Corporate America Feels The Heat

When a group of state attorneys general filed a public-nuisance lawsuit against several Midwestern utilities in July 2004, many litigation experts argued the plaintiffs were being too creative for their own good. After all, the "nuisance" over which the states were suing--global climate change--thus far hasn't been definitively proved, and even if it were, pinning the liability on any given party seems impossible.

Nevertheless, along with other lawsuits and policy developments, this public-nuisance suit might represent a canary in the coal mine of environmental policy--portending regulation to come.

"We've seen this type of litigation before," says Laurie Burt, a partner with Foley Hoag in Boston, and the former assistant attorney general of Massachusetts. "We saw a similar rash of common-law litigation--some of it successful--before we had hazardous-waste regulations under RCRA and CERCLA. We stretched the Clean Water Act as far as it could go. We might be seeing a similar trend for greenhouse gases."

In many ways, the trend toward greenhouse gas (GHG) restrictions mirrors a policy cycle that has resulted in federal regulation in many environmental, health and safety areas.

"Many federal programs enacted in the 1970s were modeled on pre-existing state and local efforts," wrote Jonathan H. Adler, a law professor at Case Western Reserve University, in National Review this past June, on the 35th anniversary of the Cuyahoga River fire that sparked Congress to pass the Clean Water Act. "Today state governments continue to lead, addressing issues ignored by federal policymakers and inventing the next generation of environmental controls."

Indeed, a historic floor vote in the U.S. Senate in June signaled a shift toward mandatory federal constraints on GHGs. Such constraints would have wide-ranging implications for many industries. GCs play an important role in helping corporate leaders understand how GHG policies affect their businesses, from financial reporting to litigation defense.

Storm Rising

The month of June 2005 might go down in history as a watershed date in global-climate-change policy. In that month the American climate-change debate perceptibly shifted from the question of whether the U.S. federal government should enact mandatory GHG constraints, to the questions of how and when it should do so.

The June developments came from many directions--left and right, state and federal, public and private.

June 1: California's Republican governor, Arnold Schwarzenegger, signed an executive order setting targets for the state to cut GHG emissions to 1990 levels by 2020. "I say the debate is over," Schwarzenegger told attendees at the United Nations World Environment Day conference in San Francisco. "We know the science, we see the threat and the time for action is now."

June 5: The U.S. Conference of Mayors, representing nearly 12,000 cities, unanimously pledged their cities would meet or exceed standards set by the Kyoto Protocol--namely, reducing GHG emissions 7 percent below 1990 levels by 2012.

June 7: The national science academies of 11 countries, including the U.S., issued a statement declaring "significant global warming is occurring," that it is caused chiefly by human activities, and prompt action by all nations is justified. U.K. Prime Minister Tony Blair visited the White House and publicly called upon President Bush to support mandatory GHG restrictions. Blair spent most of June lobbying leaders of industrialized nations to support a joint statement to be issued at the July G8 Summit in Scotland. Behind the scenes, the Bush administration negotiated to soften the statement.

In the U.S. Senate, lawmakers debated policy measures to address global warming. An omnibus energy bill the Senate passed on June 28 included two climate-change titles. The first, sponsored by Sen. Chuck Hagel (R-Neb.), authorized incentives to promote emissions-reduction technologies, directed the administration to develop a "national climate change strategy" and created a market for tradeable GHG emissions credits.

The second amendment expressed the sense of the Senate that "human activity is a substantial cause" of climate change and "mandatory steps will be required" to curb GHG emissions. It is the first time a majority in either house of Congress has made such acknowledgements. The amendment attracted a bipartisan group of co-sponsors, notably including Energy & Natural Resources Committee Chairman Sen. Pete Domenici (R-N.M.)--previously a staunch opponent of mandatory GHG reductions.

Of course the "Sense of the Senate" doesn't carry the force of law. But it indicates, as Sen. Joseph Lieberman (D-Conn.) said, "The times are changing, and eventually the U.S. Senate will change with them." Lieberman's climate-change bill, co-sponsored with John McCain every session since 2002, was defeated along with a scaled back measure that Jeff Bingaman (D-N.M.) proposed.

But both amendments attracted bipartisan support, and hinted at an endgame for climate-change legislation.

At the other end of Pennsylvania Ave., the Bush administration remained steadfast in opposition to mandatory GHG constraints, instead favoring voluntary goals and incentives.

The president argues the country has taken significant steps already that demonstrate the merits of a voluntary goal-setting and incentive process. And indeed, federal tax dollars have financed billions of dollars in climate-change R&D, and many companies are taking significant voluntary steps. Examples include General Electric, which began promoting the company's new "Ecomagination" initiative in May.

Like many companies, GE is adopting the view that growing concern about climate change represents a business opportunity. GE plans to spend $1.5 billion a year on R&D for climate-friendlier products, and pledged to reduce GHG emissions from manufacturing operations by 1 percent by 2012. The company says without the initiative its emissions would rise 40 percent.

Other companies, such as BP, DuPont and American Electric Power, are making similar pledges, and also are discussing climate-related risks in their shareholder communications.

"Not everyone is happy with us for it, but we acknowledge that man-made activities are increasing carbon and affecting the global climate," says Marc Manly, chief legal officer for Cinergy Inc., a major coal-burning utility company based in Cincinnati. "We are telling the world that we are planning and investing on the assumption that some day there will be a cost to carbon emissions."

Such initiatives support the Bush administration's contention that voluntary measures are working, and thus mandatory regulation is unnecessary.

"A command-and-control response might create the wrong market signals and artificially create winners or losers," says Michael Zimmer, a partner with Thompson Hine in Washington, D.C. "With voluntary measures, you might get better traction and a more enduring response. Some companies have taken control of the issue and adopted the approaches that are most appropriate for them."

Indeed, some corporations have been assuming for years they'd face mandatory emissions regulations eventually.

"What motivated us to get involved with this issue is our sense of the science," says Tom Jacob, DuPont's senior adviser for global affairs. "Since it first evolved out of the ozone-depletion issue, the science told us this was an issue we'd have to deal with. We decided we'd be better served on the side of reducing our exposure and helping to chart a path forward that keeps our businesses ahead of the game."

Environmental advocates, however, counter that most companies won't voluntarily invest as much--or as quickly--as they would under mandatory constraints. Even the steps companies have taken so far have been mostly to comply with existing environmental laws or to conserve increasingly costly fuel and feedstock. Remaining opportunities to cut back on GHG emissions might not be as economically attractive on their own, and investing money to pursue them in the absence of federal laws will be harder for companies to justify.

"The U.S. is the Saudi Arabia of waste heat," Zimmer says. Tapping into these resources, however, might require a more forceful and uniform national approach to GHG reductions than the current administration is prepared to undertake.

Desert Warfare

With a new administration on its way in 2008, the growing concern about climate change might translate into clear federal mandates. Until then, however, the Bush administration seems committed to preventing or delaying the imposition of mandatory constraints (See sidebar).

This position, however, is subjecting the president to increasing political heat both domestically and from the international community. This has consequences for U.S. policies on global trade and foreign affairs.

"It's no longer possible to separate issues involving globalization and climate change," says Andrew Strauss, professor of law at Widener University Law School in Wilmington, Del. "Global warming is quintessentially the kind of problem that transcends national boundaries. It's not tenable for one country to say, 'Even though there's overwhelming scientific evidence, we are not going to play with the rest of the world in the environmental arena.'"

The Bush administration has created frustration and embarrassment for Tony Blair, who identified climate change as a key priority for his term as president of the G8 this year.

Such situations have served to isolate the Bush administration from its political allies. Even faith-based groups have parted ways with the president on climate-change issues. The U.S. Catholic Conference of Bishops, the National Association of Evangelicals and the National Council of Churches joined with scientists to call for GHG constraints. And a growing list of business leaders is calling upon the government to enact mandatory GHG restrictions--in part to level the playing field between competitors, as well as to resolve questions about how and when GHG emissions will be regulated.

"The hardest thing is uncertainty," Cinergy's Manly says. "In the swirl of political, regulatory and litigation issues, we want public policymakers to make up their minds so we can plan and make investment decisions."

Furthermore, many states, cities and other community groups are unwilling to wait until some day after 2008 for the federal government to address the climate-change issue in a serious way. For redress, they are turning to courts and international tribunals.

In the aforementioned public-nuisance case, a group of states and cities, led by Connecticut, brought a federal lawsuit against several power companies (State of Connecticut et al v. American Electric Power Co. Inc., et al.) The complaint alleges the defendants are the five largest emitters of CO2 in the U.S.; CO2 contributes significantly to global warming; and global warming is a public nuisance under common law. The suit does not seek damages, but instead a court order directing the plaintiffs to reduce their CO2 emissions, "thereby abating their contribution to global warming, a public nuisance."

The suit faces several major hurdles--not the least of which is the plaintiffs' ability to establish standing.

"Traditional nuisance cases generally cannot be used to complain that an air-quality standard is not set strictly enough," says Jim Smith, a partner with Beirne Maynard & Parsons in Houston. "The assumption is that everyone is affected pretty much the same by air quality, and therefore it is the legislative branch, not the judicial branch, that has authority to set such standards."

In addition, the plaintiffs' case is based largely on predictions of future effects of global warming. For example, the compliant claims rising sea levels will affect the plaintiffs' coastlines, especially during storm surges, and "will cause billions of dollars of damage to property."

Whatever the outcome of this suit, plaintiffs seem unlikely to give up on trying to hold someone accountable for global warming. For instance, plaintiffs have filed two federal cases against government agencies on the grounds of global climate change. In Friends of the Earth et al. v. Peter Watson et al. the plaintiffs allege U.S. export-import agencies failed to comply with the National Environmental Policy Act (NEPA) by failing to review carbon emissions as part of NEPA-required environmental impact reviews for numerous U.S.-backed construction projects. And in Commonwealth of Massachusetts et al v. EPA, several states, cities and island territories argued that because former EPA Administrator Carol Browner officially defined CO2 as a pollutant under the Clean Air Act, the agency is obligated to regulate emissions. [At this writing, the EPA case was awaiting a federal appeals-court decision.]

In addition, an organization representing the Inuit peoples who live in the polar regions of Alaska, Canada, Russia and Greenland plan to file a petition before the Organization of American States (OAS) alleging the U.S. is violating the human rights of the region's residents by refusing to engage in a multilateral process to abate global-warming.

What makes the Inuit case significant is the plaintiffs are alleging demonstrable and increasing harm. "They are losing property and the ability to hunt," says Donald M. Goldberg, a senior attorney at the Center for International Environmental Law (CIEL) in Washington, D.C. "Villagers are having to relocate."

While the OAS ruling will have no legal effect on U.S. law, it could affect future petitions and litigation in various bodies. More importantly it would be an embarrassing black eye for the U.S. globally.

"No government wants to be found in violation of human rights," Goldberg says.

Climate Calculus

Most of the regulatory and court actions involving global climate change have long-term consequences, but mean little for U.S. corporations in the short term. Looming large for many companies, however, are questions about what GHG constraints mean for their current and future business in a global marketplace.

Multinational corporations, in particular, are frustrated that their efforts to reduce GHG emissions at U.S. facilities can't be used to offset their overall obligations to meet Kyoto-protocol targets, because the U.S. isn't part of the pact. Additionally, many American companies believe they are losing competitive ground in markets for climate-friendly products, as companies from countries that have signed the Kyoto protocol focus their businesses around developing products that emit less GHGs.

"Companies are recognizing that when you have a shift in how people operate, you create new opportunities, and it's imperative to be there first," says Greg Bibler, a partner with Goodwin Procter in Boston. "Regardless of where companies are located, they need to consider how carbon regulations may actually change the markets in which they operate."

International regs already are affecting companies' plans for procuring fuel and raw materials, product design and manufacturing, marketing and shipping. More broadly, increasing globalization of GHG constraints is reshaping the marketplace.

"When many companies look at their process life cycles, they see that transportation represents a large part of the carbon emissions of their products," says David Nash, a partner with Thompson Hine in Cleveland. "The result could be pressure in global markets to consolidate manufacturing facilities closer to where products are being consumed. The food industry, for example, is beginning to emphasize more local sources of produce."

Multinational companies also are factoring GHG emissions and energy resource factors into capital-investment decisions.

"As manufacturing, processing and energy production are allocated differently, rippling effects will occur geographically," Zimmer says. "This will put secondary pressures on certain harbor, rail and airport infrastructure, and it will create a whole new set of international trade, tariff and other management challenges for the future."

Facing risks with such broad ramifications, U.S. companies can scarcely afford to disregard the potential impact of climate change on their businesses. Companies need to plan for new environmental compliance requirements, litigation risks and insurance costs. Ultimately, the greatest forces for GHG reductions might prove to be corporate directors and the investment community.

A Friends of the Earth survey of SEC filings last year in five industry sectors likely to be affected by climate change showed that on average, 39 percent of companies reported impacts from climate-change trends.

The SEC doesn't explicitly require such disclosures , and precisely what companies are disclosing varies considerably as a result. However, the stricter certification and disclosure requirements of SOX might be raising the stakes for companies affected by GHG constraints. Shareholder petitions increasingly are demanding that companies disclose climate-change factors. And the consensus in the scientific and policy communities suggests GHG constraints are likely to be a material issue.

Peer pressure, too, is hard for companies and their regulators to resist. Already 90 percent of utility companies in the disclosure survey discuss climate change in their financial reports.

"Over time more and more pressure will be brought to bear," says Jacob of DuPont. "Already regulatory pressure is there in some areas, and at some point litigation pressure will increase as well. We're seeing a real evolution of expectations for corporate citizenship around the world."

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[SIDEBAR]

Bush's Policy

On the surface, the greenhouse gas (GHG) debate might seem to be about science, but it is really about politics and money. While the Bush administration has acknowledged most of the leading science on global warming, it's dedicating most of its energy to redefining the climate debate in economic terms.

The Bush administration has set its own GHG-reduction goal, namely to reduce the "GHG intensity" of the U.S. economy by 18 percent in the next 10 years. In this context, "intensity" represents the ratio of GHG emissions to economic output. On the other hand, the international community, and specifically the Kyoto Protocol, set GHG goals based on a country's "aggregate emissions"--literally the net tons of GHG it emits into the atmosphere.

By setting a goal that uses a different scale from Kyoto's aggregate-emissions benchmark, the administration is promoting what it views as a more equitable way to allocate the international burden. But critics of this approach argue that an 18 percent reduction in U.S. carbon intensity amounts to business as usual for the U.S. (the U.S. economy reduced carbon intensity by about 17 percent in the 1990s).

However, the Bush administration's measuring stick effectively shifts a greater share of the burden for cutting GHG emissions to industrializing countries--most notably China and India, which currently are not bound by Kyoto constraints, but whose carbon emissions are expected to grow much faster per capita (and presumably per-dollar of economic output) than America's.

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Editor-at-Large

Michael T. Burr

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