U.S. Companies and Greenhouse Gas Regulations

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Introduction

President Bush’s Advanced Energy Initiative reflects growing concerns in the United States over dependence on oil from the Middle East and elsewhere, but its emphasis on cleaner alternatives to oil also hints at a shift in the debate over climate change. Once focused on whether the phenomenon really exists and if it is caused by humans, discussion in policy circles now increasingly centers on how to reduce so-called “greenhouse gas” emissions in an economically feasible way. Despite the administration’s decision not to sign the Kyoto Treaty in 2001, federal restrictions on greenhouse gases continue to be debated in Congress. Current energy policy provides for some increases in fuel efficiency standards, but the administration has favored a voluntary approach to emissions reductions up to this point, particularly where industry is concerned. Some U.S. companies now say this is not enough and are calling for more stringent federal regulation on carbon emissions.

What businesses are calling for federal regulations?

Electric power companies are among those leading discussions of the issue, though as the largest emitters of carbon dioxide in the United States, they might seem to have an interest in fighting mandatory restrictions. Industries that generate the largest carbon emissions have the most to lose, potentially, should regulations go into effect, but experts say this gives them a powerful incentive to participate in the policy development process. “A lot of the companies, especially electric companies, are getting nervous that the policy could go in the wrong direction and that the policies adopted will focus on the power industry and not on the rest of the economy,” says David G. Victor, CFR adjunct senior fellow for science and technology and director of the Program on Energy and Sustainable Development at Stanford University. Concerned about the negative effect carbon emissions limits will have on their industry, many electric companies are hoping to soften the blow by working to shape legislation they have come to see as inevitable. For example, representatives of Duke Energy were among those who testified in favor of regulations on greenhouse gases in a congressional hearing last spring. American Electric Power (AEP), the nation’s largest electricity generator and consumer of coal, testified against new regulations at the same hearing. But AEP has made a voluntary commitment to gradually reduce greenhouse gas emissions.

Industries with traditionally low emissions levels, such as nuclear energy, are also active in pushing for legislation. These companies see the potential to increase their market value when their competitors are hit with carbon restrictions. In addition, companies that have already begun to reduce carbon emissions on their own, such as Wal-Mart, want to make sure they are given credit for their early action. U.S. automakers, on the other hand, are silent on the issue, though transportation is the second largest source of carbon emissions in the United States, according to the Environmental Protection Agency. The auto industry is currently involved in a legal challenge to a California law mandating vehicle emission reductions of 30 percent by 2016.

What approach does the private sector favor most?

Many businesses favor a “cap-and-trade” strategy, already used by some companies required by federal mandate to limit emissions of sulfur dioxide, the main culprit in acid rain. At an April 2006 climate conference convened by the Senate’s Committee on Energy and Natural Resources, representatives from several leading U.S. companies and energy utilities overwhelmingly endorsed approaches that would include mandatory limits on carbon dioxide emissions for all sectors of the economy, some form of emissions allowances to be either sold or given away, and a “cap and trade” program through which companies buy and sell permits to emit greenhouse gases.

Such regulations would essentially create a commodity market for carbon, an approach that is currently in use in Europe and Canada, and exists on a limited, voluntary scale in the United States as well, at the Chicago Climate Exchange. Members of the Chicago Climate Exchange make a legally binding commitment to reduce their greenhouse gas emissions by 1 percent each year, then buy and sell permits or invest in offset programs such as methane destruction or renewable energy projects to meet their reduction targets. More than 200 corporations and municipalities currently trade on the exchange, but without legally mandated emissions reductions driving participation, the volume of trading and price of carbon remain much lower than in European markets. The European carbon exchange program has had mixed results. Trading is robust, but the price of carbon has fluctuated widely, and critics charge the allowances given to businesses were too generous to spur significant emissions reductions.

Why are businesses advocating mandatory carbon emission cuts?

U.S. media increasingly have featured cover stories about Americans’ interest in eco-friendly living, and successful national chains like Whole Foods base their marketing strategy around the “sustainable” lifestyle. This trend of growing public awareness and interest in global warming has played a part in influencing more U.S. companies to get behind “green” causes, experts say. Some observers also see this as a convenient tool for corporate image makeovers. Wal-Mart, for example, has recently received a spate of bad press over its treatment of workers, but it has earned accolades for an aggressive new program to increase energy efficiency and reduce carbon emissions. However, there are other reasons why some companies say federal regulations can be good for business. “One shouldn’t discount basic good corporate citizenship and a willingness to do the right thing,” says Truman Semans, who manages the Business Environmental Leadership Council at the Pew Center on Global Climate Change. The council includes forty-one major companies including Shell Oil, Toyota, IBM, and Pacific Gas & Electric.

Corporate interest in reducing greenhouse gas emissions may stem from a mixture of altruism and pragmatism. “If a company and the leadership of a company has analyzed the issue and finds that climate change is occurring, that it’s caused at least in part by human activity, and that it poses real risks to the company, then it makes sense to act,” says Semans. Many companies have simply concluded federal carbon emission regulations are in their future whether they like it or not and see this as an opportunity to have a hand in shaping those regulations early on. “Business is getting itself ready for regulation that is almost certain to come, and it’s trying to figure out what is the best strategy to prepare for regulations and to shape the regulations,” says CFR’s Victor.

Can regulations be good for business?

Experts note some companies face pressure from investors to disclose climate-related risks and opportunities. Such risks are difficult to analyze without knowing what kinds of emissions reductions will be required in the near future. As a briefing paper by the British policy institute Chatham House notes, “In the absence of such a [climate change policy] framework, companies face uncertainty regarding the extent, timing and cost of any controls on emissions of greenhouse gases. This, in turn, creates significant uncertainty about their optimum investment strategy” (PDF).

Uniformity is another advantage that would come with federal regulations. The United States decided not to sign the Kyoto Treaty for a variety of reasons, but this created a policy vacuum. “That vacuum could have been filled by federal policy,” says Victor, “except the process of developing a credible federal policy ran off the rails when September 11[, 2001] happened because the federal government moved on to other things and the public’s attention was elsewhere.” The result is a patchwork of regional, state, and local legislation imposing a variety of different restrictions in different places. This can be complicated and costly for businesses. Power grids, for example, often span several states. “It is critical that utilities and other regulated entities not be subject to duplicative and/or conflicting regulatory requirements of multiple governmental jurisdictions,” said Jeff Sterba, Chairman and CEO of PNM Resources, an energy company based in New Mexico, at the 2006 Senate Climate Conference. “A single national GHG [greenhouse gas] emissions regulatory program, with federal oversight, is the most effective approach to ensuring an administratively simple and economically efficient GHG emissions program.”

How does the lack of federal legislation affect U.S. businesses globally?

Some experts say U.S. companies’ ability to compete in a global market is hindered by the lack of mandatory federal regulation. A 2006 report released by Ceres, an environmentally conscious investment group, found that though they had improved since 2003, U.S. companies lag behind their overseas competitors (PDF), particularly where technology is concerned. “[F]or all of the positive momentum in elevating climate as a governance priority, most American companies lag behind their international peers—a trend that is already resulting in competitive advantages for overseas companies developing low-carbon technologies in the auto and power sectors,” writes Ceres President Mindy Lubber. As a result, U.S. companies are potentially missing business opportunities created by carbon restrictions in other parts of the world. “We may be essentially protecting our economy and our companies to death in a way that’s not unlike what’s happened in the auto industry,” says Semans.

Opponents of mandatory federal emissions standards say that compliance will be too costly, both for businesses and consumers, until better technology is developed. “It’s just not going to happen without the technology,” says Dan Riedinger, a spokesman for the Edison Electric Institute, an electric power industry organization. “We can make big reductions in the near term, but it would require shuttering a lot of carbon combustion plants and switching to natural gas, and that will be much more expensive.”

What are the prospects for federal regulations on greenhouse gas emissions?

A Pew Center report to be released in October 2006 surveyed thirty-one large companies and found about 85 percent thought some form of mandatory federal emissions regulations would be enacted by 2015. Most observers, however, do not expect federal “cap-and-trade” legislation to be passed by the Bush administration, though there are bills pending in both the House and Senate. “You’ll see a consensus-building effort but probably not much in the way of legislation,” says Victor. “Companies are involved and worried about this, but they are involved and worried about a lot of other things they actually spend more time on, like making sure the lights stay on.”