This week ConocoPhillips entered into a settlement with the Attorney General of California to pay around $10 million to offset greenhouse gas emissions (carbon emissions) that will result from expansion of a refinery in California. Though the California legislation and legislation in other northeastern and western states have not yet come into effect, this case shows that carbon reductions are coming to the United States, in fact they are clearly already here. In acquiring assets and companies, the acquiring entities should consider the future potential costs for controlling and offsetting greenhouse gas emissions--they should be engaging in climate change due diligence.
It is important for oil and gas, utilities, and other companies to begin, if they have not already, taking stock of their carbon footprints, and making plans to find ways of reducing or offsetting their greenhouse gas emissions in anticipation of climate change regulation. Based on the ConocoPhillips settlement, it would seem obvious that refineries must be developing contingency plans to manage greenhouse gas emissions. Such plans will be more pressing depending on in what states the refineries are located.
As a result of the current and future potential greenhouse gas restrictions, the potential costs that may be incurred by newly acquired assets in coming years may have a significant impact on the value of those assets or the companies that hold the assets. Future profit streams may be affected by new regulations. Thus, in addition to planning for potential effects of climate change legislation on currently held assets, companies should conduct due diligence into the greenhouse gas emissions, both direct and indirect, and evaluate the potential effect of future or potential emission restrictions on the profitability of the assets.
As reported in the Wall Street Journal, one utility may suffer a significant drop in profits as a result of greenhouse gas limitations that will come into effect as a result of the Regional Greenhouse Gas Initiative being implemented by several northeastern states. The utility has several coal-fired power plants in these states.
While Congress has yet to pass any bills creating national carbon restrictions, several states have already passed legislation. It appears at least probable that more states and perhaps Congress in the next few years will adopt restrictions on carbon emissions. Careful planning by companies would appear prudent in facing the potential costs that may be incurred by a variety of US industries.
