The New Carbon Cycle

Forbes Article Concludes 93% of Public Companies Facing Climate Risk, Only 12% Disclosing Risk

A new Forbes article concludes that 93 percent of public companies face risk from climate change, but only 12 percent are actually disclosing that risk to the public and their shareholders.  The Securities and Exchange Commission (SEC) issued guidance on climate risk disclosure several years ago. Thus, there is at least a basis for arguing that all affected companies are on notice of the need to disclose climate risk in their public filings such as 10-Ks.  Having advised clients on climate risk disclosure in SEC documents, this is an important aspect of financial disclosure that should review and determine the nature of disclosure that may be advisable.  As the Paris Agreement has been negotiated, with many countries including China developing greenhouse gas regulations and cap and trade programs, the writing is on the wall that international, national, and in some instances sub-national state and provincial limits on greenhouse gas emissions are a reality that appears to only be growing.  Reviewing the supply chain and potential impact of climate change on the business may be an issue that investors may find material, or a court may judge as material. 

Companies should also consider developing approaches that reduce their carbon footprint, such as considering new energy efficiency investment, the installation of renewable generation on-site and purchase of renewable electricity from the grid.  Supply chain review and de-carbonizing it  are steps that should be considered as well.  in other words, having a good story to tell in any disclosure may provide an edge on competitors.  Key is finding carbon reducing steps that save money for the company.  Energy efficiency is the low hanging fruit typically, but renewable energy in some locations can provide cost savings as well. 

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.

World Resources Institute and World Business Council for Sustainable Development Working on Product and Supply Chain GHG Protocol

Following the success of the Corporate Standard and Project Protocol for measuring greenhouse gas emissions, the World Resources Institute and the World Business Council for Sustainable Development are now working on a new standard for measuring greenhouse gas (GHG) emissions from a product and supply chain to allow GHG accounting and reporting beyond direct emissions.

To develop the new guidelines, the GHG Protocol is following the same broad, multi-stakeholder process used to develop the Corporate and Project Protocol, with participation from businesses, policymakers, NGOs, academics and other experts and stakeholders from around the world.

The WRI/WBCSD announced that the new standard will include guidelines on both product life cycle accounting (”carbon footprinting”) and scope 3 accounting and reporting, which encompasses the full value chain of an organization. Building upon existing methodologies, the guidelines will provide a standardized approach for companies to inventory GHG emissions along their value chains and better incorporate GHG impacts into business decision-making, based on a life cycle perspective.

The protocol apparently is designed allow companies such as Wall Mart who have asked their suppliers and their suppliers' suppliers to demonstrate the sustainability of their products to measure the GHG emissions from the product supply chain.  What will be interesting to see unfold is to what extent these protocols lead to GHG reductions in developing countries.  For example, since many products are manufactured in China, where GHG emissions have grown dramatically and continue to grow, what steps will or can the suppliers make locally to reduce greenhouse gas emissions? Will they have to build windmills or install solar panels to avoid power use from Chinese coal-fired power plants?  Will such costs take away or at least reduce China's cost advantage?  The question is what level of affect could such standards and the insistence by retailers that the suppliers demonstrate reductions have on the suppliers?

The market could be a powerful force for incentivizing GHG reductions.  To what extent this will occur remains to be seen.  The formation of such standards may be seen as a potential alternative to the GHG tariffs that have been discussed in bills filed in Congress and discussed in the European Union.  The goal of such tariffs is to take away the competitive advantage that the failure to control GHG emissions is thought to have for countries that are not required or refuse to reduce their emissions. China and to some extent India are the main examples of such countries.  The suppliers in China and other developing countries may find it more and more difficult to deal with either customer or government imposed GHG emission reductions and the potential impact on their price advantage over manufacturers in developed countries.

Accounting Board Proposes Changes in How Environmental Liabilities and Other Loss Continencies Must Be Reported

The way companies report contingent liabilities, in particular environmental liabilities, in their financial statements would undergo significant changes if a proposal by the Financial Accounting Standards Board goes into effect. 

On June 5, 2008, FASB released for public comment Proposed Statement of Financial Accounting Standards, Disclosure of Certain Loss Contingencies. The proposed standard would significantly expand the quantitative and qualitative disclosure requirements for loss contingencies under SFAS 5 and 141(R). In issuing the draft, FASB is responding to investors and other users of financial statements who are seeking additional information to assess the likelihood, timing, and amount of future cash flows associated with loss contingencies.  The proposed standard would be effective for fiscal years ending after December 15, 2008, and interim and annual periods in subsequent fiscal years.

Responses from interested parties wishing to comment on the proposed standard must be received in writing by August 8, 2008. Interested parties should submit their comments by email to [email protected], File Reference No. 1025-300.

Environmental managers, attorneys, chief financial officers, and accountants should pay attention to how FASB ultimately addresse this issue, and should submit comments if they want to express any concerns to FASB.

Climate Change Disclosure Heats Up: Environmental Groups and State Pension Funds File Petition with SEC for Greater Climate Change Disclosure

Perhaps these two events were coordinated, but within a short time after the Attorney General of New York sent subpoenas under a New York securities statute to five utilitiy companies seeking information on climate change disclosure by those companies, particularly with respect to coal-fired power plants, CERES and various environmental groups and state pension funds filed a petition with the SEC seeking a rulemaking requiring greater climate change disclosure.   The press release from CERES on this issue is posted on my Law and the Environment blog.

New York Attorney General Subpoenas Utilities over Climate Change Disclosure

Please refer to my post on my other blog Law and the Environment that discusses the filing by Andrew Cuomo, the New York Attorney General, of subpoenas against five major utilities and the initiation of a securities investigation into the disclosures made to shareholders regarding climate change risk.  This is one of the first investigations by a securities agency or attorney general of climate change disclosure by public companies.  Environmental disclosure has been a growing concern for publicly traded companies, and as climate change continues to be a public concern and regulation over greenhouse gases expands in the US and internationally, companies will find disclosure regarding climate change to be a growing issue to evaluate in terms of disclosures made in their filings with the Securities and Exchange Commission. 

New Article on the Implications of Massachusetts v. EPA

I recently completed a Client Alert for clients of Thompson & Knight LLP to assist them in understanding the implications of the recent US Supreme Court case Massachusetts v. EPA, which ruled that EPA failed to follow the federal Clean Air Act in deciding not to regulate greenhouse gas emissions from vehicles.  In this alert, I outline how the opinion will likely affect other litigation with EPA over regulation of greenhouse gas emissions, the developing climate change legislation in Congress, private tort litigation, environmental financial disclosure, and other areas of law and business.

I am leading the new Climate Change and Renewable Energy Practice Group at Thompson & Knight, and see the Supreme Court case as a catalyst for significant changes in the coming years in terms of the regulation of greenhouse gas emissions in the United States and potential litigation over the effects of global warming. 

The article can be found by clicking here.

Webinar on April 5--Environmental Disclosure Issues Related to Recent SEC Enforcement Activity and FAS 143/FIN 47

From the convenience of your own computer, join environmental attorney Scott Deatherage of Thompson & Knight LLP, as he addresses the environmental disclosure issues companies are facing today related to recent enforcement activity by the Securities and Exchange Commission and the development of new accounting standards.

Designed for in-house attorneys and outside counsel, environmental managers, CFOs and accountants for companies that must comply with environmental disclosure requirements, this e-seminar will concentrate on a variety of disclosure issues.

............................

Thursday, April 5, 2007 • 12:00 - 1:30 PM EST

.................................................................................................................................................................

• The recent SEC enforcement activities relating to environmental

disclosure.

• What the SEC expects in terms of companies’ management of

their environmental disclosure processes.

• How Sarbanes-Oxley and other changes to accounting standards

impact companies’ disclosure policies.

• What you should know about the SEC’s expectations for internal

controls on reporting environmental liabilities.

• What actions auditors and the SEC expect companies to take

regarding environmental liabilities.

• The roles and responsibilities in overseeing environmental

management and disclosure.

CLE

Andrews Publications anticipates

CLE approval from all states

that accept telephone presentations

for CLE credit.

PRICING

$119 to attend -- ask about the

discount for multiple registrations.

To register for this e-seminar, call

Becky LaCroix at 800.328.9352,

ext. 85968, or e-mail her at

[email protected].