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In the complex world of sustainability, taxes are still certain

The U.S. pullout from the Paris climate accord — an agreement by more than 200 countries to reduce their carbon footprint — has created an air of uncertainty around environmental initiatives. One question making the rounds is whether countries remaining in the accord will impose energy taxes or levies on non-compliant U.S.-refined products, which could create a new tracking and reporting nightmare.

Independent of the Paris accord, in the U.S., the absence of a federal cap and trade policy (where companies pay penalties if they exceed a greenhouse emission cap, and where a market exists for companies to buy and sell allowances) forces states and other enterprises to consider launching their own initiatives to combat global warming and other environmental threats. Some of the ever-changing environmental regulations and their associated compliance requirements include the Low Carbon Fuel Standard (LCFS), the Washington Clean Air Rule and the California Global Warming Act. This lack of uniform state-level environmental reporting places a tremendous burden on companies to take responsibility for understanding and complying with applicable regulations and excise tax obligations. 

Further, any group launching an environmental initiative or attempting to issue environmental compliance reports must have access to accurate data. Yet even though U.S. companies have been required to issue compliance reports on carbon footprint for years, they still face challenges in capturing accurate data to produce reports. This means that every environmental initiative faces significant challenges from day one.

Here are just some environmental compliance reporting and excise tax challenges organizations face today. First, and most important, to calculate the carbon footprint, organizations must consider not just the carbon they use via their operations — they also must consider the products they sell and what they use for production and transportation. For example, an oil refinery’s carbon footprint might include the fuel it burns to power its operations (such as lights, pumps and compressors); the carbon-based products it produces for sale (gasoline, motor oil); and the products it uses to manufacture goods for sale.

Even though U.S. companies have been required to issue compliance reports on carbon footprint for years, they still face challenges in capturing accurate data to produce reports.

Companies selling to non-licensed parties may be required to report the relevant carbon volume as the non-license party is not required to do so. Also, companies must account for "diversions." For example, products exported out of state typically are exempt from state reporting requirements, but what happens when a manufacturer’s shipment scheduled to be trucked from one state to another gets diverted and some or all of the shipment gets delivered in the state of origin? The change may not be reconciled until days or weeks later, but the shipment must still be reported.

Internal inventory reconciliation must be accessible to and aligned with external audits and third-party verification solutions. Furthermore, analysis of the environmental compliance data should include carbon credits. For example, in a cap and trade environment, a company needs to be able to track how many credits it has to determine if it has some credits to sell or if it needs to purchase some.

Another challenge is that the source of a product must be carefully tracked. A product sourced via an exchange agreement or purchase agreement may be exempt. And, companies must be able to incorporate product returns into their processes. Lastly in this list, the terms and conditions of ownership must be fully understood. For example, if a company importing liquefied petroleum gases (LPGs) is the consignee, then the product may be subject to reporting.

Finding a solution

The solution to ensuring accurate environmental compliance reporting — and the only way to do so — is to adopt reliable, repeatable business processes. Since most Health, Safety and the Environment (HSE) organizations and environmental groups don’t have access to, or familiarity with, the transactional detail required for reporting, most organizations will want to leverage their tax department which already has experience with the transactional data involved in excise motor fuel compliance.

The burden often falls to the tax department to create a single, comprehensive process that incorporates:

  • Holistic data capture
  • Analysis (whether it is a greenhouse gas product; sold or used; destination; and if it has terms and conditions)
  • Exceptions management
  • Carbon calculation
  • Schedule and return generation
  • Monthly validation (subject to third-party validation) and annual submission

Most organizations will see this as an iterative process as they refine their data collection, determine and refine baselines, identify data and process gaps to be addressed and develop and evolve their commercial and operational reporting strategy.

Still, simply improving internal processes is not enough. Companies must develop the ability to interact with state regulators in order to clarify and regularly update the applicable requirements and their reporting obligations. Further, they must track legislative initiatives in order to understand and prepare for longer-term impacts.

Finally, companies should take advantage of state chambers of commerce, such as AWB (Association of Washington Business), which may be able to provide useful, state-specific information; and national organizations such as AFPM (American Fuel & Petrochemical Manufacturers), which can provide vital context related to international issues and advances in environmental compliance reporting technology.

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