10.26.2020 Climate Initiatives Will Impact Industry By: John M. "Jay" Holloway, III

Current and future climate initiatives at the federal and state levels are having and will have very significant impacts on industry.  Most view climate initiatives as only a utility issue, but that is not the case. Across the country, industrial sources and the transportation sector emit 22% and 28%, respectively, of CO2 emissions versus 27% from utility sources. There is no question that carbon constraints are currently focused on limiting utility CO2 emissions and requiring the replacement of utility generation with renewable generation.  The costs of these effort are enormous.  Former Vice President Biden, for example, intends to commit two trillion dollars to these efforts if he is elected President.  State level climate programs, such as Clean Energy Virginia, will impose billions of dollars of requirements on utilities, the cost of which will be paid by ratepayers.  In Virginia, residential customers pay fifty percent of the cost of electricity on a kilowatt per hour basis.  The other half is paid by the commercial and manufacturing sectors.

While manufacturing and other industry sources are typically exempt from CO2 reduction efforts, they are not exempt from paying the lion’s share of the cost.  For example, Dominion Energy is seeking between 60 and 80 billion dollars from ratepayers to fund Clean Energy Virginia compliance efforts, some 50% of which is to be paid by Virginia industry.  Industry will either pass these costs to customers in the form of price increases or absorb them, leading to lower earnings.  These costs will increase as future federal and state climate-based laws and regulations become more stringent. 

Soon, we will likely see the current exemptions for manufacturers from existing CO2 laws and regulations go away, subjecting industry to direct CO2 laws and regulations.  Again, these costs cannot be passed onto industrial customers without price increases on goods and services.  Industry must actively engage in federal and state regulatory efforts to ensure continuing operations in the U.S.  For example, to offset rising compliance costs, manufacturers need the opportunity to participate in open electricity and energy markets, generate renewable energy credits from energy efficiency efforts, and actively participate in distributive energy programs and renewable projects. 

The real challenge to manufacturers from climate initiatives will be ensuring that natural gas remains inexpensive and readily available.  The question of whether to shut down fracking is an issue that is being seriously debated.  Fracked natural gas is a large part of the current robust natural gas supply driving low prices.  Ending fracking will immediately shorten supply, raise prices and challenge supply going forward.

Renewables now compete with natural gas, oil, coal and nuclear.  As the country moves to 2050, renewables and natural gas will compete on an almost 50/50 basis.  Both sources of energy are required for the U.S. to limit CO2 and grow our economy.  If climate initiatives upset this balance by raising natural gas prices and/or limiting supply, manufacturers will bear the brunt of the risks and costs.

Going forward, the supply of natural gas also will be impacted by the regulation of methane emissions.  Methane has approximately eight times the global warming potential of CO2.  The immediate effort to regulate methane emissions focuses on emissions from natural gas production and distribution.  The Natural Resources Defense Counsel and other environmental groups are focused on forcing controls on methane emissions from all stages in the production, transport, delivery and combustion of natural gas. 

EPA’s New Source Performance Standard (NSPS) for the Oil and Gas Industry takes aim at all methane emissions from production and pipelines.  These regulatory requirements will force upgrades of production and transportation of natural gas, including pipelines, thereby increasing costs and creating new regulatory and permitting issues.  This focus on methane is driving the development of technologies that reduce methane emissions from the combustion of natural gas.  These technologies include carbon capture and sequestration.  The development of alternative fuels, such as hydrogen fuel, ethanol and syngas, is also gaining traction.  

Even given these many challenges, climate programs provide significant opportunities for industry.  For example, the dramatic increase in renewable generation, including solar, onshore and offshore wind, will require billions of dollars for the manufacture of parts and the provision of construction and maintenance.  In addition to direct supplier opportunities, industry can participate in renewable generation projects to offset energy cost increases.  Removing legal and policy prohibitions on industry selling and buying energy in the open market is key to successful industry climate strategies. 

Finally, CO2 disclosure and sustainability programs are integrated into almost all company cultures.  These programs require the public disclosure of CO2 and other greenhouse gas (GHG) emissions.  Companies also require vendors to disclose, develop and report progress on sustainability efforts.  The goal of these sustainability programs is achieving a net-zero carbon impact for both the company and its vendors.  Here is an update of some CO2 disclosure efforts.     

  • Walmart, CVS, Target, Bank of America, Dell, Imperial Brands, Jupiter Networks, Microsoft, LEGO, L'Oréal, Novartis, NRG Energy, Phillips Lighting, Philip Morris International, Royal Phillips, US GSA, Tesco, and Virginia Money Holdings, among others, are disclosing GHGs and other emissions.
  • A total of 115 companies and organizations, representing $3.3 trillion in value, are now disclosing GHG emissions.
  • Corporations are requesting climate data from 11,500 suppliers, a five percent increase from last year.

If your company does not currently disclose CO2 and other GHG emissions, it almost certainly will in the future.  An assessment of your complete carbon footprint, how you will disclose, and whether you should have an associated sustainability plan should be on your radar.

Annual Energy Outlook 2020, U.S. Energy Information Agency (Jan. 29, 2020); New Source Performance Standard for Oil and Gas industry, 40 CFR Part 60, Subpart OOOOa.