Law and the Environment

Climate Change Risk Highest Concern According to Survey of Insurance Industry Analysts

A recent survey conducted by Ernst & Young and Oxford Analytica shows that Climate Risk is the biggest concern among insurance industry analysts.  According to the Ernst & Young description, the research report sought the views of more than 70 analysts from around the world. They came from over 20 disciplines that shape the business environment, including: law, finance, the sciences, business strategy, geopolitics, regulation, medicine, economics, and demographics. They were drawn from 12 of the world’s most important sectors: asset management, automotive, banking and capital markets, biotechnology, consumer products, insurance, media and entertainment, oil and gas, pharmaceuticals, real estate, telecommunications, and utilities. Interviews were open ended and no predetermined list of risks was used. Each analyst was asked for his or her own evaluation of the most important strategic challenges facing global businesses.

The top ten risks are:

1.         Climate change: long-term, far-reaching and with significant impact on the industry.

2.         Demographic shifts in core markets: offers business opportunities but risk that other sectors will capitalize first.

3.         Catastrophic events: rising costs and serious impact on earnings for insurers.

4.         Emerging markets: risk and opportunity but competitive threat from new players.

5.         Regulatory intervention: increased scrutiny impacting on operations and practices.

6.         Channel distribution: technology is changing the way insurance is sold and purchased.

7.         Integration of technology with operations and strategy: an enabler to keep pace with competition but lack of integration is a threat at the strategic business level.

8.         Securities markets: changes in capital providers and the way capital is entering the insurance industry are causing major changes in the industry.

9.         Legal risk: significant and unexpected change in the legal environment, such as government legislation or evolving case law, will continue to have a critical impact on the insurance industry.

10.       Geopolitical or macroeconomic shocks: likely causes unknown but consequences potentially severe.

John McCain Traveling through Europe Discussing Greenhouse Gas Restrictions

Senator John McCain has been traveling in Europe, and has met with the current Prime Minister Gordon Brown of the United Kingdom and former Prime Minister Tony Blair.  Their talks were wide ranging, but included discussions of actions to address climate change and the use of a cap-and-rade system to achieve greenhouse gas reductions.  They also discussed a post-Kyoto treaty.

"I want to make clear again we will not have a global agreement that is effective unless India and China are part of it," McCain said.  "I am convinced that if we work at it, we will convince India and China that it is in their interests to be part of a global agreement to reduce greenhouse gas emissions.  I think that there will be sufficient international pressures and domestic pressures as well as the facts of the environmental challenges that will bring them into a global agreement."

Senator McCain also met with the European Union environment commissioner Stavros Dimas, who oversees Europe’s emissions trading scheme.

Pension Funds Reach Agreement with Dynegy to Disclose Climate Risks by the End of the Year

Two of the largest pension funds have forced Dynegy Inc., to agree to report on climate risk by the end of this year, and how the company will address this risk.  The California State Teachers' Retirement System and North Carolina Retirement Systems, both of which owned substantial shares in the company, filed a shareholder resolution with Dynegy in January to require the company to report on the feasibility of adopting specific greenhouse gas reduction goals for its existing and proposed power plants.

In exchange for an agreement by Dynegy to make the report, the two pension funds withdrew the resolution.  Dynegy is apparently developing a plan to disclose climate change information to its shareholders, which likely will include the company’s annual greenhouse gas emissions, as well as a plan for mitigating those emissions.  The mitigating steps may include purchase of greenhouse gas offsets or carbon credits.

At the same time, Dynegy is planning to construct coal-fired power plants in Arkansas, Georgia, Iowa, Michigan, Nevada and Texas. Two plants are under construction in Arkansas and Texas.

This development indicates a growing capability of institutional investors to force climate change disclosure from major companies.

EPA's Proposed Lowering of Ozone Standard Facing Stiff Industry Opposition

The US Environmental Protection Agency (EPA) is preparing to promulgate a rule to lower the National Ambient Air Quality Standard for Ozone to 70 to 75 parts per million (ppm) from the current standard of 80 ppm.    The proposed rule was issued on July 11, 2007.  Oil industry and agriculture representatives have presented their case to EPA and the White House Office of Management and Budget last month to discuss a proposal set for release in March.  The National Association of Manufacturers has issued a study that finds that the costs would be significant if the standard becomes stricter.

Some agricultural groups believe the lowering of the concentrations will put rural areas into non-attainment zones.  They fear this will raise the cost of farming at a time when energy prices are already high. It is not clear if this proposed rule will be issued, postponed, or revised.

Europe and US Threatening Carbon Tariffs

The European Union (EU) is proposing carbon tariffs on United States (US) goods if the US does not impose greenhouse gas restrictions on its industries.  The goal is to offset the costs EU industries face under current and more strict GHG emission restrictions.  The Lieberman-Warner bill that was passed out of the US Senate Environment and Public works Committee would similarly impose such tariffs on countries that do not limit their GHG emissions.

The carbon tariff may present a threat by the EU against the US to attempt to bring the US into a post-Kyoto treaty.  The US Congress may see carbon tariffs as a means to address complaints that if China and India do not commit to limits on GHG emissions, then an unfair economic advantage would accrue to these countries. 

Questions arise as to how the Word Trade Organization (WTO) would address claims under international trade agreements.  Legal issue and disputes may arise under a carbon tariff regime between WTO members.  As climate change regulation is debated in the US, as the EU considers tightening their own regulations, the domestic constituencies of the various developed nations will demand action to offset a economic advantage that unregulated countries would have, particularly those with large GHG emissions. 

It is not surprising that the trade ministers of various nations attended the Bali conference where the United Nations countries debated the parameters of a post-Kyoto treaty.  As the international debate and negotiations continue over the next two years, tariffs on goods made in countries without greenhouse gas restrictions may become a growing threat or bargaining chip in attempting to bring China, India, Brazil, and perhaps other developing nations under a greenhouse gas cap.

Congress Includes Greenhouse Gas Reporting Requirement and Registry in Omnibus Spending Bill

On December 21,2007, Congress moved forward with the foundation of any future greenhouse gas regulatory system by including in the Omnibus Spending bill a requirement that EPA promulgate an economy-wide greenhouse gas reporting regulation and create a greenhouse gas registry.  President Bush has signed this spending bill, making this obligation law.  A proposed regulation is due nine months from December 2007, and a final regulation 18 months from December 2007.  The details of this system will be developed by EPA unless additional legislation is passed in the next nine months further defining the parameters of the reporting requirements and registry.  Absent such legislation, how EPA will handle this mandate under the current Administration is not clear, particularly with respect to which industries and sources will be required to submit reports, what de minimis level of emissions will be set, and what other exemptions will be provided.  In any event, it would appear that a greenhouse gas reporting requirement will go into effect in less than two years.

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.

California Federal District Court Dismisses Auto Industry Challenge of California Greenhouse Gas Emission Standards for Cars and Trucks

A federal District Court in California granted summary judgment to the State of California in a suit filed by the auto industry challenging California's power to pass legislation limiting greenhouse gas emissions from automobiles.  California submitted a request for a waiver under the federal Clean Air Act to enact their own emissions standards for automobiles, but the US Environmental Protection Agency (EPA) has yet to rule on the request.  The case follows the ruling in the US Supreme Court that EPA may regulate greenhouse gases under the federal Clean Air Act and the carbon dioxide is an “air pollutant” under the Act.

The auto industry argued that California was prevented from were barred from regulating greenhouse emissions by the federal Energy Policy and Conservation Act, and that regulations proposed by the California Air Resources Control Board are preempted by U.S. foreign policy.

The District Court granted summary judgment to California, holding that the state's law would not conflict with federal authority nor bar the state from regulating greenhouse gas emissions.  Further he concluded that if the EPA granted a waiver under the federal Clean Air Act to allow California’s proposed emissions standards, enforcement of such regulations would be consistent with the Clean Air Act.

The judge stated in his ruling, “Although regulations proposed by California ... must broadly advance EPA's primary purpose to protect public health and welfare and must be at least as stringent as the corresponding EPA regulations in the aggregate, the proposed, California regulations need not establish perfect compliance with all provisions of the Clean Air Act.” 

The two-year delay in EPA issued a waiver for California resulted in the recent filing of a lawsuit against EPA to attempt to force action.  Fourteen other states — including New York, Illinois and Massachusetts.  The waiver also would allow these states and other states to adopt the California greenhouse gas emissions standards for automobiles.  These standards would reduce emissions by 2009 from cars and light trunks by 25% and from sport utility vehicles by 18%. 

“Evidence presented to this court supports the conclusion that regulation of greenhouse gases emitted from motor vehicles has a place in the broader struggle to address global warming,” the opinion said. “Ultimately, the court concludes that plaintiffs have not met their burden to demonstrate that the regulation stands as an obstacle to the Energy Policy and Conservation Act’s objectives.”

NRC Accepts First Nuclear Power Plant Application in 30 Years

The Nuclear Regulatory Commission accepted its first nuclear power plant application in 30 years.  The application is also the first new combined Construction and Operating License application for review.    The application filed by NRG Energy Inc. seeks a license to build and operate two new nuclear reactors in South Texas.

Nine Midwestern States and the Province of Manitoba Enter into Greenhouse Gas Accord

Governors of nine midwestern states, along with the Canadian province of Manitoba today signed the Midwestern Regional Greenhouse Gas Reduction Accord to establish a regional multisector cap-and-trade program to reduce greenhouse gas emissions and to promote the use of renewable energy.  With the Western States Climate Initiative and the Regional Greenhouse Gas Initiative in the northeast, the action by the Midwestern states brings the number of states to 22 that have committed to reducing greenhouse gas emissions. 

The governors were Governor Jim Doyle of Wisconsin, Governor Tim Pawlenty of Minnesota, Governor Rod Blagojevich of Illinois, Governor Mitch Daniels of Indiana, Governor Chester J. Culver of Iowa, Governor Jennifer Granholm of Michigan, Governor Kathleen Sebelius of Kansas, Governor Ted Strickland of Ohio, Governor M. Michael Rounds of South Dakota.  The Premier of Manitoba, Gary Doer, also signed the agreement.

Some of the key aspects of the Accord are as follows:

·     Establish greenhouse gas reduction targets and timeframes consistent with MGA member states’ targets;

·     Develop a market-based and multi-sector cap-and-trade mechanism to help achieve those reduction targets;

·     Establish a system to enable tracking, management, and crediting for entities that reduce greenhouse gas emissions; and

·     Develop and implement additional steps as needed to achieve the reduction targets, such as a low-carbon fuel standards and regional incentives and funding mechanisms.

These Midwestern states now must set firm emissions reductions targets and timetables for reducing greenhouse gas emissions.

The governors are also calling for greater use of non-petroleum energy sources such as wind power and grain-based ethanol.    Under the agreement, 15 percent of all gasoline stations in the region would be selling ethanol mixes by 2015, and one-in-four by 2025. 

These states combined are the fifth largest emitter of greenhouse gas emissions behind the United States as a whole, Russia, China and India. 

This new accord puts even greater pressure on Congress, as almost half the states have already committed to restricting greenhouse gas emissions.