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Is a Carbon Tax a Done Deal for the US? Ask Exxon

Contributed by by Marin Katusa, Casey Research.

We know President Obama is going to tax the rich, but I bet many didn't think he would weasel in the carbon tax as quickly as he is going to now. A Romney win would have been bullish for coal producers in the US – but Romney lost, and now so has coal, at least in the near term. The biggest winner from Obama? Natural gas.

Exxon Mobil Corp (XOM) is now supporting Obama in bringing a carbon tax to the US. Why would Exxon – and other big energy companies – join forces to bring on the carbon tax? The answer is simple: profits.

Exxon has made significant purchases, buying unconventional North American gas companies. For example, it recently bought Canadian firm Celtic Exploration for over C$2.5 billion. Let's not forget that a couple of years back, Exxon bought out XTO Energy for over US$30 billion.

How much pull does Exxon have in Washington, DC? Exxon has one of the largest lobbying groups on Capitol Hill. And how ironic: Exxon is also one of the largest holdings for all of the US Congress members. Exxon has always had clout in Washington and always will. Exxon is one of the former Rockefeller oil companies... one that has now positioned itself as one of the dominant unconventional North American companies.

How does a carbon tax benefit Exxon? Natural gas and coal race neck-and-neck when it comes to electricity generation in the United States. By increasing the cost to produce coal, natural gas becomes more attractive for utilities. This means a better bottom line for Exxon… and a fatter paycheck for its executives.

But why unconventional natural gas in the United States?

It's hard for a company as large as Exxon to find deposits that will move the needle on its production meter. Unfortunately for Exxon, most of the world-class deposits that it is looking for are in regions where US companies like it have lost their advantage. For example, in Russia and former USSR states, Exxon has to now play by Putin's rules, which could change at any minute.

South America has also proven to be very dangerous for American companies. Chevron has just had US$18 billion worth of assets seized in Argentina. Before that, Chávez in Venezuela taught Shell and Exxon about doing business in Venezuela. Nationalization drives also followed in Bolivia and Ecuador. All this means is that there are fewer places companies like Exxon can go to make a consistent return on an investment without insane political risk.

Obama knows that just taxing the rich won't be enough to fill the deficit gap in the United States. A carbon tax would help both financially as well as politically: Obama would look like a hero standing up to the "dirty polluters," as well as bring in another US$100 billion in revenues.

Coal, both metallurgical as well as thermal, is already suffering: metallurgical coal prices are down because of lower demand in Europe and Asia, while thermal coal is down because of pricing pressure from natural gas and the success of shale gas. A carbon tax would be a knockout blow to the thermal-coal industry in the United States.

With the backing of Exxon, expect Obama to not only bring in a carbon tax, but to do it a lot quicker than anyone has expected – and he will be viewed as a hero by many for doing it.

Is your portfolio positioned to benefit from this coming change? It had better be. If not, you can learn how to get it in shape – and also get in on the energy super-bull that's forming.

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Reader Comments (7)

Will push up your costs of production (via eg your electricity bill) (and subsequently make exports more expensive).
Plus in the mirror. Demand for coal will go down, so likely worldprices as well, so likley the competition on coal will get cheaper energy.
He should for the economy use a tax that will not make exports more expensive (like a VAT European style).
This will work like a VAT (producers and sellers etc just adding it to their costprice and basically sell it on, but without the exportadvantage, refund or 0-rate in case of export)
Alternative could be only a Carbon tax for end users/consumers (sort VAT style, but complicated to do and totally against the idea behind a carbontax).

Stupid idea in this economic climate but likley popular with his base (who will end up paying the bill but hiden in the price so they will not see it and think big companies pay it iso them) so could definitely happen.
November 26, 2012 | Unregistered CommenterRik
@Snowy S
And your point is?
November 27, 2012 | Unregistered CommenterRik
Rik - Thanks! I removed that comment.

On coal: in the US, demand is going down, but not worldwide. And the US is exporting ever larger amounts.

In CA we already have "carbon trading" - which imposes all the costs of a carbon tax for the end-user without the tax receipt benefit for the state (well, there is a small benefit). The big beneficiaries are Wall Street firms that are trading in it. So if I had to chose between carbon tax and carbon trading, assuming equal cost, I think I'd chose the former.
November 27, 2012 | Registered CommenterWolf Richter
Fully agree, trading carbon generally leaves the major part in financial traders pockets, and it ends up in the costprice of the product anyway.

However the main question imho remains how to structure the thing so you donot make your competitive position worse (as it does in the present form, it simply increases costprice and producers will try to drop the increase with their buyer (be it retail or consumer).
As long it is not an international standard (and it is not with most countries that are strong in exporting, with the only exception Germany and possibly Japan) you simply put an extra stimulus on outsourcing.

I havenot thought about it but a sales tax on poluting products might do a better job. It doesnot matter if the amounts are small, but with the kind of money Oba needs and energy being an important part of the costprice of most products it will make a difference and a negative one (next to reducing consumer spending on other products of course).

Another problem I have with it is that the proceeds are pure budgettary no link with a cleaner enviroment whatsoever.
November 28, 2012 | Unregistered CommenterRik
GREAT! Impose another tax, benfitting only Wall Street banks, giant oil companies and Congress members while screwing everyone else. At least the Obamas will be nouveau riche... Sounds like we're on the road to RECOVERY, finally!

The sooner everyone realizes that the larger your government, the greater the corruption (and misery for ALL of those without access to it), the sooner we can get on with the next American Revolution.
November 28, 2012 | Unregistered CommenterJB
The advantage of carbon trading over a carbon tax: it incentivizes and supports clean energy projects, sustainability projects, forest protection, etc. It's a much more targeted response to fossil fuel's externalities than a general carbon tax. What good is a carbon tax if it's thrown into the general fund and ends up being used to build tanks and subsidize oil companies?

Carbon trading should (in theory) get us moving toward renewables much faster than a carbon tax. Also, it's a market, not a tax, so it should (again, in theory) be more attractive to conservatives. It started out as a proposal from the American Enterprise Institute, after all.
November 28, 2012 | Unregistered CommenterTimothyJ
You look only from one side.
The problem with trading is that a lot ends up with a division like:
80% of the end user price for traders, certificators;
and only 20% with the one actually selling it (planting tress and so on).
I have seen several of these (and not much others).

If you want trade you need to design a completely new system in which the main financial benefits end up where they should be.
Another problem with trading now is that it favours old industries at the costs of new ones.

And as said it is not only the move to renewables, it is also filling a deficit gap and getting export going.
November 29, 2012 | Unregistered CommenterRik

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