Climate Change Due Diligence: A New Aspect of Environmental Due Diligence?

           Now that California and six western states and ten northeastern states have passed laws and entered into regional programs to limit greenhouse gas emissions, the United States is entering a carbon-constrained economy.  Nine or more bills have been filed in Congress.  As companies enter into mergers and acquisitions, the potential costs of large carbon footprints at facilities or companies being acquired is becoming a significant concern.

            Not only the regulatory costs of potential emission reductions or offsets, but the “license to operate” may in jeopardy.  The case of TXU and it’s attempt to gain permitting for eleven coal-fired power plants demonstrates that the public and many legislators may prevent the construction of large greenhouse-gas-emitting facilities. The Wall Street Journal reports that Mirant, a utility that just emerged from bankruptcy, is facing limits on its profitability as a result of carbon regulation in the northeastern states.

            Many investment companies looking to acquire facilities in Europe are evaluating greenhouse gas emissions and the allowances and credits that have been purchased to ensure the ability to continue operating.  In the US, some companies have begun entering contracts to secure carbon credits to offset expected limits on greenhouse gas emissions.

            As we appear to be moving to increasing constraints on carbon dioxide and other greenhouse gases here, the need to begin conducting greenhouse gas evaluations and considering the ability to reduce emissions or the availability of offsets will begin to be a significant part of environmental due diligence.  It will become critical to evaluate not only compliance risks arising from carbon emissions, but also the very the value of facilities and companies being acquired.