Proposed EPA Rule Requires Greenhouse Gas Disclosure

The Environmental Protection Agency has unveiled its first proposal to force companies to monitor and report their greenhouse gas emissions, opening a new realm of compliance headaches for Corporate America.

The EPA has said the March 10 proposed rule—all 818 pages of it—is a critical first step toward providing a factual background for more comprehensive federal climate change regulation in the future. It will include a standardized database of greenhouse gas emissions, allowing easier comparison of different facilities.

Under the proposed rule, businesses and utilities would be required to file reports if their annual greenhouse gas emissions exceed 25,000 metric tons (a threshold that would let most small companies off the hook). The EPA estimates that the rule would affect roughly 13,000 facilities; they would need to start monitoring and recording emissions at the start of 2010, and then start filing annual reports in the first quarter of 2011.

Motor vehicle and engine manufacturers would be required to begin reporting for model year 2011. In addition, the rule spells out particular processes and activities that are to be regulated on a facility, rather than corporate-wide, basis.

Sharkey

Patricia Sharkey of the law firm McGuire Woods says affected sectors should closely examine the rule to see how it might regulate facilities in their industry. The only exception is fuel distributors, which would be examined on a corporate level.

Sharkey also applauds the creation of a common database so companies can compare their emissions to others. A system that allows for a uniform understanding is “really important … so you can compare apples to apples,” she says. “We all want a level playing field.”

Exactly how much impact these rules would have on companies remains to be seen. William Sarni, CEO of sustainability consulting company Domani, says he doesn’t expect the rule to cause significant pain for large multinational companies that have “really invested time and energy” into this issue for quite some time. The real burden, he says, will be with small to mid-sized companies.

Sharkey agrees. The 25,000-ton threshold provides critical protection for the smallest businesses, she says, but for others that do fall under the scope of the rule, “Obviously, it’s a great burden … to have to perform the types of audits that are going to be required.”

Those additional expenses will include hiring staff with technical skills to locate a company’s greenhouse gas emitters, measure the emissions, and then file reports about the emissions annually, she says.

“If anybody had any doubt that federal climate regulation was going to show up, I think now is the time to really sit down and take a hard look at your business.”

— William Sarni,

CEO,

Domani

And to complicate matters, many companies—large and small—don’t seem prepared in this area. McGuire Woods recently surveyed the 2008 Securities and Exchange Commission filings of 350 companies, and found that only 42 had made any type of 10-K disclosure regarding greenhouse gas levels.

It gets worse. More than 120 companies in the Standard & Poor’s 500 participate in the Carbon Disclosure Project, a voluntary effort to report greenhouse gasses. But of the 123 participants, only 19 actually reported their emissions in their SEC filings as well.

“The fact remains that many S&P 500 companies make extensive disclosures regarding these matters in the CDP, and in many cases these companies identify climate change as posing ‘commercial risk,’ having a likelihood of ‘significant impact’ or as a ‘potential material risk,’—and yet, they do not reflect those risks in what is arguably their most important SEC report for the year,” the McGuire Woods report says.

GOVERNANCE & THE EPA PROPOSAL

How does this proposal from the EPA relate to U.S. government and other climate change efforts?

The proposed mandatory GHG reporting program would

provide EPA, other government agencies, and outside

stakeholders with economy-wide data on facility-level (and

in some cases corporate-level) GHG emissions. Accurate and

timely information on GHG emissions is essential for

informing some future climate change policy decisions.

Although additional data collection (e.g., for other source

categories such as indirect emissions or offsets) may be

required as the development of climate policies evolves,

the data collected in this rule would provide useful

information for a variety of polices. For example, through

data collected under this rule, EPA would gain a better

understanding of the relative emissions of specific

industries, and the distribution of emissions from

individual facilities within those industries. The

facility-specific data would also improve our understanding

of the factors that influence GHG emission rates and

actions that facilities are already taking to reduce

emissions. In addition, the data collected on some source

categories such as landfills and manure management, which

can be covered by the CAA, could also potentially help

inform offset program design by providing fundamental data

on current baseline emissions for these categories.

Through this rulemaking, EPA would be able to track

the trend of emissions from industries and facilities

within industries over time, particularly in response to

policies and potential regulations. The data collected by

this rule would also improve the U.S. government’s ability

to formulate a set of climate change policy options and to

assess which industries would be affected, and how these

industries would be affected by the options. Finally,

EPA’s experience with other reporting programs is that such

programs raise awareness of emissions among reporters and

other stakeholders, and thus contribute to efforts to

identify reduction opportunities and carry them out.

The goal is to have this GHG reporting program

supplement and complement, rather than duplicate, U.S.

government and other GHG programs (e.g., State and Regional

based programs). As discussed in Section I.D of this

preamble, EPA anticipates that facility-level GHG emissions

data would lead to improvements in the quality of the

Inventory.

As discussed in Section II of this preamble, a number

of EPA voluntary partnership programs include a GHG

emissions and/or reductions reporting component (e.g.,

Climate Leaders, the Natural Gas STAR program). Because

this mandatory reporting program would have much broader

coverage than the voluntary programs, it would help EPA

learn more about emissions from facilities not currently

included in these programs and broaden coverage of these

industries.

Also discussed in Section II of this preamble, DOE EIA

implements a voluntary GHG registry under section 1605(b)

of the Energy Policy Act. Under EIA’s “1605(b) program,”

reporters can choose to prepare an entity-wide GHG

inventory and identify specific GHG reductions made by the

entity. EPA’s proposed mandatory GHG program would have a

much broader set of reporters included, primarily at the

facility rather than entity-level, but this proposed rule

is not designed with the specific intent of reporting of

emission reductions, as is the 1605(b) program.

Again, in Section II, existing State and Regional GHG

reporting and reduction programs are summarized. Many of

those programs may be broader in scope and more aggressive

in implementation. States collecting that additional

information may have determined that types of data not

collected by this proposal are necessary to implement a

variety of climate efforts. While EPA’s proposal was

specifically developed in response to the Appropriations

Act, we also acknowledge, similar to the States, there may

be a need to collect additional data from sources subject

to this rule as well as other sources depending on the

types of policies the Agency is developing and implementing

(e.g., indirect emissions and offsets). Addressing climate

change may require a suite of policies and programs and

this proposal for a mandatory reporting program is just one

effort to collect information necessary to inform those

policies. There may well be subsequent efforts depending

on future policy direction and/or requests from Congress.

Source

EPA: Mandatory Reporting of Greenhouse Gases (2009).

The new EPA rule may change that, as it pressures companies to disclose rather than end up the target of environmental activists’ publicity campaigns. “You need to be making sure that your public statements are in line with this new data,” Sharkey says.

The EPA has also said that it does not plan to pre-empt state or regional greenhouse gas programs. “So companies may still have to be looking at multiple reporting requirements,” Sharkey says. “We think that is something worth commenting on by various affected sectors—anybody who has plants in multiple states—because it’s certainly burdensome and confusing.”

Sarni

Aside from commenting on the EPA’s proposal, Sarni also urges companies to start pondering how to “reinvent yourself creatively” vis-á-vis new products and technologies. The sooner companies can assess how this new regulation might affect their costs and how much money they can invest in software that will assist them in reporting these disclosure risks, the better off they’ll be—“because that is what you’re going to need going forward,” he says.

The rule will, ultimately, “fundamentally change how we think about our business activities,” including how companies package, transport, and create their products, says Sarni.

Sharkey also expects companies to change their thoughts about energy. Once utilities start paying for the cost of the gasses they emit, she says, that will push up the price of electricity and prod more companies to examine energy-caused emissions overall. (The EPA rule would obligate electricity generators to report on their energy use, but no others; other companies would only report on their manufacturing emissions.)

Beyond Corporate America, the rule is likely to have a number of far-reaching consequences as well. In fact, the EPA on March 20 sent a finished proposal to the White House that would label carbon dioxide as a danger to the public—a key trigger of emission regulations under the Clean Air Act. The long awaited finding stems from a 2007 U.S. Supreme Court decision that granted the EPA authority to regulate emissions that contribute to global warming.

Concludes Sarni: “If anybody had any doubt that federal climate regulation was going to show up, I think now is the time to really sit down and take a hard look at your business.”