its one gigantic omission, seems to bear out the possibility that ExxonMobil's leaders don't think at all about the longer term consequences of burning all that fossil fuel, that the alarms of science roll right off them like water off an oily duck's back. "[W]e do not project overall atmospheric GHG concentration, nor do we model global average temperature impacts," the report informs us at page 5. It is hard to avoid the conclusion that, if they don't "project" or "model," then they simply don't care. Who is going to answer this remarkably clever artifice?

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