The Federal Acquisition Regulatory Council recently issued a far-reaching proposed rule that includes significant compliance obligations for contractors related to their greenhouse gas emissions.
- Most federal contractors, including small businesses, would be required to prepare an annual inventory of their greenhouse gas emissions.
- "Major contractors" also would have to publicly disclose their annual inventory and efforts to reduce greenhouse gas emissions.
- Failure to comply with these new obligations may result in a contracting officer finding of "non-responsible" under FAR Part 9.
The Federal Acquisition Regulatory Council (FAR Council) recently issued a proposed rule, implementing Section 5(b)(i) of Executive Order 14030 (Climate-Related Financial Risk), that would require most federal contractors to make disclosures and representations regarding their greenhouse gas (GHG) emissions and certain contractors to also set science-based targets to reduce those emissions. The proposed rule adopts the definition of GHG from Federal Acquisition Regulation (FAR) 23.001, which defines GHG as carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, nitrogen trifluoride and sulfur hexafluoride.
The proposed rule would apply to "major" and "significant" contractors. A "major contractor" is defined as any entity that received more than $50 million in federal contract obligations in the prior fiscal year. A "significant contractor" is defined as any entity that has received $7.5 million or more (but less than $50 million) in federal contract obligations in the prior fiscal year. Accordingly, small businesses receiving as little as $7.5 million in awards are covered by the proposed rule. All small businesses that meet the $7.5 million threshold are to be treated as "significant contractors," so the additional obligations that apply to "major contractors" (discussed below) would not apply to small businesses. Further, all contractors would have to certify on SAM.gov whether they are or are not a major or significant contractor and, if so, represent their compliance with the three obligations discussed below.
The proposed rule includes three main obligations. First, the proposed rule would require both major and significant contractors to prepare an annual GHG inventory of their "Scope 1" and "Scope 2" GHG emissions. Scope 1 emissions include GHG emissions from sources that are owned or controlled by the contractor. Scope 2 emissions are those GHGs "associated with the generation of electricity, heating and cooling, or steam, when these are purchased or acquired for the reporting company's own consumption but occur at sources owned or controlled by another entity." Major and significant contractors must also disclose their GHG inventory on SAM.gov. In terms of calculating GHG emissions, the proposed rule provides that contractors "may calculate emissions using the calculation tool of their choice, as long as it is in alignment with the GHG Protocol Corporate Accounting and Reporting Standard" and directs contractors to the Environmental Protection Agency's simplified GHG emissions calculator.
The second obligation, which applies only to major contractors, is a requirement to complete an annual climate disclosure and make the disclosure available on a publicly accessible website (e.g., the contractor's own website). The disclosure must include the contractor's GHG inventory of Scope 1 and Scope 2 emissions, and any "relevant Scope 3 emissions, which are [GHG] emissions that are a consequence of the operations of the reporting entity but occur at sources other than those owned or controlled by the entity," such as the sources in its supply chain. The disclosure also must describe the contractor's climate risk assessment process and any risks that it has identified. The proposed rule provides that the disclosure obligation may be fulfilled by completing a questionnaire through the Carbon Disclosure Project or CDP, a nonprofit entity that runs a global environmental disclosure system.
The third obligation, which also applies only to major contractors, is a requirement to develop science-based targets and have the targets validated by Science-Based Targets Initiative (SBTi). The proposed rule defines a "science-based target" as "a target for reducing GHG emissions that is in line with reductions that the latest climate science deems necessary to meet the goals of the Paris Agreement to limit global warming to well below 2 °C above pre-industrial levels and pursue efforts to limit warming to 1.5 °C." The contractor's targets must be validated by SBTi within the previous five calendar years and must also be made available on a publicly accessible website.
A contractor's obligation to prepare its GHG inventory will begin one year after the publication of the final rule. The obligations specific to major contractors will begin two years after the publication of the final rule.
With respect to exceptions, a significant or major contractor is not required to prepare a GHG inventory of its Scope 1 or Scope 2 emissions and a major contractor is not required to complete an annual climate disclosure or set science-based targets for GHG reduction, if the contractor is a(n): (1) Alaska Native Corporation, Community Development Corporation, Indian tribe, Native Hawaiian Organization or Tribally owned concern; (2) higher education institution; (3) nonprofit research entity; (4) state or local government; or (5) entity deriving 80 percent or more of its annual revenue from federal management and operating contracts that are subject to agency annual site sustainability reporting requirements.
Finally, the proposed rule includes new procedures for determining responsibility under FAR 9.104-3. If a contractor's SAM representations indicate that it is a significant or major contractor and that it is not in compliance with its obligations under the proposed rule, then the contracting officer is directed to follow new procedures set forth at FAR 9.104-3(e). In that regard, under these new procedures, contracting officers must presume that the contractor is non-responsible, unless the contracting officer can establish the following: (1) the contractor's non-compliance resulted from circumstances properly beyond its control; (2) the contractor has provided sufficient documentation that demonstrates substantial efforts to comply; and (3) the contractor has made a public commitment to comply as soon as possible on a publicly accessible website (within one year).
Based on the significance of this proposed rule, Pillsbury expects to publish additional client alerts on this proposed rule. In the meantime, we encourage you to take advantage of the public comment period to voice your concerns and support for this proposed rule. Comments on the proposed rule are due by January 13, 2023.
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