Domestic Climate Policy.

In June 2009, the U.S. House of Representatives passed the Waxman-Markey American Clean Energy and Security Act (ACES), H.R. 2454, by seven votes. A massive piece of legislation, ACES would have established an economy-wide cap-and-trade program for global warming pollution in the United States. However, with the Senate’s failure to follow up, this is likely as far as comprehensive climate change legislation will advance in the foreseeable future (Pew Center on Global Climate Change 2011). The disappointing results of the international U.N. climate change negotiations in Copenhagen in December 2009,the Obama Administration’s prioritization of the controversial health care legislation, and the growing distraction of election year politics were among the many factors that worked to discourage Senate movement on climate change.

The 112th Congress commenced its legislative session in January 2011. The legislative landscape has changed dramatically with the new Congress; Republicans have taken control of the House, while the Senate maintains a slim Democratic majority. Key House committees with climate and energy jurisdiction have new leadership and new agendas in direct contrast to their Democratic predecessors. Representative Fred Upton (R-MI), the new chairman of the powerful House Energy & Commerce Committee has stated repeatedly that the committee’s priority will be to thwart EPA action on climate change and that he intends to hold many hearings with EPA Secretary Lisa Jackson in the hot seat. Indeed, current proposals are picking up where the 111th Congress left off, with a continued focus on stripping EPA authority to regulate greenhouse gases and delaying or stopping EPA regulation (Pew Center on Global Climate Change 2011; Synder 2011).

Over in the Executive branch, President Barack Obama kicked off his second State of the Union address by laying out his energy goals. Notably absent in his speech was any mention of climate change. Obama calls on the U.S. to produce 80% of its electricity from “clean energy sources” by 2035. “This is our generation’s Sputnik moment,” he declared in his speech. To help fund the R&D, he proposes redirecting subsidies from the fossil fuel industry to clean energy initiatives (Obama 2011). The Obama Administration released its “Blueprint for a Secure Energy Future” in March 2011. His plan includes a diversity of energy initiatives, with a focus on energy efficiency, transportation, and R&D for low-carbon energy technologies. The Blueprint doesn’t shy away from fossil-fuel based energy; it includes plans for domestic oil and natural gas development and production and support for carbon capture and sequestration (CCS) technology development (The White House 2011).

If there is any room for bipartisan policy, a Clean Energy Standard (CES) is the most appealing proposal. The CES would require that a certain percentage of energy generation come from “clean” sources. As opposed to the Renewable Energy Standard (RES), the CES would broaden the allowable energy types that can be used to satisfy the mandate, such as energy generated from plants with CCS technology or nuclear energy—technologies which have strong Republican support (Pew Center on Global Climate Change 2011).

Other potentially viable congressional proposals include adding low-carbon provisions in the transportation bill and farm bill, and continued adaptation efforts. Obama is more particular about his transportation goals; in his State of the Union address, he specifically champions advanced technology vehicles and biofuels: “With more research and incentives, we can break our dependence on oil with biofuels, and become the first country to have 1 million electric vehicles on the road by 2015” (Obama 2011; Pew Center on Global Climate Change 2011).

Finally, apart from the substantive issue debates, climate and energy policy is sensitive to general macro-level politics, such as those surrounding the upcoming presidential election and increasing partisanship in Congress. This will continue to have implications for climate and energy policy.

Bottom Line: The comprehensive cap-and-trade model of legislation is effectively dead, as are proposals that directly address climate change. The “Clean Energy Standard” is the new buzz phrase and focus of energy policies in Congress and the Administration. Businesses may find opportunities in the variety of energy initiatives having the most political support right now: energy efficiency, electric vehicles and biofuels, technologies to mitigate Greenhouse Gases (GHG) from coal, some renewable energy, natural gas, and nuclear.

GHG Regulation Under the Clean Air Act

In 2010, with the climate bill stalled in the Senate, attention turned toward the U.S. EPA and how the agency would exercise its authority to regulate GHG pollution under the Clean Air Act, as directed by the 2007 Supreme Court decision, Massachusetts v. EPA (Pew Center on Global Climate Change 2011).

EPA’s regulation of GHG emissions from mobile sources per the Supreme Court decision subsequently triggered the regulation of GHG from stationary sources under other parts of the Act. In May 2010, the EPA identified which stationary sources are to be regulated in the “Tailoring Rule,” which adjusted the threshold criteria that trigger regulation so that only the very largest sources will be covered. The EPA used a tiered approach to ease implementation so that by July 2011, new sources and major modifications of existing sources that emit GHG pollution—in excess of 100,000 tons for the former, or at least 75,000 tons for the latter—will be required to obtain a permit and implement Best Available Control Technology (BACT) to limit their GHG pollution. The EPA issued guidance for states to use in setting permitting requirements that recommends energy efficiency and also the use of certain types of biomass, among other strategies, to help covered entities reduce GHG emissions (Bravender 2010; U.S. EPA 2011).

In December 2010, the EPA announced its plan to issue rules that will limit emissions from power plants and petroleum refineries by instituting performance standards on plants. The EPA expects to complete a draft rule for power plants by July 2011 and a final rule by November 2012. The EPA is also looking to develop additional performance standards for other types of plants, such as cement kilns, fertilizer plants, crude oil and natural gas production, and possibly steel plants and lead smelters (Pew Center on Global Climate Change 2011; U.S. EPA 2011).

Bottom Line:  Despite intense opposition, the EPA is taking definitive steps to regulate GHG pollution. While GHG-intensive industries have been prepared for some form of regulation for some time, other industries await possible EPA regulation that may have a direct or indirect impact on their business. Such uncertainty may encourage companies to seek professional guidance on managing risk from new regulations.

EPA’s Mandatory Greenhouse Gas Reporting

Due to a legislative requirement seeking to better inform policymakers on matters of GHG emissions, the EPA has begun requiring the biggest emitters of greenhouse gases to collect and report their GHG emissions data to the EPA. This information will provide for the first-ever inventory of major sources of greenhouse gasses in the U.S. This requirement covers suppliers of fossil fuels or industrial GHGs, vehicle and engine manufacturers, and facilities that emit at least 25,000 metric tons of GHGs per year. Data collection began in January 2010 and the first annual reports are due in March 2011 (Pew Center on Global Climate Change 2011; U.S. EPA 2011).In response to concerns about the public disclosure of certain data elements, the EPA has postponed the collection of those data until further examination of the likely business impact (U.S. EPA 2011).

SEC Disclosure Requirements. On February 10, 2010, the U.S. Securities and Exchange Commission (SEC) issued guidance that effectively requires companies to disclose its risks from climate change impacts, including physical impacts and related legislative or regulatory developments. While the guidance does not establish new disclosure obligations or change any rules, in practice, the SEC’s usage of the term “material risk” triggers a disclosure requirement for public companies (Broder 2010).

The guidance is an extension of existing environmental risk disclosure requirements. It is to be applied to 10-K reports and certain other SEC filings, and could affect four disclosure areas: description of business, legal proceedings, Management Discussion and Analysis (MD&A), and risk factors (Fornaro 2011).

Risks that could trigger a disclosure obligation include:

  • Climate-related legislation and regulation (existing and pending) – for example, the effects from the sale or purchase of allowances under a cap and trade program;
  • International environmental accords;
  • Indirect consequences of regulation or business trends; and
  • Physical effects of climate change (Fornaro 2011).

The SEC guidance was preceded by the decision of the National Association of Insurance Commissioners to adopt rules, went into effect May 2010, requiring insurers to publically disclose climate risks to regulators and shareholders. A year later, a backlash from state commissions uncomfortable with the perception of being engaged in the climate debate, succeeded in scaling back the requirement so that companies can choose to disclose survey results anonymously (Lehmann 2010).

Bottom Line: The EPA and SEC requirements demonstrate a movement toward greater “carbon transparency” in anticipation of eventual caps on GHG pollution. For many companies, this may be the first time considering climate change in any context. These requirements may help drive demand for climate consulting services to evaluat ea company’s carbon exposure risk, which generally requires conducting a basic GHG inventory and/or life cycle analysis, and some expertise in climate science, impacts, and policy.

Federal Leadership in Environmental, Energy and Economic Performance

Executive Order (E.O.) 13514, signed by President Obama on October 5, 2009 requires Federal agencies to meet certain sustainability goals so as to demonstrate commitment and leadership in protecting the environment. The Federal government owns approximately 500,000 buildings and operates more than 600,000 fleet vehicles, and is the largest energy consumer in the U.S. (The White House 2011). Some of the climate-related targets in the E.O. include:

  • Reducing petroleum consumption by 2% per year through FY 2020;
  • Ensuring at least 15% of existing buildings and leases meet Guiding Principles by FY2015;
  • Ensuring 95% of all new contracts require products and services that are energy-efficient;
  • Increasing renewable energy use and generation;
  • Pursuing opportunities with vendors and contractors to reduce GHG emissions (i.e., transportation options and supply chain activities);
  • Reducing building intensity;
  • Ensuing new Federal buildings that enter the planning process 2020 and after must achieve zero net energy standards by 2030;
  • Decreasing use of GHG intensive chemicals; and
  • Developing and implementing policies and procedures for reducing scope 3 GHG emissions (FedCenter 2011).

Bottom Line: E.O. 13514 creates major demand for sustainable, low-carbon products, clean energy, and climate consulting services.

State and Regional Efforts

The failure of federal action has also turned attention to states and regions (Behr 2010).We find mixed trends at this level—there are both progressive climate actions and recently, more intense efforts to disengage from climate policy and regulation.

Regional efforts to regulate GHG consist of consortiums of states working together to reduce their collection emissions: the Western Climate Initiative (WCI), Northeast Regional Greenhouse Gas Initiative (RGGI), and the Midwestern Greenhouse Gas Reduction Accord (MGRRA) (Pew Center on Global Climate Change 2011).WCI and RGGI are currently considering linking up in an effort to create as large and as liquid a market as possible. Together, these states comprise a third of the $15.5 trillion U.S. and Canadian economies (G.V. 2010). However, New Hampshire and Delaware have been looking to withdraw from RGGI, which has been operating the first carbon cap-and-trade program in the U.S. since September 2008 (Love 2011; Nathans 2011). Another setback for carbon markets was the closing of the Chicago Climate Exchange (CCX) at the end of 2010. CCX was a voluntary cap-and-trade market that in recent years had problems with carbon offsets flooding the market and severely depressing carbon credit prices (Gronewold 2011).

Source: Pew Center on Global Climate Change (Jan. 2010)

States are working on a wide variety of climate and energy policies, from the renewable portfolio standard, which would require that a certain amount of energy come from clean energy sources, to incentives for alternative fuels (Pew Center on Global Climate Change 2011). One of the most notable state efforts is California’s global warming law, AB32, now in the process of implementation, despite continuing roadblocks (Kahn 2010; Sullivan 2011). Recently, more state legislatures have been pushing back against EPA climate regulation. As of April 2011, more than ten states have introduced resolutions calling on Congress to limit EPA’s authority to regulate climate change (Peterka 2011).

Bottom Line: Inconsistent trends in state, regional, and voluntary efforts present more uncertainty on top of federal uncertainty, and businesses need to be prepared. This is especially problematic for large U.S. companies and multinational companies that have to deal with the patchwork of state and international laws.

 
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