Law and the Environment

EPA Issues Final Greenhouse Gas Monitoring and Reporting Rule

On September 22, 2009, the United States Environmental Protection Agency (EPA)  issued its final greenhouse gas monitoring and reporting rule that will require as many as 10,000 facilities in the United States to measure their greenhouse gases (GHGs) and start reporting them in early 2011 (GHG Reporting Rule).  Some industry groups had asked EPAfor a delay until 2011 to start monitoring and 2012 to start reporting their GHG emissions.  EPA chose not to provide such a delay and regulated facilities only have three and a half months to prepare for the monitoring that they must begin January 1, 2010.  This may be particularly challenging for those companies that must install or modify continuous emission monitors.

Following a Congressional amendment to the Omnibus Spending Bill in December of 2007 that required the EPA to issue a proposed rule by September of last year and a final rule by June of this year, the EPA under the Obama Administration has now moved forward with an initial step in establishing a GHG regulatory system.

In the GHG Reporting Rule, EPA has adopted a substantial program of GHG monitoring and reporting with a publicly available registry.  The program is “economy wide” and covers 85-90 percent of GHG emissions in the United States.

The EPA is in part implementing the GHG Reporting Rule to gather information for future regulatory and policy decisions. Thus, many of those sources that would be required to report under the GHG Reporting Rule may also be those that would be regulated under a federal GHG cap and trade system being discussed by Congress and the Obama Administration.

While the rule does not impose any reduction obligations, as prior reporting rules, such as the Toxic Release Reporting of SARA Title III, have shown, companies reporting emissions “manage what they measure.”  In other words, once companies must publicly report their emissions, they start to invest in ways to reduce those emissions.

I.     WHEN MUST YOU START MONITORING?

As stated above the monitoring must begin on January 1, 2010.

 

II. WHEN MUST YOU START REPORTING TO EPA?

The first report will have to be submitted to EPA by March 31, 2011, and then for subsequent years thereafter.

 

III.    WHAT GASES ARE COVERED?

The EPA has identified the traditional GHGs for reporting: carbon dioxide (CO2), methane, nitrous oxide, sulfur hexafluoride, hydrofluorocarbons, chlorofluorocarbons, perfluorocarbons, and certain other fluorinated gases. For purposes of comparing emissions of the various gases using a single unit, the gases are converted into the equivalent GHG impact of CO2. The conversion is based on the principle that the other gases have a greater impact in terms of causing the greenhouse effect and thereby global warming. As an example, one metric ton of methane emissions would be reported in terms of the carbon dioxide equivalent (CO2e) of 21 metric tons. This is critical in understanding the threshold levels for application of the reporting requirements, as the non-CO2 GHG emissions may need to be converted to CO2e before determining whether the GHG reporting obligations apply to a particular facility.

IV.   WHAT FACILITIES ARE COVERED?

Four categories of facilities are required to measure and report their GHG emissions. In addition, vehicle manufacturers would be required to report the GHG emissions of their vehicles. We will focus on facility-based emitters in this Article.

1. Source Categories

The first category of facilities required to report under the GHG Reporting Rule are facilities that fall under a list of source categories identified by the EPA. These sources include, among others,

• coal-fired electric generating plants subject to the Acid Rain program,
• aluminum,
• ammonia,
• cement,
• electronics,
• lime,
• petrochemical,
• petroleum refining,
• certain underground coal mines, and
• municipal landfills.

2. Other Facilities That Emit 25,000 Tons Per Year or More of CO2e of Combined Emissions From Listed Source Categories

The second category of sources required to report are facilities that emit 25,000 or more metric tons of CO2e per year of combined emissions from stationary fuel combustion units, miscellaneous uses of carbonate, and all source categories that are listed and located at the facility in any calendar year.

These sources include, among others,

• electricity generation,
• electronics,
• ethanol production,
• food processing,
• glass production,
• iron and steel production,
• ferrous alloy production,
• oil and natural gas systems,
• pulp and paper,
• industrial landfills, and
• wastewater treatment.

3. Facilities That Do Not Meet the First Two Source Categories, but That Emit 25,000 Metric Tons of CO2e Per Year From Stationary Fuel Combustion Sources

The third source of facilities required to report are those that meet all of the following conditions:

(1) the facility does not contain any source category designated for the first two groups of categories;

(2) the aggregate maximum rated heat input capacity of stationary fuel combustion units at the facility is 30 mmBtu/hr or greater; and

(3) the facility emits 25,000 metric tons of CO2e per year or more from all stationary fuel combustion sources.

4. Entities That Sell, Import, or Export Fossil Fuels, Industrial GHGs, and CO2

The final category of entities required to submit GHG emission reports under the proposed GHG Reporting Rule are suppliers of coal, coal-based liquid fuels, petroleum products, natural gas and natural gas liquids, producers of industrial GHGs as listed in the Rule, importers and exporters of industrial GHGs and CO2, and importers and exporters of industrial GHGs and CO2 exceeding 25,000 metric tons of CO2e per year.

V. WHAT MONITORING AND MEASUREMENT APPROACH MUST BE USED?

The EPA reviewed several monitoring or measurement options in developing the GHG Reporting Rule. The EPA selected the option of combined direct emission measurement and facility-specific calculations. Facilities that already have continuous emission monitoring (CEM) devices are generally required to add a GHG measurement capability. Those that do not have CEM devices would have the choice to install them or to use facility-specific calculation methods.

VI.   WHAT CERTIFICATION AND VERIFICATION IS REQUIRED?

The EPA reviewed several options regarding certification and verification of the GHG emissions reported to the EPA. The agency decided to require certification by a designated representative of the facility submitting the report and to have the EPA verify the emissions report. No third-party verification is currently proposed.

VII.     WILL THE INFORMATION REPORTED TO EPA BE AVAILABLE TO THE PUBLIC?

The information provided by the regulated facilities will be made available to the general public by a website developed by EPA.

VIII. WHAT CORPORATE FINANCIAL DISCLOSURE AND CORPORATE STRATEGIES SHOULD BE DEVELOPED AS A RESULT OF THIS NEW REGULATION?

The GHG Reporting Rule is one of the significant steps made by the Obama Administration into climate change regulation and extends GHG measurement and reporting to a large part of the economy. As companies continue to review and develop their strategies for evaluating the potential risks and opportunities that a GHG regulatory system and potential cap and trade system will present, the GHG Reporting Rule is the one of the first salvos in what will be a concerted effort by Congress and the President to impose a GHG regulatory system in the United States.  Since establishing a company’s “carbon footprint” is now mandatory, understanding the implications of the reporting and public disclosure of the amount of greenhouse gas emissions raises several issues.

With this rule and potential future legislation that may be passed as early as this year or early next year, many publicly traded companies should also consider their disclosures in their filings with the Securities and Exchange Commission to determine if any further description of the risks or opportunities presented by climate change legislation should be discussed in their public filings.

Companies that may be regulated by any future climate change legislation, whether state, federal, or both, should develop a climate change strategy. Such strategies should include an evaluation of the number of GHG or carbon allowances that may be required to comply with climate legislation. One allowance would be required for every ton of emissions of CO2e equivalent. In addition, those companies selling or importing fossil fuels may be required to obtain allowances for every ton of CO2e equivalent of fuel sold. In engaging in this planning, companies should consider the extent to which low cost offsets purchased today could reduce the ultimate liabilities of the company in the future.

Many utilities, oil and gas companies, and other potentially regulated companies are already investing in carbon offset projects or purchasing credits now. In what could be one of the most significant environmental regulatory programs in the history of the United States, planning today could pay off with significant savings or dividends in the future. For many companies, climate change impacts should be a key strategic issue for the board and management.

Thompson & Knight Attorney Publishes Article on Climate Risk Disclosure

Texas- "Earlier this month, Xcel Energy entered into a settlement with the state of New York as a result of an investigation of several publicly traded utility companies with coal-fired power plants," according to Thompson & Knight Environmental Partner Scott D. Deatherage. His article "Climate Risk Disclosure: Xcel Raises Questions" was published in the September 17, 2008 editions of Energy Law360 and Environmental Law360.

According to the article, "the attorney general's office alleged that Xcel and four other named utilities - AES Corporation, Dominion Resources, Dynegy, and Peabody Energy - had failed to properly disclose climate risk in the companies' public filings." Deatherage says the settlement raises important questions, including "to what extent should publicly traded utilities that operate coal-fired power plants consider the Xcel settlement as appropriate precedent for future disclosure in SEC filings?" and "to what extent does the settlement reflect further pressure or liability on operators of existing or proposed coal-fired power plants?" He concludes, "the combined actions of environmental groups, certain state governments, and public pension and other public funds to influence the behavior of corporate America, and ultimately the legal and legislative process, may prove to be one of the broadest and most effective such campaigns ever witnessed."

Xcel Energy Settlement with New York Attorney General Requires Greater Climate Risk Disclosure

Xcel Energy entered into a settlement with Andrew Cuomo, the Attorney General of New York, as a result of an investigation of several publicly traded utility companies that the Attorney General's office alleged failed to properly disclosure climate risk in the companies' public filings.  The other utility companies that are being investigated are AES Corporation, Dominion Resources, Dynegy, and Peabody Energy.  In the settlement, Xcel Energy agreed to a variety of additional disclosures relating to climate risk.

The agreement requires that Xcel provide detailed disclosure of climate change and associated risks in its “Form 10-K” filings, the annual report required under securities laws and regulations issued by the Securities and Exchange Commission (SEC) to provide financial performance information to investors. 

The climate risk disclosure agreed to by Xcel includes analysis of the impact of the following: 

the potential impact of present and probable future climate change regulation and legislation;

climate-change related litigation;

physical impacts of climate change;

current carbon (or greenhouse gas) emissions;

projected increases in carbon emissions from planned coal-fired power plants;

company strategies for reducing, offsetting, limiting, or otherwise managing its global warming pollution emissions and expected global warming emissions reductions from these actions; and

corporate governance actions related to climate change, including whether environmental  performance is incorporated into officer compensation.

“This landmark agreement sets a new industry-wide precedent that will force companies to disclose   the true financial risks that climate change poses to their investors,” said Attorney General Andrew Cuomo. “Coal-fired power plants can significantly contribute to global warming and investors have the right to know all the associated risks. I commend Xcel Energy for working with my office to establish a standard that will improve our environment and our marketplace over the long-term.” 

Ceres has been a proponent of increased climate risk disclosure.  Ceres is a nonprofit organization, supported by what it asserts is institutional investors with more than $6 trillion in capital, including the treasurers and  comptrollers of Newy York, California, Florida, Maryland, Rhode Island and five other states, and two of the country's largest pension funds--CalPERS and CalSSTRS. 

Ceres President Mindy S. Lubber said, “This groundbreaking settlement will send ripples far beyond Xcel Energy. It serves notice that all companies face financial exposure from climate change and will be expected to better inform investors of their strategies for dealing with it.”

The Director of the Natural Resources Defense Council's State Climate Change Program and the Deputy General Counsel of the Environmental Defense Fund, cheered the settlement.

Obviously, these statements reflect the views of parties that are promoting greater disclosure and hope they will be successful in forcing some form of change in the corporate emissions of greenhouse gases. Industry reaction has not been published as yet.  Many industries may find this development to raise additional questions as to disclosure obligations when it comes to the potential physical impact of climate change, the financial impact of current and future regulations, and future potential litigation.

These questions are particularly important for utilities that operate coal-fired power plants.  The degree to which other publicly traded companies feel compelled to consider similar disclosure will be something that will unfold over the next year or so.    At present, there is perhaps considerable uncertainty as to what is legally required.  In 2009, we may see developments that help reduce the uncertainty as to what degree of climate disclosure is necessary as new federal greenhouse gas reporting requirements will be issued and climate change legislation may be passed.  Many proposed bills offered in Congress require that the SEC create guidance and then regulations governing climate risk disclosure.

Andrew Cuomo’s investigation of the financial disclosure of Xcel and the other utilities is only one part of a larger attack by environmental groups, certain state governments, and public pension and other public funds on coal-fired power plants and the companies that owne and operate them.  As Congress and the Whitehouse had been an impossible place to achieve any climate change legislation, the environmental groups moved to the state legislatures, have filed lawsuits to try to force action under federal and state statutes, and have brought public nuisance suits.  Finally, they have tried to force action through shareholder initiatives and petitions and through an attempt to pressure public companies, especially those that operate coal-fired power plants to disclose what the environmental groups believe to be significant financial risk from operating plants that emit significant greenhouse gases.

If these actions are successful, the use of coal may be curtailed or the operators of coal-fired plants may begin to install a means of capturing the carbon dioxide emissions from the plants and injecting it underground.  If either occurs, alternative forms of producing electricity or capturing and “sequestering” carbon dioxide may lead to higher electricity prices.  Any federal legislation that places controls on carbon dioxide emissions from coal-fired power plant will likely increase power prices as well.

Lieberman-Warner Climate Security Act Bill Contains Climate Risk Disclosure Provision

As companies prepare for their SEC filings and issuance of annual reports the question of climate risk disclosure becomes an issue to consider. With the events and rapid developments in the courts, states, Congress, and in Bali, companies may find it of particular importance this year to review their environmental disclosures for potential additional statements about climate change and greenhouse gas regulation. Of course, this will depend on their business and the location of their facilities.

What is important to consider is the fact that three separate climate change bills filed in Congress call for the SEC to issue an interpretive release, including the Lieberman-Warner Climate Security Act, that was the first climate change bill voted out of the Environment and Public Works Committee.  This bill may be considered by the full Senate in 2008.

The text of the climate risk disclosure provision, similar to provisions in two other Senate climate change bills, is found in Section 9002 of the Climate Security Act, S. 2191, and is set forth below:

(a) Regulations- Not later than 2 years after the date of enactment of this Act, the Securities and Exchange Commission (referred to in this section as the `Commission') shall promulgate regulations in accordance with section 13 of the Securities Exchange Act of 1934 (15 U.S.C. 78m) directing each issuer of securities under that Act, to inform, based on the current expectations and projections and knowledge of facts of the issuer, securities investors of material risks relating to--

(1) the financial exposure of the issuer because of the net global warming pollution emissions of the issuer; and

(2) the potential economic impacts of global warming on the interests of the issuer.

(b) Uniform Format for Disclosure- In carrying out subsection (a), the Commission shall enter into an agreement with the Financial Accounting Standards Board, or another appropriate organization that establishes voluntary standards, to develop a uniform format for disclosing to securities investors information on the risks described in subsection (a).

(c) Interim Interpretive Release-

(1) IN GENERAL- Not later than 1 year after the date of enactment of this Act, the Commission shall issue an interpretive release clarifying that under items 101 and 303 of Regulation S-K of the Commission under part 229 of title 17, Code of Federal Regulations (as in effect on the date of enactment of this Act)--

(A) the commitments of the United States to reduce emissions of global warming pollution under the United Nations Framework Convention on Climate Change, done at New York on May 9, 1992, are considered to be a material effect; and

(B) global warming constitutes a known trend.

(2) PERIOD OF EFFECTIVENESS- The interpretive release issued under paragraph (1) shall remain in effect until the effective date of the final regulations promulgated under subsection (a).

This provision has not become law, but the SEC is currently reviewing a petition filed by various state pension funds and other socially conscious investors and environmental groups, asking for the SEC to issue an interpretive release to provide guidance for companies and to require climate risk disclosure.  Whether this provision becomes law or the SEC independently adopts an interpretive release, the demand for climate risk disclosure in Congress and a significant part of the institutional investment community suggests that corporations that may be impacted by future greenhouse gas emission regulation should evaluate their corporate strategy regarding climate risk disclosure.

President, General Counsel, and Chief Medical Officer Fined $34.5 Million in Oxycontin Drug Case

As we continue to receive requests for clients for advice on potential civil and criminal liability for officers and directors under federal and state environmental laws, we continuously review reports of the filing of cases and the settlements or plea bargains in these cases.  Althought not prosecuted under environmental laws, the guilty plea and sentencing of Purdu Pharma provides an example of the potential liability officers of companies can face under US laws.

Purdue manufacturers Oxycontin, a trade name for a long-acting form of the painkiller oxycodone, that produces a heroin-like high if ground and swallowed or snorted.  It is also highly addictive.  Many deaths have occurred from overdoses of this drug. From 1996 to 2001, the number of deaths related to oxycodone nationwide increased fivefold while the annual number of OxyContin prescriptions increased by nearly 20 times, according to a report by the Drug Enforcement Administration.

The company and its president Michael Friedman, who retired in June, its general counsel Howard Udell, and its former chief medical officer Paul Goldenheim plead guilty in May to a misdemeanor count of misbranding the drug for claiming that OxyContin was less addictive and less subject to abuse than other pain medications.

The company and the three officers were fined in total $634.5 million.  The three officers must pay $34.5 million.

The case demonstrates the potential liablity of officers in the United States for actions they take with respect to the company's operations and activities.  While not arising under environmental laws, cases like this demonstrate that participation in civil or criminal activities of a corporation may lead to significant liability.  In this case, the officers escaped any prison sentence and were only put on probation for three years.  This decision by the federal district judge was, however, highly controversial, with victims and victims relatives decrying what they believed was a very light sentence.