Despite the United States' rejection of the Kyoto Protocol and the absence of any federal regulations mandating measurements or controls, a growing number of successful U.S. companies are taking steps to inventory and reduce their greenhouse gas ("GHG") emissions. Factors prompting companies to act now, rather than await new federal legislation, include shareholder concerns about sustainable development and climate change, emerging international and state regulations targeting GHG, and heightened scrutiny of public companies' disclosures concerning the effects of impending environmental controls on their operations. Voluntary trading programs, operational savings, and other economic benefits also are providing incentives to companies for reducing their GHG emissions.
Emissions of GHGs - including carbon dioxide ("CO2 ") and several other gases - are widely believed to contribute to climate change. Until recently, GHGs were considered an issue of concern primarily in the energy industry. While many of the current and proposed GHG control programs are focused on electric utilities, GHG impacts now are being targeted in other industry sectors that consume electric power or fossil fuels.
Corporations that have implemented significant GHG reductions voluntarily have reported related economic benefits. For example:
Why Are Companies Addressing GHG Emissions Now?
The trend among U.S. companies toward inventorying, reducing and disclosing GHG emissions has resulted from a convergence of several factors, including pressure from institutional and "green" investors, emerging new requirements at the international and state level, emission trading programs and other market incentives, and internal corporate policies concerning sustainable development and global management standards.
Shareholder resolutions regarding climate change and global warming have been sponsored with increasing frequency by public pension funds, investment funds, foundations, religious institutional investors and public interest groups. At least 30 such resolutions were already filed in the 2005 proxy season; almost half in the oil and gas industry. One organization that is helping to spur shareholder resolutions on GHG emissions is the Investor Network on Climate Risk ("INCR"), launched by 10 institutional investors representing over $1 trillion in assets, which is encouraging companies in which its members invest to increase disclosure of the risks and opportunities associated with climate change.
Although no federal legislation for mandatory GHG emissions reductions has been adopted yet, and the U.S. Environmental Protection Agency ("EPA") has concluded that it lacks authority to regulate GHGs under the Clean Air Act, a growing number of states are creating their own regulatory programs for GHG emissions. Many of these programs are voluntary, but the number of mandatory regimes appears to be on the rise.
Multinational corporations also may be affected by emerging restrictions and emissions programs in countries which have adopted the Kyoto Protocol. The European Union ("EU"), for example, has adopted a Greenhouse Gas Emissions Trading Scheme, a mandatory CO2 trading scheme that took effect in January 2005. Corporations with facilities in the EU and other countries are taking steps now to evaluate the effects of international regulatory developments on their future operations, and are considering whether such trends may constitute events reportable in their disclosures to the SEC.
Voluntary RegistriesAnd Reduction Programs
Many businesses are participating in voluntary federal, state, international and private GHG reporting and reduction programs, which involve inventorying and declaring GHG emissions and reductions and, in some instances, commitments for future reductions. Reductions often may be achieved either by reducing GHG emissions directly, from a company's process or products, or by off-setting carbon - either by performing or funding carbon fixation or sequestration projects.
Following precedent established earlier under the Clean Air Act for SO2 emissions, commodity-like markets are being developed for the buying and selling of CO2 emission reduction allowances. Government policies being developed in the United States and abroad call for a cap and trade approach to GHG emissions. In the U.S., 11 northeastern states plan to establish a mandatory, market-based cap and trade program for CO2 emissions from electric generators in 2005. The EU's mandatory CO2 trading scheme will cover installations in the energy, iron and steel, mineral, and pulp, paper and board industries. It has been estimated that the program will cover approximately 46% of the EU's CO2 emissions and lead to a market of carbon assets and liabilities worth billions of euros.
Voluntary CO2 emissions markets, such as the Chicago Climate Exchange ("CCX"), are already in operation. The CCX, a legally binding exchange that provides a multi-sector marketplace for reducing and trading GHG emissions, requires its members to reduce their GHG emissions by a cumulative 10% between 2003 and 2006.
What Steps Are CompaniesTaking Now?
GHG emission registries and trading programs are attracting an increasing level of corporate participation. For example:
Potential Benefits Of VoluntaryGHG Reductions
Businesses that have chosen to address GHG emissions on a voluntary basis, and shareholder groups that have advocated for such action, have enumerated a variety of potential benefits, including:
Reducing energy consumption is often an initial step in controlling GHG emissions because the two are closely linked, and increased energy efficiency can lead to significant short-term financial benefits. For example, DuPont reported that its 9% decrease in global energy use below its 1990 level resulted in cumulative savings of almost $2 billion over 12 years.
Potential GHG Strategies
GHG emissions and climate change present both business risks and opportunities to U.S. companies. At a minimum, this is an issue that merits the attention of corporate leaders, given the pace of development in this rapidly evolving field. Companies with material GHG impacts that have not yet done so should consider developing a GHG strategy.
Any company deciding whether or how to address GHG emissions should ensure that it has sufficient internal or external expertise to understand its current and projected GHG impacts, emission reduction options and associated costs and benefits. Before deciding to embark on a corporate GHG emissions inventory and reduction plan, it is important for a company to clearly identify its goals and objectives and to develop a strategic plan for GHG management tailored to the company's business, markets and culture.
An accurate emissions inventory and analysis of projected emissions is an essential first step. Once a corporation decides on the type of program that fits its goals, it should identify a methodology for measuring and reducing its GHG emissions that is both feasible and acceptable to as broad an array of reporting and trading programs as possible. The GHG inventory accounting protocol developed by the World Resources Institute and the World Business Council for Sustainable Development ("WRI/WBCSD") has been widely adopted.
It is important to set realistic and achievable GHG reduction goals, because failing to meet a publicized reduction target may bring unwanted public attention and internal frustration. As part of a corporate GHG management strategy, GHG considerations should be incorporated into the company's capital investment decision making, and assessed in the context of prospective acquisitions. Potential competitive advantages associated with GHG mitigation should be investigated, as should potential opportunities in the evolving GHG offset markets.
No one approach is appropriate for every company. In the face of emerging regulations, investor concerns, and market pressures, however, it is clear that a "no action" strategy should be selected only after carefully considering all the alternatives.
Christopher P. Davis is a Partner in Goodwin Procter's Environmental Practice. Mr. Davis has over 20 years of experience in environmental law and specializes in federal and state Superfund matters, advice and transactions concerning contaminated property, hazardous waste issues, compliance and enforcement matters, environmental litigation and dispute resolution. Aladdine D. Joroff, an Associate in Goodwin Procter's Environmental and Energy Practice and Real Estate Development and Permitting Practice, counsels clients on an array of environmental and land use issues.