For many of those concerned about business’ role in fighting climate change, the Inflation Reduction Act (IRA), passed by Congress and signed by President Biden in August 2022, was a watershed moment. But while the IRA went far in incentivizing both industry and individuals to move beyond fossil fuels, it did little to regulate business where greenhouse gas (GHG) emissions are concerned.
Over the past 6 months, however, those regulatory gaps have begun to fill. This month, the SEC finalized its long-planned requirements for public companies to disclose a wide range of climate-related information. Under the new rule, each company will need to provide an accounting of its climate-related risks, the potential impacts of climate change on its business, disclosures about what the company is doing to address these risks, disclosures about board oversight of climate risks, and information about any of its climate-related targets or goals, including spending and financial impacts. Additionally, larger public companies will need to publicly report their Scope 1 and/or Scope 2 GHG emissions (which include emissions produced directly during operations, and emissions from purchased energy).
The SEC rule has its own gaps, however. Most notably, a draft proposal to mandate Scope 3 emissions disclosure for certain companies was dropped from the final version, under heavy opposition. As a result, no company will be required to report the emissions created by its suppliers, or by its customers when using its products. And as expected, the SEC rule was immediately challenged, including by a number of state attorneys-general. Nevertheless, the new regulation represents a fundamental shift in thinking about corporate responsibility for GHG emissions. Assuming it survives legal challenges, the rule should do much to bolster regulatory support for fighting climate change.
One candidate for filling gaps in the SEC rule could be California, where three climate disclosure bills were signed into law last October. These laws will require any company with more than $1 billion in yearly revenues to report Scope 1 and 2 GHG emissions annually beginning in 2026, and Scope 3 emissions in 2027. The rules also require climate-related risk reporting for companies with over $500 million in revenues, similar to the SEC. Just as critical as these requirements are their applicability: the state legislation covers any company “doing business in California,” a broad standard that will reportedly include more than 10,000 US companies, public and private.
Further afield, and just a week before the passage of the California laws, the European Union (EU) enacted the world’s first significant carbon border tax. The EU has, in fact, put a price on carbon for nearly 20 years, with fees that apply to local companies in carbon-intensive industries; its carbon prices are among the highest in the world. But without similar fees for companies in outside markets, EU companies that make carbon-intensive products like cement, fertilizer or steel can be undercut by other producers (from China, for instance, which doesn’t have a carbon tax on steel). The new EU rule, known as the Carbon Border Adjustment Mechanism (CBAM), aims to change that.
Over the next 10 years, the CBAM will gradually subject foreign companies to the same carbon pricing scheme as those in the EU, via GHG emissions-based import taxes. Economists expect the move to effectively regulate GHG emissions disclosure outside the EU’s borders, incentivizing high-emitting companies around the world to reduce their emissions in the process. And with a discount for foreign companies that already pay a carbon tax in their home markets, some expect more countries to institute carbon taxes as the law is rolled out, in order to keep their own companies competitive in the EU market.
For now, the SEC rule has been temporarily paused by an appeals court; much of the implementation of the California law is still to be determined; and the EU has at least one difficult choice to make about how its border tax on carbon will affect Ukraine. But financial markets and global businesses don’t have the luxury of waiting on appeal; even those who challenge new regulations must simultaneously plan how to abide by them. In the process, it is our hope that a more climate-friendly approach to doing business continues to become the norm in the United States and around the world.
