United States: Greenhouse Gas Management Strategies for U.S. Corporations

Originally published April 2004

By Christopher P. Davis and Aladdine D. Joroff

Despite the United States’ repudiation of the Kyoto Protocol, and in the absence of any national legislation 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 take action now, rather than await new legislation in Congress, include shareholder concerns about sustainable development and climate change, emerging international and state regulations targeting GHG, and heightened scrutiny of each public company’s 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 – carbon dioxide ("CO₂"), methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulphur hexafluoride – are widely believed to contribute to climate change. Until recently, GHGs were considered an issue of concern primarily in the energy industry, particularly for coal-fired power plants. While many of the current and proposed GHG control programs are focused on the energy industry, GHG impacts now are being targeted in other industry sectors, including in businesses that consume electric power or fossil fuels, directly or indirectly through their products.

Corporations that have implemented significant GHG reductions voluntarily have reported related economic benefits. For example:

• BP America, Inc. reduced its GHG emissions 10% below 1990 levels – creating approximately $650 million in value in the process – and has committed to maintain its reduced net emissions for at least a decade.

• Alcoa has reduced its direct GHG emissions 25% below 1990 levels through energy efficiency improvements, has captured over $16 million per year in energy savings, and projects that technological improvements could lead to a 50% reduction by 2010.

This article briefly reviews trends that are motivating companies to examine their GHG emissions, reports what some businesses are doing to inventory and reduce their emissions, and discusses potential strategies and benefits that may accrue for companies that take a forward-looking approach to GHG emissions.

The trend among U.S. companies toward inventorying, reducing and disclosing GHG emissions has resulted from a convergence of 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. Twenty-eight such resolutions have already been filed in 2004; shareholders who have filed 13 resolutions in the oil and gas industry alone represent over $250 billion in assets.

In their resolutions, shareholders typically demand more detailed disclosure of how the company evaluated and quantified business risks and opportunities associated with global warming, including an inventory of GHG emissions and estimates of costs to reduce them. Seven of 12 resolutions voted upon between January and August, 2003 received over 20% shareholder support. Groups sponsoring the resolutions argue that reductions in GHG emissions may result in cost savings and provide a net benefit to the corporation and its shareholders from a "triple bottom line" perspective, which incorporates economic, environmental and social impacts into the assessment process.

One organization that is helping to spur shareholder resolutions on GHG emissions is the Investor Network on Climate Risk ("INCR"). INCR, launched by 10 institutional investors representing over $1 trillion in assets, is encouraging companies in which its members invest to increase disclosure of the risks and opportunities associated with climate change.

Although the U.S. Environmental Protection Agency ("EPA") has concluded that it lacks authority to regulate GHGs under the Clean Air Act, a 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.

For example, between 1997 and 2002, Washington, Oregon, Massachusetts and New Hampshire all required either that existing or new power plants reduce or offset their CO₂ emissions to levels up to 20%. In 2002, California adopted legislation lowering permissible limits on GHG emissions from cars and light trucks, based on regulations to be promulgated by 2005. Car and truck manufacturers in California can secure credits for early emissions reductions by participating in the state’s GHG emissions registry. In New Jersey and Wisconsin, certain businesses have been required to inventory and report GHG emissions.

While no federal legislation for mandatory GHG emissions reductions has been adopted yet, Congress has debated many different proposals during the past decade. See http://www.goodwinprocter.com/publications/ELA_GreenhouseGases_3_03.pdf Most recently, the Lieberman-McCain Climate Stewardship Act received 43 votes in the Senate in 2003, and it may be reconsidered in 2004.

Multinational corporations also may be affected by emerging restrictions and emissions programs in countries which, unlike the United States, have adopted the Kyoto Protocol. The European Union ("EU"), for example, has adopted a Greenhouse Gas Emissions Trading Scheme, a mandatory CO₂ trading scheme scheduled to take effect in 2005. Corporations with facilities in the EU and other countries are taking steps now to evaluate the effects of international developments on their future operations, and are considering whether such trends may constitute events reportable in their disclosures to the SEC. To the extent a company’s internal corporate policies call for applying the same "best practices" standards worldwide, they also could trigger implementation of the EU standards, or their equivalent, in the United States.

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.

The number of registries is likely to increase as states continue to focus on controlling GHG emissions in the absence of federal action. For instance:

• 38 states have completed GHG inventories estimating the total emissions from all sectors in the state; and

• 23 have created Climate Action Plans detailing steps to reduce the state’s contributions to climate change.

Regional registries are being discussed by California, Washington, Oregon; New York, the New England states and the Eastern Canadian Provinces.

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. Examples include:

• Northeastern Emissions Trading Scheme - Eleven northeastern states plan to establish a mandatory, market-based cap and trade program for CO₂ emissions from fossil-fuel fired power plants by April 2005.

• European Union Greenhouse Gas Emissions Trading Scheme - Mandatory participation for specified large emitting sectors in a multi-national CO₂ emissions trading scheme beginning 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. Many member countries, including Italy and Germany, have already developed their national allocation plans. The United Kingdom, which has a voluntary trading program, is working to coordinate its program with the EU’s initiative.

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. In March, 2004 the high price per 2004 ton of CO₂ reduction credit was 95 cents.

GHG emission registries and trading programs are attracting an increasing level of corporate participation. For example:

• 228 companies and organizations reported 2,027 GHG reduction or sequestration projects to the Department of Energy’s Voluntary Reporting of Greenhouse Gases Program in 2002. While 43% of the reports were from the electric power sector, a total of 29 industries or services were represented.
• 50 entities participate in EPA’s Climate Leaders Program, 20 of whom have set reduction goals in addition to measuring emissions. Participants document emissions for all six GHGs considered by the Kyoto Protocol (CO₂, CH4, NO2, HFCs, PFCs and SF6) and report on a company-wide, facility-level basis for all domestic facilities.

• Businesses with annual revenues over $140 billion report their direct and indirect emissions to California’s Climate Action Registry, perhaps the most developed and influential GHG emissions registry in the United States

• Corporate participants in the World Economic Forum’s Global GHG Register represent nearly 5% of GHG emissions and report verified GHG emissions and reduction targets on a global level.
• Companies track over 100 million tons of CO₂ equivalent in the Environmental Resources Trust’s ("ERT") GHG Registry, often on a confidential basis, and trade reduction credits. The Registry, which aims to provide early actors with an objective and reliable verification of their emissions reductions that can be used to satisfy future regulatory requirements or in GHG emission trading schemes, is one of several such programs run by non-profit organizations and private groups.

• Over 50 entities belong to the Chicago Climate Exchange, which has had an average daily volume of 9,205 metric tons CO₂ since trading began in December 2003.

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:

• Enhancing reputation and "brand value" via public recognition, use of approved "climate leader" logos and reporting transparency.

• Enhancing or protecting shareholder value, by taking forward-looking steps to take advantage of GHG-related opportunities and mitigating GHG-related risks.

• Achieving cost savings and other economic benefits through increased energy efficiency, enhanced productivity and sales of reduced emissions.

• Influencing future regulatory regimes by demonstrating the viability of a voluntary approach, developing support for market-oriented policies and establishing realistic baselines.

Reducing energy consumption is often an early 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. Additional activities that are often recognized by programs and that can result in cost-savings or favorable publicity include:

• Fuel switching, appliance efficiency and use of renewable energy;

• Tree planting and forest management;

• Manufacture or use of vehicles with reduced emissions and car pooling;

• Methane recovery;

• Cogeneration; and

• Waste processing.