The New York Attorney General (“NYAG”) has sued Exxon Mobil (“Exxon”) for fraud and misrepresentation to its investors under a New York securities law known as the Martin Act. The NYAG contends that Exxon represented to the public that it was accounting for “projected carbon costs in evaluating its ongoing investments” using one value ($80.00 per ton of CO2 emissions) but that internally (and secretly) it used another set of lower values. The effect of this, according to the NYAG was to make “its assets appear significantly more secure than they really were, which had a material impact on its share price.” Those claims are being tested in a bench trial now underway in New York. The NYAG’s pre-trial brief is here.
Exxon responds by accusing the NYAG of deliberately conflating two entirely different analyses for the purpose of salvaging a well-publicized and politically motivated investigation that was unable to unearth any real wrongdoing. Its pre-trial brief is here. Exxon says that it has long considered the potential impacts of climate change regulation to evaluate the long-term worldwide demand for energy. In this evaluation, it has sought to measure “the impact of all CO2 policies and regulations on global energy demand.” That calculus yielded a “cost” per ton of CO2 emissions that Exxon used for projecting demand for oil and gas. As part of those calculations, it considered costs not directly borne by Exxon—such as fuel efficiency standards and gasoline taxes on consumers. One tool it used to arrive at likely future costs to society of CO2 controls was the projected costs of future carbon taxes and CO2 trading schemes. Exxon referred to this cost figure, used to assess demand, as the “proxy cost of carbon.”
But Exxon also separately evaluated the direct effects of CO2 permitting and regulatory burdens on its own projects. The purpose of this evaluation was not to assess energy demand. Instead, its purpose was to derive the costs of CO2 controls to individual Exxon-sponsored projects for assessing returns and allocating capital within the company. This value, known as the “GHG costs,” should generally be lower than the “proxy cost of carbon” because it includes only the direct costs of production to Exxon and not the broader impacts of CO2 policies on consumers.
Thus, claims Exxon, the fact that Exxon uses one cost for assessing the worldwide demand for its product and another for evaluating its direct costs of production is neither fraudulent nor surprising—instead, it makes good business sense. And, says Exxon, while it ultimately revealed that it conducted those analyses, it did not publish its proxy costs until 2013 and never published the GHG costs that it used for assessing its own projects—claiming that as a result investors could not have been misled.
The NYAAG’s counter is less clear. It does not, in its pre-trial brief, grapple extensively with the distinctions made by Exxon. In one place, it suggests that Exxon used shifting “proxy costs of carbon” that ranged from a high of $80/ton CO2 to much lower values when assessing demand. NYAG Br., 14. But Exxon explains that. In assessing the impacts of CO2 policies on demand, it assumed that the policy and regulatory costs imposed on energy production and use would be far lower in less developed nations than in more developed ones. Thus, it makes perfect sense to assign different cost pressures on energy demand in different regions.
In another place, the NYAG collapses the distinction between the “proxy cost of carbon” and the “GHG costs” by treating them as the same. It then contends that Exxon should have used something approaching its proxy costs of carbon (used for assessing demand) also to evaluate its project-specific costs, and that it was fraudulent not to do so. NYAG Br., 18–29. By not evaluating the viability of its own projects using the “proxy cost of carbon,” then, according to the NYAG, Exxon failed to properly evaluate the need to write down the value of its long-term assets. But the NYAG never really explains why it makes sense to use the proxy costs to evaluate project-specific costs.
In large part, the NYAG’s case that the two costs are really one relies on a document issued by Exxon, ironically, to allay activist shareholders. In 2014, to address shareholder proposals, Exxon published two reports: Energy and Climate and Energy and Carbon-Managing the Risks. In the first, Exxon explained that its “proxy cost [of carbon] seeks to reflect a reasonable approximation of costs associated with policies that society may impose over time on GHG emissions … [and] that we believe drive society toward increased efficiency and changes … [to the] fuel mix.” The second document, Managing the Risks, started with a review of the global factors driving energy demand and then of steps Exxon was taking to reduce its own emissions. Then, in Exxon’s words, Managing the Risks “pivoted” to a discussion of GHG cost: “[p]erhaps most importantly, we recognize that all our business segments include, where appropriate, GHG costs in their economics when seeking funding for capital….” This, according to Exxon, was an entirely accurate explanation of its project-specific GHG cost accounting.
The NYAG, however, suggests that Exxon at times used the proxy costs and GHG interchangeably, and that its reports advised the public that the company “requires that all business units use a consistent corporate planning basis, including the proxy cost of carbon discussed above, in evaluating capital expenditures and developing business plans.” And, to be fair to the NYAG, Exxon itself produced an in-house email (for the purpose of showing Exxon scrupulously sought to avoid misrepresentation) in which one employee reminded another that the terms proxy costs” and “GHG costs” were not interchangeable:
The trial judge reportedly understands the issues in the case, which may not bode well for the NYAG. According to one reporter, he asked at the outset of the trial whether the parties could agree that if Exxon used its proxy costs just for evaluating demand and its GHG cost calculations just for determining future expenses, then there was no Martin Act violation. Second, he asked whether the Martin Act would be violated if investors were confused by the two different calculations. Given that this is a bench trial, the Court will soon be answering both questions itself.