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National - Climate Change and the Case for Sustainability
- Part Two
By Ritchie Priddy, Director, Sustainability Marketing, GDF SUEZ Energy Resources NA
In the
last issue of “On the Horizon” I addressed some of the
drivers of climate change (CC) and sustainability. A number of
our customers have inquired about the potential impact of
climate change on their businesses – an extremely complicated
question to answer. While we don’t have a crystal ball, it is
fairly easy to read the tea leaves. But it is also very easy to
get too far down in the weeds or caught up in the misinformation
swirling around the subject.
Our customers typically ask
us questions that focus on three issues: What is happening on
the legislative front? What is happening on the regulatory
front? And how is business generally responding? None of these
questions is easy to address with any certainty today because
the landscape involving all three is constantly changing.
Further, there are other “intangible” factors in play such as
evolving financial rules, insurance industry impacts, lawsuits
and peer pressure.
Last quarter’s issue highlighted some of the federal legislative efforts to
pass a companion bill to the Waxman-Markey bill approved by the
House of Representatives last year. There are a myriad of
efforts under way, probably the most important of which is the
just-introduced Kerry-Graham-Lieberman bill. This plan all but
scraps the economy-wide cap-and- trade requirements that are the
hallmark of the House measure.
Regardless of what the
Senate passes (if anything), a compromise bill must still be
worked out between the two chambers. Most insiders agree that
barring some bipartisan breakthrough between now and mid-May, no
legislation is likely to be discussed before the 2010 mid-term
elections. The country remains deeply divided over health care,
and the next major legislative offensive is likely to deal with
the financial crisis. Bringing up another contentious issue
before the elections – one that everyone agrees will increase
energy costs – is probably not the wisest course of action. But
we may all be surprised by the intensity of the President’s
efforts, and perhaps even see a bill brought before the Senate
by summer’s end.
Remember, the only way for CC
legislation and the subsequent alternative energy scenario to be
viable over the long run is for power prices to be high, and
remain there. [This fact is irrefutable – simple economics. Most
politicians, including the President, have already publicly
stated that this is so.]
One thing I want to emphasize
is that while the science is not settled, and public opinion is
overwhelmingly anti-climate change right now, things are moving
forward on the CC front. In fact, it would take monumental
legislative, regulatory and legal changes to derail the train,
as evidenced by the fact that many of the regulations and some
laws on the books now (as well as citations in legal battles)
refer to the U.N. Intergovernmental Panel on Climate Change
(IPCC) as if it were settled science.
Other Legislative
Activities
Several states are forging ahead on climate
legislation, most notably California, which earlier this year
passed the country’s first mandatory climate action bill. That
bill requires all new construction in the state to meet
stringent building codes that will reduce energy and water use,
and adopt renewable energy practices. Among other things, the
code mandates inspections of energy systems to ensure they are
operating efficiently. The new code will go into effect next
January, and there is some talk that it will eventually extend
to existing structures as well.
Other states and cities
are adopting or encouraging efficiency and renewable energy
mandates for commercial properties in particular. Perhaps the
most important requirements for commercial real estate companies
are the new city ordinances mandating owners of large buildings
to benchmark their buildings’ energy consumption and disclose
the scores publicly. New York City, Austin, Boston and others
now require owners to use the EPA’s online Portfolio Manager
tool to benchmark energy usage and assign a score of between 0
and 100 to each building. The higher the score, the more
efficient the building is. Buildings that score 75 or above are
considered efficient and qualify for the Energy Star
designation. High scores can also provide additional Leadership
in Energy and Environmental Design (LEED) points. By becoming
more efficient, a building may actually increase its score.
There is a real possibility that other cities will adopt
similar ordinances. I personally think this is a good idea
because buildings account for over 70 percent of the nation’s
electricity consumption, and there is a lot of room for
improvement. Often times, though, peer pressure will work better
than mandates. In the commercial real estate industry,
inefficient buildings have much less value, and a definite trend
toward more efficient buildings (i.e., Energy Star and LEED) is
growing rapidly.
Meanwhile, the prospect for an
international climate change agreement to be completed in 2010
is all but dead. Some countries have actually publicly stated
their emissions reductions goals, but they remain non-binding.
Several European countries have stated that their economies must
be protected by import tariffs before they’ll commit to funding
non-industrialized countries’ efforts on carbon reduction. Most
of that money will have to be raised via higher energy costs
and, some claim, lower standards of living for Europeans.
All of the action on the legislative front appears to be
heading to the courts, which means lengthy delays in passing
legislation on every level. That potential is fueling the
regulatory strategies many leaders and interest groups are
pushing.
Regulatory actions: EPA and SEC
The
Administration’s strategy involving CC has become clear in the
past few months. If legislation cannot be passed, it will rely
on the various regulatory agencies to adopt and enforce action.
As outlined before, the significant regulatory actions in the
United State include the EPA’s Endangerment Finding, which is
already being challenged by several states, and its greenhouse
gas (GHG) reporting rule, which has recently been expanded to
include oil and gas properties.
Perhaps the most influential
piece of regulation is the Security and Exchange Commission’s
(SEC) guideline for reporting climate risks in financial
documents. In it, the SEC made clear that existing reporting
requirements call for climate risk disclosures to be made. This
is a Sarbanes-Oxley issue and should be taken seriously.
Legal Actions
Since February two federal appeals court
rulings have altered the litigation front concerning climate
change public nuisance claims, and each will likely end up
before the Supreme Court. A nuisance occurs when a defendant
unreasonably or substantially interferes with the enjoyment of
one’s property. Earlier, federal courts allowed nuisance claims
to proceed in climate change cases – though none has succeeded
to date. Thus far, two prominent cases have taken on special
significance.
In the first one, the U.S. Court of Appeals for
the Second Circuit issued a landmark ruling in late September in
the case of Connecticut v. American Electric Power Company,
Inc., which overturned a 2005 district court judgment that
denied the plaintiffs’ ability to pursue claims against private
emitters of greenhouse gases. The suit was originally brought by
eight states and three land trusts against six electric power
companies that own and operate fossil-fired plants in 20 states.
The district court dismissed the case on the grounds that the
question of climate change should be addressed by politicians
rather than by the courts.
But the appeals court decided
that the case had standing, and that U.S. federal courts could
decide common law actions that allege private emitters of GHGs
are liable for creating a public nuisance. Perhaps more
importantly, the court also ruled that the states and the land
trusts had standing because their property rights had allegedly
suffered a direct, tangible injury as a result the emissions
generated by the power plants.
In early March, the Second
Circuit denied rehearing en banc of its decision in Connecticut
v. American Electric Power. (An en banc review is heard before
the entire court, not simply a quorum of judges.) That decision
followed a Fifth Circuit ruling a week earlier in Comer et al v.
Murphy Oil Company, the second significant court case, that
vacated its original decision by a three-judge panel that would
have allowed defendants to pursue compensatory and punitive
damages against energy companies for their alleged contribution
to the climate change and the resulting intensification of
storms.
The primary issue with a nuisance claim has been
showing that individual polluters’ emissions were the proximate
cause of the plaintiffs’ harm and to what degree that harm was
increased due to the defendant’s emissions. While the plaintiffs
still must prove that the actions of the emitters have
contributed to climate change (called “fairly traceable”) the
Second Circuit ruled that “an indirect causal relationship will
suffice so long as there is a fairly traceable connection
between the alleged injury in act and the alleged conduct of the
defendant.” That surely will cause a few eyebrows to be raised
in the boardrooms of large emitters.
Regardless of how
they are decided, these and similar cases will have an enormous
impact on many industries across the country. The costs alone to
companies defending themselves against such claims will be
staggering, and insurance companies are already claiming they
are exempt from covering climate change litigation costs.
As
a point in fact, one case in particular, Steadfast Insurance
Company v. The AES Corporation, is a clear sign of things to
come regarding insurance and their large emitter customers. The
Steadfast case actually has its roots in Village of Kivalina v
ExxonMobil, in which AES is one of 24 named defendants. In that
case, the small fishing village located above the Arctic Circle
could be forced to relocate due to rising sea levels, something
the plaintiffs allege was caused by the collective actions of
the defendants.
The insurance company filed a declaratory
judgment asking a Virginia state court to rule that the
commercial general liability policy it issued to AES does not
cover climate change assertions. Specifically, Steadfast argued
that the AES policy does not cover global warming claims for
three reasons: 1) the damages allegedly caused by global warming
were not caused by an “occurrence” within the meaning of the
policy; 2) since the damages allegedly caused by global warming
began prior to the date the policy was issued, the “loss in
progress” endorsement excluded coverage; and 3) coverage is
excluded under the policy’s pollution exclusion.
Corporate risk managers should pay close attention to this case
in particular.
End-User Actions Responding to CC
All
of the discussions and actions discussed above are interesting,
but they do little to provide clear information to end-use
customers. Those customers need certainty, but that is likely
years away – though some regulations are in effect now, or soon
will be, meaning that a company delays action at its own peril.
Polls suggest that most companies are aware of the potential for
legislation and regulation, but only a minority have taken
concrete action to date.
The key drivers for customer action
include new state and local mandates; SEC and EPA disclosure
risks; insurance and banking pressures; and peer pressure.
Specific action will be dictated by the industry in which a
company is involved. For instance, in the corporate real estate
industry, a growing trend for sustainable certifications such as
Energy Star and LEED is evident. On a micro scale, these
companies’ portfolios could not be considered large emitters,
but they recognize that they should take action before being
required to do so. But, perhaps for the first time, some
industries also see a bottom-line connection to sustainability
efforts.
Why are these companies taking action while most
companies seem to have little idea of all the issues surrounding
an already overly complicated and political subject? I don’t
have a good answer for that, other than to repeat what I
witnessed at a recent conference that had sessions devoted to
this topic. All of the companies attending the reporting session
stated they were far more concerned about specific equipment
emissions to fulfill state and federal requirements (i.e.,
boilers, chillers, cooking equipment, etc.), and did not have
the resources to devote to finding and interpreting the
larger-scale CC activities, particularly in multiple
jurisdictions.
Other companies such as Wal-Mart see an
opportunity to be a step ahead of their peers, and influence the
direction their respective industries are taking regarding CC.
By doing this, they establish best practices, are recognized by
regulators and legislators, save money and reap the public
relations gains associated with being proactive. Their actions
are prudent, and competitors should recognize that much of the
burden associated with CC reporting, in particular, could fall
upon their shoulders.
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