The Four Most Important Things Your Business Needs to Know Right Now About Climate Change

With all of the uncertainty surrounding the prospects for federal climate change legislation, U.S. businesses could be excused for taking a “wait and see” approach. Unfortunately, they do not have that luxury. Federal regulations issued last fall already require tracking and reporting of 2010 greenhouse gas (“GHG”) emissions from more than 10,000 facilities, and time has just about run out to put monitoring programs in place. The SEC has already issued guidance on corporate disclosure of climate risk by the country’s nearly 9,000 publically traded companies. EPA is widely expected toward the end of March to impose the first-ever direct federal controls on GHG emissions, affecting at least 14,000 stationary sources, and possibly many more. And the Council on Environmental Quality (CEQ) is reportedly about to issue new guidance on how climate change impacts should be incorporated into the environmental review process for every major public or private project requiring federal approval or obtaining federal funding.

Companies, as well as public agencies, should now be incorporating all four of these developments into their planning, especially those with ongoing operations or planned developments that create, or have the potential to create, significant GHG emissions. The EPA, SEC and CEQ actions discussed in this article are new and controversial, and some may be challenged – particularly EPA’s efforts to apply existing Clean Air Act programs to GHG emissions. But those subject to these new regulatory requirements may not have the luxury of waiting until the dust settles before they respond.

1. Track and Report GHG Emissions

Last fall, EPA issued regulations that require approximately 10,000 facilities to monitor their GHG emissions and file their first annual reports by March 31, 2011. See EPA Issues Mandatory Greenhouse Gas Reporting Rule, Marten Law Environmental News (Sept. 23, 2009). EPA’s rules apply to 29 source categories, including a residual category for facilities that are not otherwise covered but have large stationary fuel burning equipment. Sources in fifteen of the categories have to report their GHG emissions even if they do not exceed the 25,000 ton per year emissions threshold that applies to other categories.[1]

EPA required sources to begin quantifying their emissions on January 1, 2010. Some sources – such as some power plants – already were required to monitor their carbon dioxide emissions, and this is reflected in the new reporting rule. But most sources were required to install new monitoring equipment, or develop new measurement protocols.

April 1 Deadline for Installing Monitoring Equipment

EPA recognized that not all sources would be able to obtain and install new monitoring equipment or complete calibration procedures in time to meet the January 1, 2010 deadline. Accordingly, the reporting rule allows sources to use “best available monitoring methods” (“BAMM”) for the first quarter of 2010, instead of the permanent methods specified for their source category.[2] BAMM could include monitoring methods currently being used by a facility even though they do not meet specifications for that source category, engineering calculations, other company records, or data from suppliers.

Facilities that knew they would not be able to put new equipment in place by March 31 also were allowed to request a waiver, which if granted lets them use BAMM methods for the remainder of 2010.[3] For example, EPA indicated a waiver would be granted for a facility that must completely shut down a process unit to install continuous monitors, so long as it does not have a shutdown scheduled before April 1. However, EPA also required that waiver requests be submitted by January 28, 2010.[4] Facilities that missed that deadline must have the necessary monitoring equipment in place by April 1. EPA has not indicated it will grant any additional leeway on that deadline.

April 1 Deadline for Monitoring Plans

In addition to requiring that facilities begin tracking their GHG emissions this year, the GHG reporting rule also requires that facilities have in place a written GHG Monitoring Plan.[5] This plan must explain the processes and methods used to collect the data required by the rule, and must specify the quality assurance, maintenance, and repair procedures for the GHG monitoring equipment. Facilities are not required to send their Monitoring Plans to EPA. Rather, the plan must be kept in their facility and available in the event EPA requests to see the document.

Ideally a facility would have developed its GHG Monitoring Plan before January 1. However, the provisions allowing reliance on BAMM for the first quarter of 2010 effectively allow facilities until April 1, 2010 to have their GHG Monitoring Plans in place.

2. Consider Climate Risks in SEC Reporting

After years of lobbying from environmental groups and some investors, the SEC (following a close, 3-2 vote) has issued guidance on the obligations public companies may have to address climate change-related risks in their disclosure filings. See SEC Issues Interpretive Guidance on Climate Change Disclosure Requirements for Public Companies, Marten Law Environmental News (February 3, 2010). Many publicly traded companies already provide at least a mention of climate change or greenhouse gases in their SEC disclosures. Those that have not done so in the past – or that have not taken a rigorous approach to disclosing climate risks – must now evaluate whether, and how, to begin doing so.

The guidance recommends that companies consider whether climate change figures in the description of their business and legal proceedings, their disclosure of investment risk factors, and in their Management’s Discussion and Analysis (MD&A). The SEC highlighted the following specific areas that companies should consider in developing their disclosures:

• Whether existing climate-related laws and regulations are likely to have a material impact on the company’s financial condition;
• Whether proposed climate change regulations or pending legislation is likely to have a material effect on the company’s financial condition or operations, including such factors as potential capital costs for environmental controls, or the costs (or profits) associated with buying (or selling) emission allowances under a cap-and-trade program;
  • A company must also consider the likelihood that proposed regulations or pending legislation will be enacted.
• Whether international accords or treaties related to climate change are likely to pose material risks to a business;
• Whether a company is likely to face indirect risks (or opportunities) due to climate-related developments, such as changes in demand for a company’s goods or services, or an increase in competition; and
• Whether a company faces actual or potential risks due to the physical impacts of climate change, such as disruption of operations (directly or due to supply interruptions), increased insurance costs, or weather-related impacts.

The SEC noted in its press release announcing the decision to issue this guidance that it is an interpretive document and does not create new legal requirements.[6] But as a practical matter, companies can be expected to treat this guidance as binding. Companies that have not disclosed climate risks in the past will need to consider this guidance closely. It also provides a benchmark for those companies that have made a practice of disclosing climate risks.

3. Anticipate GHG Limits in Clean Air Act Permits

EPA is on track to issue regulations in March that will bring GHG emissions from stationary sources within the Clean Air Act’s existing preconstruction and operating permit programs, according to comments agency officials have made in several forums on the last few weeks. At a minimum, this is expected to affect 14,000 facilities nationwide, and the number could be much higher. EPA’s actions already have drawn several attacks, and more will follow. But none of the attacks are likely to result in a stay of EPA’s actions. This will put companies that face GHG emission limits – and particularly those with projects and facilities that require air permits this year – in a difficult position.

Late last year, the developers of a fertilizer plant in Idaho voluntarily accepted GHG emission limits, in order to resolve an appeal of the facility’s air permit. See First State Air Permit With Enforceable CO2 Limits Issued For Idaho Coal-Fueled Fertilizer Plant, Marten Law Environmental News (December 14, 2009). In early February, Calpine voluntarily agreed to BACT limits on GHG emissions from a proposed natural gas-fired power plant to be built in California, with an eye toward the pending EPA actions.[7] Others also are likely to conclude that they have no practical alternative but to amend pending applications or to incorporate GHGs into applications that will be filed later in the year. Some, no doubt, will choose instead to fight GHG limits for their projects, in hopes that EPA ultimately will be stopped from regulating their emissions under the existing Clean Air Act programs. But regardless of which of these paths a company chooses, a choice will have to be made in the next few months.

EPA’s actions have their origin in the Supreme Court’s decision in Massachusetts v. EPA,[8] which held that GHGs are “air pollutants” within the meaning of the Clean Air Act, and remanded to EPA the question of whether GHG emissions from cars endanger public health and welfare. EPA then determined last December that GHG emissions from new vehicles cause or contribute to such a threat (EPA’s “Endangerment Finding”).[9] The agency is now effectively compelled by section 202(a) of the Clean Air Act to develop regulations limiting vehicle GHG emissions.[10] EPA has indicated that it plans to complete final regulations for vehicle emissions by March of 2010, so that auto companies can implement new standards in the 2012 vehicle model year.

In EPA’s view, issuance of these vehicle regulations will for the first time make GHGs “subject to regulation” under the Clean Air Act. This, in turn, will force stationary sources to address GHG emissions in permits issued under the Clean Air Act. For a detailed discussion of how regulating vehicle emissions may trigger limits on GHG emissions from stationary sources, as well as EPA’s plan to try to limit the scope of the new GHG requirements to larger sources like power plants, refineries, pulp mills, and other industrial facilities, see EPA Proposes Regulating Stationary Source Greenhouse Gas Emissions Under Federal Clean Air Act, Marten Law Environmental News (October 7, 2009).

Groups opposed to EPA’s plans have recognized that the lynchpin for the agency’s actions is the Endangerment Finding. The Coalition for Responsible Regulation, several mining companies, and the National Cattlemen’s Beef Association filed a petition for review of the Endangerment Finding in the D.C. Circuit on December 23, less than two weeks after it was issued.[11] The Competitive Enterprise Institute, a free-market advocacy group, also has said it will challenge the agency's decision. On the other side, at least 16 states and a number of environmental groups have moved to intervene to defend EPA’s decision.

Taking a slightly different approach, Pacific Legal Foundation filed a petition with EPA on February 5, asking the agency to reopen the Endangerment Finding and refer it to EPA’s Scientific Advisory Board for reconsideration.[12] PLF’s petition is based on the so-called “climategate” emails, which (according to the petition) demonstrate that scientists at Great Britain’s University of East Anglia questioned the reliability of the climate data that underpins the Endangerment Finding. Section 307 of the Clean Air Act authorizes petitions for reconsideration on a variety of EPA decisions, and allows an appeal to the D.C Circuit should EPA deny the petition (which it presumably will).[13] If this petition ends up in court it will provide a venue for arguments over the significance of the East Anglia emails, as the parties debate whether the emails raise sufficient doubt about the reliability of climate data relied upon by EPA to taint the process resulting in the Endangerment Finding.

The plaintiffs in these cases, or in later suits directed at the regulations EPA issues in March, may ask the courts to enjoin EPA from regulating GHGs under the Clean Air Act until the litigation is resolved. Given that EPA has issued the Endangerment Finding in response to the Supreme Court’s decision in Massachusetts v. EPA, any such effort is likely to be an uphill battle, with little chance of success short of a return to the Supreme Court. Also complicating the situation is the role of the states, which have their own laws that mirror the federal Clean Air Act, and who issue the bulk of the permits for stationary sources. The sheer complexity of the Act’s regulatory scheme would render quite difficult any effort to block the consequences that flow from the Endangerment Finding and the EPA vehicle regulations in the courts, while challenges to the Endangerment Finding play out.

The Endangerment Finding also is under attack in Congress, where Senator Murkowski has introduced S.J.Res. 26, a disapproval resolution under the Congressional Review Act (“CRA”). CRA resolutions are not subject to filibuster in the Senate, and a vote on the Murkowski resolution is expected in March. If enacted, it would nullify the Endangerment Finding. However, even if the resolution were to pass the Senate, it is unlikely to be adopted by the House, where the Democrats exercise greater control, nor would it be signed by President Obama. Thus, the Senate vote on the resolution may be more symbolic, with greater implications for climate change legislation than for EPA’s regulations.

EPA’s efforts also are likely to become the fodder for amendments in the Congressional appropriations process. President Obama has proposed a federal budget that includes $25 million for state air agencies to help them process GHG-related permits under existing Clean Air Act programs.[14] The budget also would provide $5 million for EPA to write permitting guidance, and $7 million for EPA to consider writing rules that specify GHG performance standards for individual source categories.[15] While these funding requests may receive some attention as Congress shapes the federal budget this spring, they are more likely to be in the crosshairs as appropriations bills are drafted this summer and fall. Assuming EPA issues its regulations in March, opponents will no doubt gather examples over the coming months to make their case for cutting off the funding needed to implement the new rules. But blocking EPA funding would not be enough by itself to stop implementation of GHG permitting requirements, since most of the permits are issued by the states under their parallel state laws.

Opponents of regulating GHGs under existing Clean Air Act permitting programs will pursue these, and no doubt other, avenues in an attempt to derail EPA’s actions. But even if successful, none of these paths is likely to lead to a quick resolution. That, even more than the ultimate outcome, is likely to be a decisive factor for many businesses. Any company weighing a large capital investment in a project that will have significant GHG emissions must make a choice: to cooperate in setting GHG emission limits, or to fight those limits in a holding action while the various challenges play out. For some, this may not be a difficult choice. Others will find it quite hard. But regardless, the choice will have to be made in the next few months, and should be being weighed now.

4. Incorporate Climate Change In Environmental Reviews

On December 29, 2009, Nancy Sutley, Chair of the Council on Environmental Quality (which oversees federal implementation of NEPA) sent a letter to two Republican senators stating CEQ’s view that “it is appropriate and necessary to consider the impact of significant Federal actions on greenhouse gas emissions and the potential for climate change to affect Federal activities,” as well as alternatives for managing those effects.[16] She said that CEQ is developing guidance on how climate change issues should be evaluated through the NEPA process, and that CEQ intends to issue the guidance in draft form for public comment. As this guidance will necessarily be prescriptive, it is likely to have the effect of narrowing agency discretion as to how climate change is addressed in NEPA documents.

The incorporation of GHG emissions and climate change into environmental reviews is not new. For more than a decade, it has been common for NEPA documents to include at least some discussion of climate change or GHG emissions. In 2008, the Ninth Circuit made clear that analysis of impacts from a project’s GHG emissions had to include the project’s contribution to cumulative impacts on climate.[17] But the issuance of new guidance by CEQ, as well as EPA’s issuance of its Endangerment Finding last December will likely give more weight to GHG impacts analysis, and may spur litigation under NEPA, other statutes, and the common law. See EPA’s Endangerment Finding Could Spur More NEPA, Nuisance Litigation,Marten Law Environmental News (December 10, 2009).

In addition, several states – California and Washington among them – have their own statutes that require NEPA-style environmental reviews, with the added requirement that significant impacts identified in those reviews be mitigated. It is increasingly common to see litigation in those states over the need to mitigate GHG impacts. For example, Center for Biological Diversity (“CBD”) recently re-filed suits against fifteen of Sierra Pacific Industries’ timber harvest plans in California, claiming that CEQA documents had not properly evaluated the GHG impacts of the practice of clearcutting forestlands, and that specific mitigation for those impacts should have been required.[18] CBD originally filed a suit asserting essentially the same claims last August. See Two Lawsuits Seek to Block Project Approvals Based on Failure to Mitigate Climate Change Impacts, Marten Law Environmental News (August 26, 2009). Sierra Pacific withdrew the timber harvest plan challenged in that August suit, then submitted revised plans. CBD has now launched a broad challenge to Sierra Pacific’s approach to documenting the GHG impacts of its harvest practices.

Companies trying to permit projects that require environmental reviews at the federal or state level should draw several lessons from these developments:

• Ensure that any environmental review documents clearly identify and discuss any greenhouse gas emissions associated with a project; as well as the project’s potential contribution to cumulative climate impacts.
• If appropriate, assure the documents discuss any physical risks that climate change may pose to a project, such as the effect that a changing climate could have on the project’s water supply.
• Any alternatives analysis also should include GHG alternatives, where feasible.
• Watch for CEQ’s issuance of draft guidance on incorporation of GHGs and climate change in NEPA documents. Even when in draft form, this guidance is likely to feature in public comments on environmental review documents, and in litigation over adequacy of those documents.

In some states, identifying potential climate impacts may trigger mitigation requirements. At the federal level, however, NEPA is a procedural statute, and its requirements should be satisfied if environmental review documents contain a clear identification of these issues, the potential direct and cumulative impacts, and a reasonable range of alternatives.[19]

Conclusion

At the moment, adoption of a federal GHG cap-and-trade program appears unlikely, at least this year. But the Obama administration is not waiting for Congress to act before it regulates GHG emissions and requires companies to evaluate climate risks. It has required companies to act now – to monitor and report their emissions, and to disclose climate risks in SEC filings. It is preparing to sharpen the focus on climate issues in environmental reviews conducted under NEPA. Finally, it is about to require the first federal limits on GHG emissions. While there will be plenty of battles ahead, the rules already in place need to be understood.

For more information regarding the regulation of greenhouse gas emissions, please contact Svend Brandt-Erichsen, or any member of Marten Law’s Climate Change practice group.