Why Exxon is spending $1 million to push for a carbon tax

Exxon, long accused of downplaying the threat of climate change, announced plans on Tuesday to donate $1 million over two years to a group urging Washington to enact a tax on carbon.

The donation to Americans for Carbon Dividends makes Exxon (XOM) the first American oil and gas supermajor to financially support the movement.

The decision reflects Exxon's desire to be viewed as part of a climate change solution, not the problem. Exxon realizes its early support could allow the company to shape legislation -- and prevent a more burdensome outcome from Washington.

"Exxon sees this as a way to be part of a real emissions reduction strategy -- without significantly affecting their bottom line," said Noah Kaufman, a research scholar at Columbia University's Center on Global Energy Policy.

"It's a tax on their product, but they could pass most of that tax along to consumers," Kaufman said.

Americans for Carbon Dividends is advocating a carbon tax policy proposed by former Republican secretaries of state James Baker and George Schultz. The group's co-chairman is Trent Lott, the former Republican Senate majority leader.

Importantly, the Baker-Schultz carbon tax would be "revenue-neutral," meaning it would not boost government revenue. Instead, money raised by the tax would flow back to American households through a "carbon dividend" that could total $2,000 a year for a family of four.

In a statement, Exxon said that for a decade it's supported imposing a "revenue-neutral" price on carbon to "manage the risk of climate change."

Exxon's financial support for Americans for Carbon Dividends reflects a realization that a carbon tax could be the least-bad response from Washington.

Columbia University published a study in July that concluded a carbon tax would accelerate the shift away from coal, but only have a "relatively small" impact on the production and consumption of oil and natural gas. The study even found that natural gas -- one of Exxon's central businesses -- would probably increase in price and production over the first five years.

Exxon wants clarity

At the same time, Exxon is hoping for clarity on how the United States will respond to the threat of climate change. Earlier this week, the United Nations published a dire warning that governments must take "rapid, far-reaching and unprecedented changes" to avoid disastrous levels of global warming.

Some states are already acting. Washington State is holding a referendum in November on whether to enact the first state-level carbon tax in the United States. California launched a cap-and-trade program in 2013.

Exxon said it supports policy that replaces the "patchwork of literally thousands of regulations, laws and mandates today" that effectively price carbon in a costly and inefficient way.

"Exxon would benefit from regulatory certainty across the different jurisdictions," said Katie Bays, an energy analyst at Height Capital Markets. "There is this undercurrent in the United States of progressivism that is uncomfortable with unlimited carbon emissions. And Exxon realizes this."

'Couch cushion money'

The $1 million donation from Exxon could also be an easy way for the company to win points in the public relations battle. The company has long been targeted by climate activists for its role in contributing to global warming. But Exxon is fighting back, including by launching television ads that highlight the company's research into algae as a potential biofuel.

"There may be a PR element to this," said Pavel Molchanov, an energy analyst at Raymond James. "$1 million is an absolutely meaningless amount of money for a company of this size."

Bays agreed, calling $1 million "couch cushion money" for Exxon. "It's token support and a political move to position themselves as more nuanced than just another big oil producer."

Ted Halstead, CEO of Americans for Carbon Dividends, said that $1 million to support a climate plan that is not yet being voted on is "quite significant."

Americans for Carbon Dividends has raised $3.4 million since launching in June, according to Halstead.

"Exxon is putting its weight publicly behind an ambitious solution. Other companies are joining them and more will follow," Halstead said.

Carbon tax not imminent

So does Exxon's support mean a carbon tax is around the corner? Not exactly.

Halstead predicted that a bipartisan bill will get introduced by the next Congress. However, he conceded that a carbon tax may not get passed until 2021.

Although Exxon may be in favor of a carbon tax, oil companies that exclusively operate in the United States remain opposed. Bays called that opposition an "insurmountable obstacle" at this point.

"There is not going to be a federal carbon tax in the United States anytime soon," Molchanov said.

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