Point of view: Greenhouse gas emissions

Mandatory reporting

The US EPA has made it mandatory for certain companies to measure and report greenhouse gas (GHG) emissions and has further proposed its intention to regulate emissions produced by the nation’s largest sources.

Getting the baseline

The reported data will serve as a baseline for measuring progress toward any future emissions-reduction targets. It is a preliminary step toward establishing comprehensive climate change regulation in the United States.

Start, renew, or intensify your efforts

As companies work to comply with the rule, they also should remain focused on preparing for federal mandates to reduce GHG emissions.

Mandatory reporting moves the US closer to comprehensive regulation of GHG emissions

On December 29, 2009, the EPA will put into effect a mandatory reporting rule for GHG emissions in response to the FY 2008 Consolidated Appropriations Act.¹

The measurements provided to the EPA will be used for rulemaking under the Clean Air Act or more comprehensive policies that may be put in place to drive down GHG emissions. In a separate regulatory proceeding, the EPA has proposed that the facilities subject to mandatory reporting also be required to obtain permits demonstrating they are using the best practices and technologies to minimize GHG emissions.

Highlights of the reporting rule include:

• The threshold for reporting is 25,000 metric tons or more of carbon dioxide equivalent (CO2_e) per year.
• Reporting is at the facility level, with some exceptions. Certain suppliers of fossil fuels and industrial GHGs, along with vehicle and engine manufacturers, will report at the corporate level.
• Companies will begin collecting data on January 1, 2010. The first emissions report is due March 31, 2011, except for manufacturers of vehicles and engines (outside of the light-duty sector), who are required to begin reporting for model year 2011.
• An estimated 85 percent of US GHG emissions from approximately 10,000 facilities are covered by this rule.
• Most small businesses would fall below the 25,000 metric ton-threshold and would not be required to report GHG emissions to the EPA.
• The only emission source in the agriculture sector covered by the rule is manure management systems at livestock operations with GHG emissions that meet or exceed the threshold of 25,000 metric tons.

Preparing for mandatory reporting to the EPA

Companies subject to the rule should compare their current measurement and reporting methods with the reporting requirements of the final rule. The design of the review, which includes examining systems, processes, and controls, should consider that reported data are subject to verification by the EPA and that the data may be used as a baseline measurement for a company’s obligations under a possible future federal cap-and-trade system or a carbon tax.

In its role as verifier, we believe the EPA may view companies with no previous record of voluntary reporting as having a higher risk of error, and therefore seek out those companies in their verification process. Companies with no previous record of reporting can be ready, however, with good planning and rapid implementation.

Although third-party verification is not required under the rule, it is required for many other active or emerging reporting and trading programs, including The Climate Registry, California AB 32, the Regional Greenhouse Gas Initiative (RGGI), the European Union’s Emissions Trading System (EU-ETS), and the nascent Western Climate Initiative (WCI). Companies participating in programs that require third-party verification or that are voluntarily seeking third-party assurance for GHG emissions data will want to ensure that their verification process also considers the reporting requirements under this new rule.

Who would be required to report GHG emissions?

Source: United States Environmental Protection Agency

¹H.R. 2764; Public Law 110-161

Companies subject to the rule should prepare for federal reduction mandates

All companies subject to the rule need an accurate measurement of their GHG emissions in order to devise efficient reduction programs. Diligent preparation today will give your company more control over the emerging risks related to a conversion to a low-carbon economy.

Your company can and should take several steps now:

1. Assess overall readiness for changes in both energy and climate change policy. Organizations that take a holistic approach to carbon management are best positioned to capitalize on opportunities and minimize associated risks. Start with a landscape view of how different business and functional units will need to evolve and the degree to which those functions are prepared.

2. Recheck enterprise risk evaluations. Review risk assumptions, which include how more comprehensive climate-energy legislation would influence business opportunities, capital expenditures, utilization, and maintenance. Determine what responsibility your company would have for GHG emissions reductions in your operations or products, which may include commitments to reduce GHGs from your suppliers. Disclose material risks associated with GHG emissions or their regulation through external reporting, such as Securities and Exchange Commission (SEC) filings.

3. Participate in policy discussions. Your views are needed to contribute to the effectiveness of future policy decisions. The EPA rule-making process under the Clean Air Act will continue while Congress debates a more comprehensive package to determine the long-term future of energy and climate policy.

4. Determine when to start forecasting for the cost of carbon. Your forecasts will help determine your company’s carbon management path and whether a carbon trading strategy is needed (either under regional cap-and-trade systems or a national one, should Congress put such a system in place). Forecasts should include potential savings due to mitigation steps and federal, state, or local tax incentives for alternative energy and energy-efficiency programs.

5. Align carbon management steps with strategic objectives. A clear business strategy that also reduces GHG emissions relies on an accurate emissions baseline and ongoing risk assessment. Understand where the business case for reducing GHG emissions warrants early action, and devise reduction methods that support strategic initiatives. This includes equipment upgrades as well as participation in energy-efficiency programs.

6. Mobilize functional units. Functional units should be accountable for helping businesses operate efficiently under carbon constraints. For example, energy-efficiency programs and supply-chain integrity initiatives can protect the business against rising commodity costs that many businesses anticipate with comprehensive climate change regulation. Carbon due diligence for mergers and acquisitions and the capital budgeting process can help the company manage new sources of emissions during phases of maintenance or growth.

7. Report credibly to stakeholders. Mandatory reporting of GHG emissions will allow transparency to all interested parties. Therefore, companies will want to report GHG emissions in a credible, consistent fashion to avoid potentially costly restatements, penalties, or misunderstandings. In addition, an inventory of your company’s voluntary reporting processes (e.g., sustainability or corporate responsibility reports, or participation in voluntary programs such as the Carbon Disclosure Project) can ensure that data is consistently reported for these purposes and that all staff who perform reporting functions have the appropriate oversight.

Steps you take now can benefit your business under future carbon constraints

Q&A

Q: Is my company required to report?

A: To determine whether the proposed rule applies to your company, first check the source categories listed in the rule. Owners of facilities that do not match the list of source categories will need to determine whether any of their facilities emit 25,000 metric tons or more of carbon dioxide equivalent annually. If yes, reporting is required. An interactive questionnaire to help you find out whether the rule applies to your facility is available here: http://www.epa.gov/climatechange/emissions/GHG-calculator/index.html.

Q: Would reporting be at the corporate level or the facility level?

A: Reporting is at the facility level, but certain suppliers of fossil fuels and industrial GHGs, along with vehicle and engine manufacturers, will report at the corporate level.

Q: Does the rule apply to non-US-owned facilities?

A: Yes. The rule states that any owner or operator of a facility in the United States that directly emits GHGs from the source categories or emits 25,000 metric tons or more of carbon dioxide emissions annually will be required to report.

Q: How will the EPA conduct its verification?

A: The EPA calls for a system by which reporters self-certify emissions data. The EPA will then perform verification on the reports. We expect the agency will conduct verification of selected reports in accordance with existing emissions reporting programs. This includes spot checks at approximately 20 percent of reporting facilities. Most regional cap-and-trade systems require third-party verification of emissions data to ensure the credibility of the system. Companies that participate in a cap-and-trade system (or expect to) are likely to seek out a third party to verify the accuracy of reported data.

Q: How does this rule relate to financial reporting and disclosure?

A: The SEC recognizes that regulation of GHG emissions would result in material impacts to some businesses. The most direct example would be a material value of carbon emissions allowances under a cap-and-trade system. The SEC has stated that it intends to review its disclosure system in this area to ensure companies have the necessary clarity on what information to disclose to investors related to GHGs and other climate-related risks.

Q: What is the status of federal legislation to reduce GHGs in the United States?

A: The US House of Representatives approved the American Clean Energy and Security Act of 2009 in June, which establishes a cap-and-trade system for GHGs. Debate in the US Senate on the Clean Energy Jobs and American Power Act is ongoing.