From the July-August 2010 issue of Treasury & Risk magazine

Getting a Handle on Greenhouse Gases

Although momentum on initiating a U.S. cap-and-trade system to reduce greenhouse gas emissions has slowed, the first step in the process--a mandate to report greenhouse gases--kicks in this year. Deloitte & Touche's Stephen Engler, who leads carbon management services in the firm's climate change practice, outlines some of the forces in play and what this means for companies.

As North American greenhouse gas (GHG) markets continue to develop, CFOs and senior finance executives will play a key role in managing and mitigating GHG risk and exposure. While much of this activity falls under the auspices of risk management, there are many business opportunities to be realized through strategic GHG management as the visibility and importance of non-financial reporting increases in the eyes of investors, consumers, employees and business partners.

The CFO can and should be a driver of many strategic decisions as reporting on sustainability performance, climate-change risk and greenhouse gases matures from a siloed perspective to an enterprise-wide approach. Organizations large and small will need to view non-financial reporting with the same rigor, controls and processes in place as financial reporting to ensure consistent, accurate and auditable reporting. The CFO and the finance function are well-positioned to shape and drive pending and current non-financial reporting requirements.

The first comprehensive national system for reporting emissions of carbon dioxide and other greenhouse gases produced by major sources in the United States went into effect on Dec. 29, 2009. The rule requires certain companies in the U.S. to begin collecting GHG emissions data on Jan. 1, 2010, with the first annual reports on GHGs emitted during 2010 due on March 31, 2011.

It's estimated that the new Environmental Protection Agency (EPA) GHG mandatory reporting rule covers about 85% of the nation's GHG emissions and roughly 10,000 facilities. Industries affected by the rule include stationary combustion sources, landfills, natural gas suppliers, electricity generation facilities, pulp and paper plants, petroleum product suppliers, GHG suppliers, petroleum refineries, iron and steel producers and others in the chemical, cement and glass industries.

Many companies are establishing the data collection, reporting tools, governance processes and controls capabilities they will need to submit the required emission reports. The use of manual processes and the development of spreadsheet and database tools for reporting are common. However, the complexity of the reporting requirements and the possibility of carbon regulations in North America that would rely on the emissions data are driving some companies to consider implementing more automated and enterprise-level reporting solutions.

In addition, companies subject to multi-jurisdictional mandatory GHG reporting requirements at the federal, regional, state and provincial levels in the U.S. and Canada must cope with added complexity as they manage a wide variety of impacts throughout their organizations.

The rule includes specific requirements for other industries. In March, the EPA expanded the reporting rule to cover petroleum and natural gas production and transmission, emitters of fluorinated GHGs and the injection of carbon dioxide into the ground for sequestration or enhanced oil and gas recovery, with data collection beginning in 2011.

More Schemes
In the absence of federal climate legislation, state and regional actors have taken the initiative, creating a patchwork of reporting requirements.

The Western Climate Initiative (WCI) is a proposed cap-and-trade program across four Canadian provinces and seven U.S. states that calls for mandatory GHG reporting and third-party verification beginning in 2011 for producers of metals, cement, paper and petroleum products, and other chemicals. Also affected are electricity generators and retailers, coal mines, large industrial processors and refiners.

The Regional Greenhouse Gas Initiative (RGGI) is an existing emissions trading program for utilities in the Northeast that aims to cap and then reduce GHG emissions.

California passed its own cap-and-trade law requiring the state Air Resources Board to issue a GHG reporting rule. It covers large-scale fossil fuel combustion, refineries, cement and electricity producers, and retailers. The first annual reports covering 2009 emissions were due on April 1, with third-party verification required by Oct. 1. Other states that have already implemented mandatory GHG reporting include New Mexico, Oregon, Washington, Maine, Massachusetts and West Virginia.

In February, the Securities and Exchange Commission issued interpretive guidance regarding disclosure rules for climate-change matters, such as the impact of new or existing legislation and litigation, the effect on the business as a result of international accords and treaties, actual and potential consequences as a result of climate-change legislation or business trends, and actual and potential effects of climate change on the business.

Cap-and-Trade Status
There remains significant uncertainty as to the scope, timing and specific mechanisms of a potential cap-and-trade scheme in the United States. The American Power Act, drafted by Sens. John Kerry (D-Mass.) and Joseph Lieberman (I-Conn.), was introduced in May, but prospects for its passage remain uncertain. As elections draw closer, many remain skeptical that a bill will pass in 2010. Further, a number of variations are being discussed, including limiting the scope of a cap-and-trade market to the electric power industry.

Regardless of the exact scope and the specific timing, however, it is likely a question of when rather than if there will be a price on carbon and other greenhouse gases. As such, it is critical that companies act now to establish a comprehensive and accurate emissions inventory. This inventory is the necessary first step for any market participant, as it establishes the company's "carbon position," around which it will manage risk exposure and capitalize on market opportunities. As such, it is critical that companies act now to establish a comprehensive and accurate emissions inventory. This inventory is the necessary first step for any market participant, as it establishes the company's "carbon position," around which it will manage risk exposure and capitalize on market opportunities.

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