Companies Face Tough Choices on GHG Management

Companies Face Tough Choices on GHG Management

Imagine the following scenario. The year is 2010 and Company X is in a tailspin. Company X might be a large manufacturer, a power producer, a mining company or any other firm with a large energy profile. In the past six months, the stock price has plummeted, its debt has been downgraded, and executives are quietly beginning to filter out of the company. What has happened to cause this disastrous situation?

First, a national greenhouse gas (GHG) cap and trade system has recently been approved by Congress. As Company X had never given much thought to tracking or reducing its GHG emissions, it is now facing the difficult choice of either spending large sums on retrofitting equipment, or purchasing expensive offsets from its competitors.

Second, Company X was named as a defendant in a suit brought by a coalition of attorneys general of coastal states. As a result of rising sea levels attributed to climate change, these states were anticipating huge expenses to protect low-lying areas and wanted large GHG emitters share the cost.

Third, a group of institutional shareholders was suing the company's board of directors. The company was facing major liabilities from GHG emissions and shareholders were looking for someone to take the blame.

Fourth, the insurer that provided Company X with directors’ and officers’ liability insurance had informed the company that it would not provide liability coverage for the shareholders’ suit, since the board had never adopted any GHG reduction or mitigation policies, leaving the company largely exposed.

Fifth, Company X was being investigated by the SEC for violating disclosure obligations, since none of the above liabilities were ever discussed in its financial reports.

Is this picture implausible? Surprisingly, it is not. Each of the elements in this picture could well occur within a few years.

A GHG cap and trade system, either on a state or federal level is looking increasingly likely. The northeastern states are already well advanced on a regulatory system for the electric power industry. The Climate Stewardship Act to create such a system has recently been reintroduced in both the House and Senate. It got 43 Senate votes last year, and is almost certain to fare better this year.

Litigation against major GHG emitters is not as far-fetched as it might seem. Linking company actions with the injuries suffered by the plaintiffs will not be simple, but then again, no one ever expected the tobacco lawsuits to succeed either. Companies who argue that they were following the law at the time the actions took place are in much the same legal situation as companies that dumped toxic waste in the 1950s when there was no legal standard for handling many of these materials. Nevertheless, the companies found themselves fighting off toxic tort suits decades later.

Moreover, corporate directors and officers can face liability from shareholder lawsuits if they can be shown to have acted with gross negligence of readily available information. As information on climate change is widely available, it will be difficult for a corporate official to argue that he did not know in 2004 this might be a problem. Swiss Reinsurance has already announced that it will withdraw coverage for liability claims associated with global warming for companies that do not adopt adequate climate change policies.

A number of companies already reference climate change liability in their SEC disclosures. If some of the costs and liabilities discussed in this article occur, they will increasingly be seen as "material" and necessary to disclose.

Now imagine a different scenario. Company Y is a direct competitor to Company X. Some years back, it registered a GHG emissions baseline. Since then, it has applied a policy of including GHG emissions and energy efficiency as a factor in all investment decisions. As a result, Company Y’s GHG emissions have been dropping gradually for some time, with the energy savings going directly to the bottom line. Moreover, Company Y has had less exposure to energy price fluctuations. With the new cap and trade program, the company has been able to sell its reductions to Company X.

Because the company has been diligent in reducing its GHG emissions over time, it was not included in the lawsuit by the state attorneys general. Nor has it experienced any shareholder litigation, since the overall impact of climate change has, in fact, been positive for earnings.

Is such a future possible? I might be wrong about the details. The rules might take a different form and the year might be different, but the writing is clearly on the wall.

Might companies soon find themselves having to choose between the paths of Company X and Company Y? In fact, they are making those choices today. Putting effective GHG policies in place can take several years. For better or worse, the choices that companies make today are positioning them for the policy environment they will face tomorrow.

Joel Levin is vice president of the California Climate Action Registry, a public/private partnership established by the State of California to encourage companies to track and manage their GHG emissions.