ExxonMobil and the Challenge of Environmental Damage

ExxonMobil and the Challenge of Environmental Damage

ExxonMobil and the Challenge of Environmental Damage

            A majority of irresponsible industrial activities that lead to pollution, environmental damage, and other negative consequences such as climate change are attributable to a small number of large corporations in developed countries. Despite the existence of stiff regulatory measures that seek to curb illegal dumping, excessive emissions, or poor resource utilization, big companies are using deceptive ways that either mislead stakeholders or circumvent existing regulations. ExxonMobil’s failure to reduce emissions and continued interest in undertaking harmful oil exploration and drilling will not only lead to irreversible climate change but also tarnish the company’s image and potentially cause its collapse.

The Economics of Environmental Damage by ExxonMobil

ExxonMobil has historically used deceptive and manipulative tactics to engage in harmful business practices that damage the environment. Its position as one of the biggest oil supermajors has over the years allowed it to finance activities that either conceal or legitimize its hazardous practices. However, the challenge of environmental damage is complex and it is difficult to accurately determine the economic impact of a single actor such as ExxonMobil since most organizations try to hide their illegal activities. Fortunately, there are estimates that reveal the net effect of pollution on specific economic sectors and countries. For instance, studies in the U.S. reveal that fossil fuel pollution that  is responsible for environmental damage and climate change costs the county close to $240 billion each year (Doyle). A majority of these expenses are as a result the rising costs that are linked to healthcare and management of extreme weather experiences.

            Health is the biggest economic component that reflects the cost of pollution and environmental degradation. Toxins from fossil fuel combustion contaminate the air and impair the health of people who are exposed to pollutants. As a result, the rising cases of health complications that are associated with fossil emissions are clear indicators of the increasing burden of pollution. As a major player in the global oil sector, ExxonMobil threatens the health of millions of people either directly or indirectly. According to Perera, pollution from fossil fuel combustion is the biggest single threat to global pediatric health, especially among young children who are more vulnerable, both physically and biologically (2). Unlike adults who have stronger immune systems, body-weight advantage, and better decision-making capabilities to hide from pollutants, young children in their early development lack critical safeguards that can cushion them from the adverse effects of fossil pollutants. In fact, it is estimated that more than 40% of the health burden arising from environmental damage is borne by infants under the age of five years (Perera 3). More disturbingly, a child exposed to pollution can suffer lifelong health challenges that diminish the quality of life.

            Fossil fuel subsidies are the second economic dimension of environmental damage by ExxonMobil. Many governments across the world offer support to oil corporations to make their operations more sustainable. For instance, inefficient taxation and failure to incorporate the cost of externalities on oil prices are indirect subsidies that allow oil companies to make more profits even though their activities pose direct dangers to the public. Direct cash payments and tax exceptions given to oil corporations not only reduce the incentive to invest in renewable sources of energy but also legitimize production of dirty energy that endangers the health of people. According to International Monetary Fund (IMF), global energy subsidies in 2015 were close to $5.3 trillion (Coady et al. 3). Studies have also revealed that the U.S. spends more than $20 billion each year on fossil fuel subsidies (Nuccitelli). Therefore, environmental damage by ExxonMobil and other large oil corporations is partly a product of favorable government policies that use subsidies instead of restrictions.

            Climate change also gives insight into the economic dynamics of environmental damage. Global warming that is as a result of rising levels of CO₂ is responsible for loss of agricultural productivity, disruption of water supply, and extreme weather such as hurricanes that results in loss of properties and lives. Cost analyses further reveal that climate change is a threat to three major industries: agriculture, fisheries, and forestry. More so, poor countries that lack capacity to forecast and prevent climate change will experience worst conditions that will lead to food shortages, loss of flora and fauna, and loss of jobs.

Significance of Environmental Damage to ExxonMobil

ExxonMobil has always handled environmental damage as a core managerial issue that has a direct impact on its profitability and brand. The company understands that strict legislation on the issue will increase its operational costs, reduce revenue generation, and hurt profits. As a result, it has in the past participated in efforts to discredit climate science in order to prevent formulation of strict policies. Evidence shows that between 2007 and 2015, ExxonMobil donated $1.87 million to politicians to convince them to oppose climate change (Henderson et al. 11). During the same period, it was also accused of giving $454,000 to American Legislative Exchange Council, a corporate lobbying group that is against fighting climate change (Henderson et al. 11). Besides persuading lobby groups and legislators, ExxonMobil has also used a prolonged deceptive approach that aims at sponsoring frontline science experts and academic experts to refute climate change data, to misrepresent information, or to advocate for further research before passing adverse laws. Between 1972 and 200, the company funded weekly advertorials in The New York Times with the sole objective of misrepresenting climate science information to mislead millions of readers (Johnston). All in all, it is evident that ExxonMobil is using multiple approaches to sway legislation and public opinion to its favor.

            The dominance of ExxonMobil not only in the oil sector but also in the U.S. economy highlights how the company has managed to navigate policy restrictions imposed on firms that contribute to environmental damage. In 2018, it was ranked as the fourth biggest American company behind Apple, Berkshire Hathaway, and JPMorgan Chase (Forbes). As a result, it is surprising that a company that is associated with fossil fuel combustion is in the same league of technology and investment giants such as Apple and JPMorgan Chase. However, it is important to underscore that increased migration to clean energy is a big threat to its future survival. Moreover, even though ExxonMobil is among the most profitable companies in the U.S., its profit margins are shrinking fast die to huge capital investments and rising operational costs. For instance, in 2018 it made sales worth $220.4 billion, with profits accounting for only $19.7 billion (Forbes). As a result, finding practical remedies for environmental damage will diffuse the threat of clean energy as well as lower the cost of operations.

Economic Models

Two Factor Heckscher-Ohmin Model. According to this model, land and labor are the most important factors of production. Differences in the amount of these resources in various countries are responsible for variations in productivity. As a result, production possibilities are modeled around the availability of land and labor. The model also suggests that cloth and food are the only goods that are necessary for production and consumption. Moreover, it provides that competion determines wage and price of goods. Lastly, this model is conceptualized around two types of countries: domestic and foreign.

The Standard Trade Model. The Standard Trade Model is built around the idea of market equilibrium. Firstly, it suggests that production and consumption must lie on the same isovalue line. The point of production is the production possibility frontier (PPF) tangent to the isovalue, whereas the point of consumption is the indifference curve tangent to the isovalue line. The model also argues that relative prices affect consumption. For example, when the price item X rises relative to the price of item Y, a country is better of exporting item X. The relationship also implies an economy can import more of Y. Economic growth also affects supply and prices. In particular, biased growth of a specific industry can lower the prices of goods.

Ricardian Model. Ricardian model explains how technological differences are a source of comparative advantage in the international market. It believes that only two countries are involved in trade and that only two goods are traded. It assumes that labor is homogenous and it is the only factor of production. Technological advancement in one sector can lead to biased growth and led to lower prices, thus impacting the composition of imports and exports.

The Two Factor Heckscher-Ohmin Model and ExxonMobil Environmental Damage

The Two Factor Heckscher-Ohmin Model can explain the drivers of environmental damage in ExxonMobil. The American oil giant is after maximizing profitability and this objective pushes it to acquire strategic resources that are suitable for oil exploration and drilling. Specifically, its exploration activities aim at increasing the acreage of land under oil production. Abundant land resources have little opportunity cost since labour is easily substitutable or transferable. As a result, ExxonMobil has extended its activities to remote areas such as the Arctic where destruction to the environment is more perilous. By establishing bases in such underutilized areas, the company effectively builds a microclimate zone that affects temperature, precipitation, and plant cover. Green house gas (GHG) emissions are amplified by consumption and the subsequent pollution levels contribute to global warming, climate change, and rising burden of health complications. As a result, by accumulating land resources for oil production, ExxonMobil directly contributes to the accumulations of GHG stock that is in turn responsible for environmental damage.

Remedies

Foremost, ExxonMobil must maximize welfare by relying on other economic models that are more sustainable. More so, the company should adopt the Ricardian model that uses technology as a source for comparative advantage. While historically the company has experienced biased growth as a result of accumulating strategic land resources, it now needs to change its approach and emphasize on building technological advantages. The global economy is shifting towards renewable sources of energy where technology is the main source of comparative advantage. Fortunately, the U.S., the parent country of ExxonMobil has taken a lead in clean energy innovation. As a result, the company is in a position to harness existing technology and to use it as a launch pad to achieve biased growth in clean energy. In doing so, it will solve the challenge of environmental destruction.

            Undertaking optimal growth under the conditions of Standard Trade Model can also help ExxonMobil to reduce emissions. The company will supply optimal quantities of oil at equilibrium price. In doing so, consumer preferences will dictate demand and potentially allow external market forces to reduce demand for fossil fuel, while at the same time increasing demand for clean energy sources. In doing so, the company will realize it is better off producing renewable energy.

Works Cited

Coady, David, et al. How large are global energy subsidies?. No. 15-105. International Monetary Fund, 2015.

Doyle, Alister. “Weather Extremes, Fossil Pollution Cost US $240 Billion: Study. Reuters, 2017. Retrieved from https://www.reuters.com/article/us-climatechange-usa/weather-extremes-fossil-fuel-pollution-cost-us-240-billion-study-idUSKCN1C22AM

Forbes. “America’s Largest Public Companies: 2018 Ranking.” Forbes. Retrieved from https://www.forbes.com/top-public-companies/list/

Henderson, Rebecca M., et al. “Climate Change in 2018: Implications for Business.” Harvard Business School, 2018.

Johnson, Ian. “ExxonMobil: Oil and Gas Giant ‘Misled’ the Public about Climate Change, Say Harvard Experts.” Independent, 2017. Retrieved from https://www.independent.co.uk/environment/exxonmobil-climate-change-oil-gas-fossil-fuels-global-warming-harvard-a7908541.html

Nuccitelli, Dana. “America Spends Over $20 Billion Per Year on Fossil Fuel Subsidies. Abolish Them. The Guardian, 2018. Retrieved from https://www.theguardian.com/environment/climate-consensus-97-per-cent/2018/jul/30/america-spends-over-20bn-per-year-on-fossil-fuel-subsidies-abolish them

Perera, Frederica. “Pollution from fossil-fuel combustion is the leading environmental threat to global pediatric health and equity: Solutions exist.” International journal of environmental research and public health 15.1 (2017): 16.

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