Earlier this month, ExxonMobil (NYSE:XOM) unveiled a new business unit to commercialize its low-carbon technology portfolio. Its focus will be on finding ways to leverage its existing expertise and participate in the energy transition to lower-carbon fuel sources.

While it's a notable step for the company, I don't think it goes far enough. I'm concerned that Exxon will fall behind its big oil rivals that are making bolder commitments to clean up their act.

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Just a drop in the bucket

Exxon plans to invest $3 billion into lower-emissions energy projects through 2025. The initial focus will be on carbon capture and storage (CCS) projects, though the company will also explore other lower-carbon technologies in the future, including hydrogen. It's currently a global leader in CCS as its existing facilities in the U.S., Australia, and Qatar capture 9 million tonnes of carbon dioxide per year, the equivalent of planting 150 million trees. It has several more projects under consideration that could capture and store millions of additional tonnes of carbon dioxide per year.

However, at $3 billion, Exxon is only spending a tiny fraction of its capital project budget on carbon-friendly projects. For comparison's sake, it expects to invest between $16 billion and $19 billion on capital and exploration projects this year and $20 billion to $25 billion annually through 2025. The bulk of that investment spending will go toward discovering and developing new oil and gas projects. While the oil giant expects these investments to grow its earnings two-fold by 2027 thanks to margin improvements (assuming oil prices cooperate), its production will steadily decline as legacy fields deplete.

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Contrasting approaches by its big oil rivals

While the global economy will continue to need fossil fuels, it's rapidly pivoting toward cleaner sources. That's leading some of Exxon's rivals to make bold moves into lower-carbon energy. For example, BP (NYSE:BP) unveiled an ambitious plan to transition from fossil fuels to renewable energy. BP plans to shrink its oil and gas business by 40% from 2019's level by 2030 while boosting its renewable power generation capacity from 2.5 gigawatts (GW) to 50 GW during that timeframe. Powering BP's transition will be a steady shift in investment spending, with it aiming to expand its low-carbon investment level to $5 billion per year by 2030 while reducing the amount it reinvests in its legacy fossil fuels business.

BP is taking a multifaceted approach to the lower carbon future by investing in renewables, bioenergy, hydrogen, and CCS. The company recently made a big splash in the offshore wind market by winning leases to build up to 3 GW of capacity in the U.K. Fellow European oil giants Equinor (NYSE:EQNR) and Total (NYSE:TOT) are also betting big on offshore wind. Total joined BP in recently winning a UK lease auction to build 1.5 GW of capacity. That's part of the company's decision to ramp up its renewable power generation by investing in wind, solar, and hydro projects with the objective to get 15% to 20% of its revenue from renewable power sales by 2040.

Meanwhile, Equinor has partnered with BP to build up to 4.4 GW of offshore wind capacity in the U.S. By 2026, Equinor expects to produce between 4 GW and 6 GW of renewable energy, 10 times its current capacity while expanding that up to 12 GW to 16 GW by 2035.

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Two big problems with Exxon's strategy

While most of its rivals are building renewable energy generating projects, Exxon's strategy is to lower its existing oil and gas business' carbon intensity by expanding its CCS operations. That will allow it to stay the course and continue investing in its legacy fossil fuel business.

However, there are two potential flaws to this approach. First, it adds to the cost of fossil fuel production because the company needs to invest additional capital into CCS projects to lower its emission profile. That's a concern considering that the cost of renewable energy is rapidly falling. If lower carbon fuels continue to decline in cost, it could become cheaper to produce those cleaner fuels than oil when adding in the expense of capturing and storing the associated carbon.

The other issue I have with Exxon's approach is the nature of the oil business, which is very capital intense because production from oil wells declines until the well depletes. That's why Exxon needs to routinely plow the bulk of the cash flow produced by its oil and gas business back into maintaining its output by developing new projects that can replace legacy reserves as they dry up. That's evident in the projected decline in its production by 2025 and the big drop BP expects to see by 2030.

Contrast that with a renewable energy project, which can produce at a relatively steady state for a decade or more. As a result, these assets have relatively low maintenance capital requirements. Energy companies thus have more flexibility as they can reinvest the cash flow generated by these assets into expanding their capacity or return it to investors via share repurchases or dividends.

Not a lot to love with Exxon's new approach

Exxon is trying to embrace the energy transition by lowering the carbon intensity of its oil production. However, that approach doesn't look like it will pay dividends over the long term since it adds to the costs of an already capital intense business. On the other hand, most of its European rivals are shifting spending from oil and gas to emissions-free renewables that have the added benefit of producing at a relatively steady state for decades. Exxon could fall well behind its rivals in the coming years, which is why I'm not in love with its low-carbon strategy.

This article represents the opinion of the writer, who may disagree with the "official" recommendation position of a Motley Fool premium advisory service. We're motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.