ExxonMobil Most Exposed, Southern Most Vulnerable and Exelon More Prosperous Under US Cap-and-Trade

Point Carbon identified the winners and losers in a proposed cap-and-trade system for greenhouse gas emissions in the United States in its latest report Carbon Exposure unveiled today at its annual fall conference Carbon Market Insights Americas. Within the power and oil sectors, representing 40% of covered emissions in the market, the greatest winners and losers come from the power industry. Atlanta-based Southern Company would suffer the most as a single entity under the cap while Exelon Corporation will likely profit.

The report by the world-leading provider of market analysis for the energy and environmental markets is the first to identify the major market participants and quantify the financial impact of a carbon cap on each of them. Point Carbon’s analysis uses the scope and structure proposed under the Kerry-Boxer bill (S.1733) presently debated in the Senate.

“Now, we can begin to see which firms would have larger market share and corresponding ability to move carbon markets,” noted Emilie Mazzacurati, head of Point Carbon’s North American research division.
“We can also see which companies will remain financially attractive, and which will be more exposed to carbon risk.”

The most vulnerable companies come from the power sector. Namely, these are Southern Company, American Electric Power and Duke Energy.
Compliance could cost Southern 12% of its operating income, AEP 11% of its operating income and Duke 5% of its operating income. This is in spite of the fact that the largest electric company in the US, American Electric Power or AEP, emits less than half of what ExxonMobil emits. AEP’s gross cost of carbon, a company’s total emissions multiplied by the price of allowances, would be $2.3 billion while Southern Company’s would be $2.2 billion. However, AEP is anticipated to recover 90% of its net carbon cost thru carbon revenues.

“This information may entice some companies to explore pre-compliance strategies such as offsets now, since that might reduce costs later,” said Mazzacurati. “If the more vulnerable companies were to do this now in a thorough and strategic manner, they could hedge their exposure considerably.”

Point Carbon’s report makes clear that volume of emissions or nominal size of compliance costs are not correlated positively to the financial impact on the company. Indeed, the largest emitter in the United States is ExxonMobil, alone accounting for over 6% of all US emissions. Yet ExxonMobil’s operating income will be only slightly affected under the system.

Using Point Carbon’s forecasted average price of carbon at $15 for the first few years of the program, ExxonMobil would need to pay $5.9 billion annually to purchase the carbon allowances needed for compliance. This corresponds to eight percent of ExxonMobil’s operating income. However, the company would likely recoup $5.6 billion by carbon revenues through a small increase (5%) in gasoline prices, leaving its final cost of carbon at $277 million and making its gross carbon cost small when contrasted to its operating income of $84.1 billion.

A $15 price of carbon translates into a $0.13 increase per gallon of gasoline. Such a price increase is viewed as negligible when compared to gasoline price swings caused by volatility in oil markets. Oil companies of comparable size would fare similarly under a US system.

Certain power companies would gain under the proposed cap-and-trade system. The final cost of carbon for Exelon is a net gain of over 36 percent of its operating income. This is due to its large portfolio of low-emission power generation facilities. Other energy companies that may move forward financially are FirstEnergy and PG&E.

About Point Carbon

Point Carbon is a world-leading provider of independent news and market analysis for European and global power, gas and carbon markets. Point Carbon’s comprehensive services provide professionals with market-moving information through monitoring fundamental information, key market players, and business and policy developments.