Unburnable Carbon, Stranded Assets and the Carbon Bubble: Coming to an Energy Company Near You?

Posted on January 15, 2014 by Christopher Davis

Some regulatory and economic forces are calling into question the business models of some of the world’s largest oil and gas, coal and electric power companies, and posing a new kind of risk to the investors who own them. Variously described as “unburnable carbon,” “carbon asset risk,” “stranded assets,” “peak carbon,” or the “carbon bubble,” this issue has recently become a hot topic among institutional investors, energy analysts, the International Energy Agency (IEA) and a handful of NGOs—and as a result, some of the world’s largest energy companies.

According to the International Energy Agency and UK NGO Carbon Tracker Initiative (CTI), 2/3 of the current proven carbon reserves of the world’s publicly listed fossil energy companies need to be left in the ground to avoid warming exceeding 2 degrees. Yet according to CTI, these oil, gas and coal companies spent over $650 billion in 2012 to explore and develop new reserves.  If these reserves are substantially unusable, or if their use causes catastrophic change, this business model and strategy are unsustainable.

The “unburnable carbon” thesis is based in part on the premise that governments will take action to restrict GHG emissions to avoid catastrophic climate change.  Alternatively, global demand for fossil fuels may peak and decline due to a combination of advances in energy efficiency, switching to renewables and cleaner fuels (e.g., from coal to gas), and environmental regulation generally.

These regulatory and market forces, in combination with energy companies’ varying production costs for conventional and unconventional (e.g., tar sands, hydraulic fracturing, deepwater drilling) resources, are predicted to cause high cost producers’ reserves to become “stranded assets.” Indeed, we are already seeing some stranded assets in the U.S. coal industry, where demand— and share prices —have fallen significantly.  Proven, producible reserves are a key determinant of the market valuation of fossil energy companies.  If the “unburnable carbon” theory is even partially valid, some of these companies’ valuations are at risk.

Based on concerns about “Carbon Asset Risk,” in September 2013, 70 institutional investors, who collectively manage assets of nearly $3 trillion and own substantial shares of major energy companies’ stock, sent letters to 45 of the world’s largest oil & gas, coal and electric power companies inquiring about their exposure to this issue.  The letters asked the companies to do scenario analyses on the impact on their business of regulations that would limit global warming to 2 or 4 degrees Celsius, to assess their capital expenditure plans for reserve development under differing demand scenarios, and also to assess the impact of unmitigated climate change on their operations, and to share the results of these analyses with their investors.  

More than 30 of the recipient companies have made initial responses, ranging from agreeing to do the requested analyses, to requesting  clarification on what the investors are seeking. Others claim they have fully assessed these risks, or dismissed the requests and underlying concerns as totally unfounded. The participating investors intend to engage in dialogues with those companies that respond constructively, and initial meetings have occurred with several major oil companies. 

It is anticipated that investors will file shareholder proposals seeking the same assessments and disclosures from U.S. listed companies that are unresponsive or decline to cooperate, and nine such proposals have been filed to date. Some of these resolutions will likely be voted on at corporate annual meetings during the 2013-14 proxy season.  

It is unlikely that the institutional investors’ Carbon Asset Risk initiative will convince Exxon Mobil or Peabody Energy that they are in the wrong business or to abandon production of oil, gas and coal.  But the unburnable carbon thesis and the risk of stranded assets do raise serious questions about the viability of the long-term business strategies of many fossil energy companies. They are effectively betting that governments will not take meaningful action to curb climate change anytime soon, that climate change won’t have serious physical and economic impacts on their businesses, and that demand for their products will continue to increase for the foreseeable future.  

As an investor, I would not bet my money that they are right.  And as a lawyer I’d ask if there are material SEC disclosure issues about these risks, the value of their reserves and potential liabilities to shareholders should these assets become stranded.

Investors Filing More Shareholder Proposals on Environmental Issues, and More Companies are Listening

Posted on March 20, 2013 by Christopher Davis

Investors, including public, labor and religious pension funds and socially responsible investment (SRI) funds, are filing increasing numbers of shareholder resolutions on environmental, social and governance (ESG) issues.  Each spring, investors vote their proxies on these shareholder proposals, including many focused on environmental matters.  The average number of votes on environmental proposals are increasing as well.  In addition, a growing number of such resolutions are “withdrawn”, based on an agreement that the company will take specified actions consistent with the proposal.  Ceres tracks ESG resolutions filed by members of its investor network, and nearly 40% have been withdrawn by agreement in recent years.

ESG proposals generally call for reports, policy changes or actions by companies to address ESG-related business risks and opportunities, such as filing a sustainability report, setting a greenhouse gas emission reduction target, improving energy efficiency or linking executive compensation to ESG metrics.  As outlined in a recent Bloomberg BNA article, emerging topics featured in 2013 resolutions include physical risks from climate change, risks from hydraulic fracturing including methane emissions, “stranded asset” risks associated with energy companies’ fossil fuel reserves and sourcing sustainable palm oil to reduce deforestation. According to a recent analysis, investors now file about 50% more shareholder proposals on environmental and social issues than they did a decade ago, with nearly 400 filed each year.

But there has not been as dramatic an increase in the number of proposals voted on because proponents have withdrawn an increasing number of their proposals, generally after reaching agreements with the company.  Such negotiated “withdrawals” are a sign that corporate America is increasingly willing to adopt new practices to address social and environmental concerns.  Although votes on shareholder proposals are legally nonbinding, companies now appear to pay more attention to them.

One likely reason for greater corporate responsiveness is that the shareholder resolutions are garnering higher votes – the average vote on such proposals has grown from 11.9% in 2003 to 18.5% in 2012, according to As You Sow.  In addition,  according to a recent study by the IRRC Institute entitled “Growing Traction for Environmental and Social Proposals at U.S. Companies”, the number E&S resolutions grew by one-third between 2005 and 2011 to about 40 percent of all shareholder proposals going to a vote, and the number of votes above 30% on such proposals grew from 3% in 2005 to 31% in 2011.

Investors who have filed the most ESG resolutions during the 2013 proxy season to date are:  socially responsible investment firms (29%), pension funds (26%), and faith-based institutional investors (18%).  Surprisingly, philanthropic foundations have filed only 7%, while unions have filed 8%, and individual investors 6%.  Special interest groups such as animal rights organizations accounted for the remaining 6%. 

The fastest growing type of resolution filed over the last several years has related to political spending disclosure, representing 33% of 2013 resolutions so far, with ‘sustainable governance’ resolutions representing another 14% of this year’s resolutions.  Sustainable governance resolutions include those asking for annual sustainability reports, as well as requests linking executive compensation to ESG metrics, such as reduced pollution or improved worker safety.  Climate change and other environmental issues are the focus of 26% of the 2013 resolutions. 

As ESG filings and average votes continue to grow, companies are increasingly faced with the question of how best to respond to a shareholder resolution.  Corporate managers nearly always oppose these resolutions, and frequently ask for the SEC’s approval to exclude them from their proxy statement, although the resolutions often serve as early warnings for emerging financial risks such as climate change.  The Society of Corporate Secretaries of Governance Professionals recommends that companies:  1) meet with the filer to discuss the request; and 2) consider whether and to what extent the company can implement the proposal or take other actions that will satisfy the filer.

Companies receiving resolutions should keep in the mind that the shareholder filer’s ultimate goal is not to get a high vote, but rather for the company to address the issue raised in the resolution, which the shareholder believes presents an important risk or otherwise affects the value of their investment.  And filers are generally willing to negotiate in good faith and build a productive working relationship with the company.  Some banks that received resolutions about predatory lending practices prior to the financial crisis probably wish they had paid more attention to the risks raised in the resolutions.  Nearly all companies and investors would have been better off if they had done so, and the same lesson may very well apply to resolutions on environmental issues.

Corporate Disclosure of Climate Change Risks Since the SEC Interpretive Guidance

Posted on August 3, 2012 by Christopher Davis

In February 2010, the U.S. Securities and Exchange Commission (“SEC”) issued interpretive guidance that clarified corporate disclosure obligations regarding climate change-related risks and opportunities. While the guidance didn’t create any new legal requirements, it indicated that climate-related issues can have a material impact on companies that requires appropriate disclosure. It also offered examples of the ways in which companies may be impacted, including from regulations, international accords, litigation, and physical impacts from water quality and quantity issues. 

A recent Ceres report, “Physical Risks from Climate Change: A Guide for Companies and Investors in Disclosure and Management of Climate Impacts,” released in May 2012, highlights the economic impacts of extreme weather events on companies and their supply chains in seven key sectors.

More than two years after the release of this guidance, what is the state of corporate disclosure on climate change issues? Two recent reports by Ceres examined climate-related disclosure in multiple sectors.

Clearing the Waters: A Review of Corporate Water Risk Disclosure in SEC Filings,” released June 18, 2012, examined corporate disclosure on a key climate-related issue—water risks—to see what impact the interpretive guidance had on disclosure practices. The report analyzes changes in water risk disclosure by more than 80 companies in eight water-intensive sectors: beverages, chemicals, electric power, food, homebuilding, mining, oil and gas, and semiconductors. It found that significantly more companies are disclosing exposure to water risk in 2011 compared to 2009, with a focus on physical risk. For example, 87 percent of companies surveyed now report physical risk exposure versus 76 percent in 2009, with the biggest increases coming from the oil and gas sector. There was also a meaningful increase in the number of companies connecting water issues to climate change as part of a long-term trend.

The report recommends, however, that companies make further efforts to include quantitative data and performance targets in financial filings to clarify how they are actually responding to these water-related risks. Without this level of specificity, as well as more information on water management systems, it remains difficult for investors to incorporate these factors into their decision-making. 

Another new Ceres report, “Sustainable Extraction? An Analysis of SEC Disclosure by Major Oil & Gas Companies on Climate Risk and Deepwater Drilling Risk,” released August 2, 2012, examines climate change disclosure in one carbon-intensive industry: oil and gas. The report examined the financial filings that ten of the world’s largest oil and gas companies filed in 2011, a year after the interpretive guidance was issued. While six of the ten companies provided fair disclosure on efforts to manage their own greenhouse gas emissions, the disclosures reviewed in the report were generally disappointing. Particularly on regulatory risks—both direct and indirect—the level of specificity, comprehensiveness, and quality of analysis varied widely across the ten companies’ filings, showing a clear need for further attention and due diligence on material climate risks.

Climate change is a complicated issue for companies to address in their financial filings, particularly with emerging and shifting regulatory regimes and the complexity of modeling the physical impacts of a changing climate. Good climate disclosure that meets the requirements of the SEC guidance and is useful to investors requires the collaboration of a company’s senior legal, environmental, financial and operational managers and advisors. The above-referenced Ceres reports provide a window into the current state of climate-related disclosure and offer recommendations for companies to improve how they address their climate-related risks.

Earth Day 2012 Ten Things You Can Do to Help Save the Planet

Posted on April 26, 2012 by Christopher Davis

April 22, 2012 was the 42nd Earth Day, an event that passed with limited notice by most Americans and the news media. For all but a few of us who work in the field, the environment is no longer a “top 10” issue. Yet objectively, the planet is in materially worse shape than it was on the first Earth Day in 1970. As a species, we are collectively destroying the earth’s natural systems, plundering its resources and squandering its natural capital at an accelerating and unsustainable rate. The “Tragedy of the Commons” that Garrett Hardin wrote so eloquently about in advance of the first Earth Day is rapidly unfolding just as he predicted.  

On a global scale, the earth’s ecosystems are under siege.  With a human population of 7 billion, and headed for at least 10 billion fairly soon, growing greenhouse gas emissions and resultant climate change, increasing regional water scarcity, and growing global competition for dwindling resources, the trends are to put it mildly, not looking good.  It has been estimated that we are now consuming the planet’s resources, emitting pollutants and generating waste at about 1.5 times the earth’s carrying capacity. The “externalities” of our ever growing global economy are overwhelming the earth’s ability to assimilate them.
[For a fairly comprehensive and sobering account of the causes, effects and trends of global environmental degradation, I recommend Paul Gilding’s recent book, The Great Disruption.]

If we continue on our present course, our environmental, social and economic systems appear to be headed for collapse, or at least some very rough sledding with unacceptably high (and of course, inequitably distributed) human and ecological casualties.  Catastrophic and irreversible climate change is a growing possibility, if not a probability, without fundamental changes in how we use energy.  After more than 40 years of effort, and a proliferation of “green” policies and initiatives, we are clearly losing the war of environmental protection and conservation.  This is particularly disquieting for those of us who work in the environmental profession, supposedly understand these issues, and presumably care about the real world outcomes.

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WHY INSTITUTIONAL INVESTORS CARE ABOUT CORPORATE SUSTAINABILTY

Posted on July 13, 2011 by Christopher Davis

Institutional investors, including pension funds, insurance companies, foundations and university endowments, own about 70 percent of the stock of the world’s largest companies. As part of their fiduciary duty to maximize the long-term, risk-adjusted value of their investments, more institutional investors are becoming “active shareowners,” pressing companies whose shares they own to adopt sustainable business practices on a variety of environmental, social and governance (ESG) issues. This trend has important implications for corporate management and their advisors.

 

Recent events including the BP Deepwater Horizon oil spill, the Massey Big Branch mine explosion and the TEPCO Fukushima Daiichi nuclear power plant meltdown highlight the potential for poorly managed environmental and safety risks to result in destruction of shareholder value. By contrast, there is evidence from Sustainable Asset Management, and from investment consultant Mercer, that companies with superior ESG performance also have superior financial performance. Thus, how companies address these so-called “nonfinancial” business risks and opportunities is of increasing interest to investors.

 

Indications that institutional investors are paying greater attention to ESG factors include:

In recent years there has been a proliferation of research, data and ratings of companies’ ESG performance. One example is the scores that the Carbon Disclosure Project gives to companies based on their reporting and management of greenhouse gas (GHG) emissions. Financial data provider Bloomberg now offers ESG data on a wide range of companies on its terminals. Analysts at both socially responsible investment (SRI) funds and increasingly at mainstream investment firms analyze and report on companies’ ESG performance, and companies are ranked and selected for their ESG performance for indexes such as the Dow Jones Sustainability Index. The net result is that ESG factors are starting to be incorporated in corporate valuations, and this trend is likely to accelerate.

 

Given increasing investor interest in these factors, it behooves corporate management and boards to focus on, improve and report their ESG performance.

 

A company should communicate the “business case” for its sustainability strategy to shareholders, customers and other stakeholders with whom the company engages, as a key driver of the company’s competitive positioning, risk management, reputation and brand. Managing ESG risks and opportunities, on issues ranging from climate change to workforce diversity, should be integrated into companies’ business strategy, and not merely assigned to the environmental, human resources or corporate social responsibility (CSR) departments.

Institutional investors’ attention to these issues is likely to increase, as “sustainable” or “responsible” investment becomes more widely accepted as fundamental to the fiduciary duty of asset owners and investment managers. Counsel can add value by helping their corporate clients recognize this trend, better assess and manage their ESG risks and opportunities, and review and revisit their mandatory and voluntary disclosures of these issues.

A Year After SEC Guidance, Investors Expect Better Climate-related Disclosure

Posted on March 14, 2011 by Christopher Davis

Last year, the U.S. Securities and Exchange Commission (“SEC”) issued interpretive guidance on climate change-related disclosure, a significant step towards focusing companies on addressing this important issue and improving the quality of the information available to investors on this subject. While this guidance caused some companies to reevaluate and improve their disclosure practices, overall disclosure of the risks and opportunities presented to companies by climate change remains inadequate.

 

That is the finding of Disclosing Climate Risks & Opportunities in SEC Filings: A Guide for Corporate Executives, Attorneys & Directors, a new Ceres report intended as a practical guide for companies and their advisors on how they should respond to the SEC disclosure regulations and the interpretive guidance, so that they can ensure they are disclosing all material climate-related information.

 

Developed with input from members of the Ceres Investor Network on Climate Risk (INCR), which includes 95 investors managing over $9 trillion in assets, the report offers the investor perspective on climate-related disclosure. It closely examines the disclosure practices of over a dozen companies across multiple sectors, highlighting some industry leaders—like electric power company AES Corp. and technology company Seimens—for disclosure that quantifies material climate issues and provides additional important details.

 

However, in the case of every company examined, there was room for improvement. And the report found that for many companies, disclosure was non-existent or unhelpful boilerplate. The main takeaways from the report are that companies should be doing more comprehensive analysis of climate risks and opportunities applicable to their business, compiling more consistent and quantified information, and that they should be disclosing it where investors look to find it, both in their voluntary reporting and, where material, in their annual mandatory filings.

 

ACOEL piece on SEC guidance available here.

 

Disclosure report is available here.

The Challenges and Rewards of Environmental Pro Bono Work

Posted on December 10, 2009 by Christopher Davis

I suspect most of us did not go into environmental law to see how much money we could make as lawyers, but because we care about preserving and protecting the planet. While many of us, particularly in the private sector, have made a good living practicing environmental law, I believe it is our interest in and dedication to the subject matter and the outcomes that have attracted and kept most of us in this field. Most of us are “green” at heart and want to do well while doing good for the environment. Environmental pro bono work provides an opportunity to “give back” to the planet in ways private practice may not.

While we can do much good in private practice, the economic realities of private environmental practice impose some significant limitations on what we work on – generally solving the problems that our clients are willing to pay us to address that serve their business interests. To some extent, most of us are constrained to work on yesterday’s environmental problems – those which are regulated and for which clients will pay us to solve. Relatively few of us get a chance to work for paying clients on the great environmental issues of our time that will determine the future of life on earth: climate change, sustainable development and business practices, tropical forest preservation and species conservation, the impact of environmental degradation on the poor.

One way for those of us in private practice who are environmentalists at heart to more affirmatively work on the side of the environment and thereby increase our professional satisfaction and impact is to do environmental pro bono work. Pro bono work is generally defined by ABA Model Rule 6.1 and the Pro Bono Institute as performing legal work outside the ordinary course of commercial practice and without expectation of a fee, for persons of limited means or charitable, religious, civic, community, governmental or educational organizations, where such services are focused primarily to address the needs of persons of limited means, or to secure or protect civil rights, civil liberties or public rights. An additional category of pro bono work involves providing legal services to charitable, religious, civic, community, governmental or educational organizations in matters that further their organizational purposes. Environmental pro bono work typically involves the protection of public rights and the representation of nonprofit organizations in furtherance of their environmental missions. Many law firms have committed to the Pro Bono Institute’s Pro Bono Challenge, committing to dedicate at least 3% of the firm’s billable hours to pro bono work. 

 

Environmental pro bono work is a way for environmental lawyers to use their skills and experience to promote the environmental values that inspired us to practice environmental law. Environmental pro bono practice can include a variety of litigation and transactional work and related legal advice designed to conserve or protect resources, lay the groundwork for new laws or regulations, enforce existing environmental laws, and prevent or mitigate adverse environmental impacts to various environmental resources or disadvantaged communities. The latter, focusing on preventing adverse environmental impacts on low income, minority or other disadvantaged communities is typically described as “environmental justice” work. In Massachusetts, a referral clearinghouse called the Massachusetts Environmental Justice Assistance Network (MEJAN) has been set up by a non-profit organization and the Environmental Law Section of the Boston Bar Association to link environmental lawyers and consultants with community groups seeking legal assistance. 

 

Environmental pro bono work is often harder to come by than traditional pro bono work. One problem, particularly in a large law firm, is conflicts. In addition to the obvious ethical prohibition on handling matters directly adverse to a firm’s clients, proposed environmental pro bono work often raises “issue conflicts” where the proposed representation would involve representing an organization or position that might be considered generally adverse to the interests of the firm’s current or prospective clients (e.g., real estate developers, power companies or manufacturers), have the potential to create an adverse precedent for an important industry, or involve representation of interests and positions that some clients (or partners) do not like. In theory, pro bono clients and representations should be subject to the same ethical and conflicts standards as work for paying clients, but in practice this can be difficult to achieve given the politics and economics involved.

 

Regarding potential issue conflicts, there is a respectable argument that may be persuasive at least to enlightened clients (and partners) that it is helpful to be represented by lawyers who have worked on the other side of an issue, represented or have good relationships with adversaries and have a deeper understanding of the relevant environmental issues and perspectives. A lawyer who has worked on both the “environmental” and “regulated community” sides of an issue should be able to provide better advice and may have more credibility with regulators and citizen group adversaries that will be useful in negotiating a solution. Also, in our work for paying clients, it is not uncommon to take inconsistent positions for different clients in different matters, and to represent both plaintiffs and defendants or buyers and sellers.

 

Some types of environmental pro bono work may be less problematic in terms of client or issue conflicts. These may include conservation work for non-profits like The Nature Conservancy, the Trust for Public Land or local land trusts; matters seeking to enforce environmental laws against those government agencies and their operations, activities and projects, opposing particular development projects that threaten public resources, and certain environmental justice cases. Of course, each case is fact and situation specific and may raise conflicts or concerns.

We are fortunate to have the privilege to practice environmental law. Our work is generally interesting and significant – combining law, policy, science, economics and politics in solving complex and important environmental problems. Moreover, environmental lawyers are generally nice, thoughtful and decent people, and the environmental bar is still relatively small, collegial and public spirited. Each of us has the opportunity to do more good for the planet and achieve greater personal satisfaction than our paying practice allows through environmental pro bono work. Finding viable opportunities to do environmental pro bono work can be challenging, but is worth the effort.

BIOFUELS AND CLIMATE CHANGE

Posted on June 23, 2009 by Christopher Davis

Biofuels are the subject of much recent interest and investment, as indicated by a recent Wall Street Journal article on biomass fueled power plants. Given the increasing scrutiny that is being given to “green” marketing claims by the Federal Trade Commission and various citizen groups (and the potential for SEC scrutiny of similar claims in public offering prospectuses), care should be taken to analyze and document the basis for any claims of carbon neutrality or other environmental benefits associated with particular biofuels.  

 Advantages cited by biofuel proponents include reduction of greenhouse gas (GHG) emissions as compared to fossil fuels, energy security, benefits from domestic production and green job creation. Downsides of biofuels production can include displacement of food crops and increased food prices, deforestation and conversion of grasslands to crop lands, GHG emissions associated with growing and converting biofuels, and other environmental impacts such as nutrient runoff and water consumption.
 

 

While all biofuels are renewable energy sources, this category includes a variety of liquid and solid fuels with a variety of sources and uses. For example, power plants can utilize biomass, generally in the form of wood or municipal solid waste. In the transportation arena, fuel can be made from corn and cellulose-based ethanol, or oils from soybeans, palm oil or animal wastes that can be used directly or chemically processed into biodiesel. Additional types of biofuels include syngas and algae-derived fuels. 

Numerous “clean tech” companies as well as established energy multinationals have invested in biofuels production. Examples include Mascoma Corporation and Verenium Corporation (cellulosic ethanol), Changing World Technologies (biodiesel from animal waste), GreenFuel Technologies (algae-based fuel) and Biogas Energy and Harvest Power (methane from agricultural wastes). Large energy and waste management companies are also investing heavily in biofuels, including Covanta (biomass-fired power plants), BP, Chevron, and Shell Oil (bio-ethanol and biodiesel), and Waste Management (landfill gas). The market for biofuels is sensitive to oil prices and demand for transportation fuels, as evidenced by recent bankruptcies and economic distress in the corn-based ethanol industry.

Biofuels are supported by a variety of federal and state mandates, subsidies and tax credits. For example, the Energy Policy Act of 2005 established a renewable fuel standard, and this standard was increased by the Energy Independence and Security Act of 2007. Further, the Food, Conservation, and Energy Act of 2008 provides financial assistance to biorefineries, funding for advanced biofuels and biomass research, biomass crop assistance, and tax credits for cellulosic ethanol production, among other measures. In addition, the American Recovery and Reinvestment Act of 2009 provides for loan guarantees, tax credits, and Department of Energy research related to biofuels and biomass energy.   Ethanol proponents are pressing Congress to further increase the mandate for ethanol use in transportation fuels, but many groups are simultaneously opposing such an increase.

Biofuels are often claimed to be “carbon neutral” (i.e., producing no net GHG emissions), because the plants from which they are derived only emit the same amount of carbon they would have released if they naturally died and decomposed, as compared to fossil fuels that release carbon stored in the earth’s crust that would not have been emitted. But not all biofuels are equal and generic claims of carbon neutrality need further scrutiny. 

Recently, a number of studies have attempted to assess the lifecycle GHG emissions of various biofuels. For example, several studies, including a leading study by the University of Minnesota and a California study performed in association with its low-carbon fuel standard, have concluded that corn-based ethanol may result in minimal net GHG emission reductions or even net GHG increases. This conclusion has been supported by scientists from The Nature Conservancy in a study published in Science that examines the GHG emissions and other environmental impacts of land use changes involved in the production of various biofuels. They conclude that there are significant differences in the “carbon footprint” of different biofuels based on how and where the underlying crops are grown.    In its recent proposed regulations for the National Renewable Fuel Standard, EPA has proposed to require evaluation of GHG emissions over the full lifecycle of various biofuels and to establish life cycle GHG emission reduction thresholds as compared to a lifecycle emissions analysis of baseline petroleum fuels – a requirement that is opposed by corn-based ethanol proponents.

It is clear that advanced biofuels, such as cellulosic ethanol and some types of biodiesel, hold great promise to reduce GHG emissions from transportation and other fuel uses. Such biofuels are clearly part of the solution in mitigating climate change and developing a sustainable energy economy, but careful scrutiny is needed to ensure that the full life cycle GHG emissions and other environmental impacts of biofuels are considered by policymakers and investors.

Posted by Christopher P. Davis, Goodwin Procter LLP

BIOFUELS AND CLIMATE CHANGE

Posted on June 23, 2009 by Christopher Davis

Biofuels are the subject of much recent interest and investment, as indicated by a recent Wall Street Journal article on biomass fueled power plants. Given the increasing scrutiny that is being given to “green” marketing claims by the Federal Trade Commission and various citizen groups (and the potential for SEC scrutiny of similar claims in public offering prospectuses), care should be taken to analyze and document the basis for any claims of carbon neutrality or other environmental benefits associated with particular biofuels.  

 Advantages cited by biofuel proponents include reduction of greenhouse gas (GHG) emissions as compared to fossil fuels, energy security, benefits from domestic production and green job creation. Downsides of biofuels production can include displacement of food crops and increased food prices, deforestation and conversion of grasslands to crop lands, GHG emissions associated with growing and converting biofuels, and other environmental impacts such as nutrient runoff and water consumption.
 

 

While all biofuels are renewable energy sources, this category includes a variety of liquid and solid fuels with a variety of sources and uses. For example, power plants can utilize biomass, generally in the form of wood or municipal solid waste. In the transportation arena, fuel can be made from corn and cellulose-based ethanol, or oils from soybeans, palm oil or animal wastes that can be used directly or chemically processed into biodiesel. Additional types of biofuels include syngas and algae-derived fuels. 

Numerous “clean tech” companies as well as established energy multinationals have invested in biofuels production. Examples include Mascoma Corporation and Verenium Corporation (cellulosic ethanol), Changing World Technologies (biodiesel from animal waste), GreenFuel Technologies (algae-based fuel) and Biogas Energy and Harvest Power (methane from agricultural wastes). Large energy and waste management companies are also investing heavily in biofuels, including Covanta (biomass-fired power plants), BP, Chevron, and Shell Oil (bio-ethanol and biodiesel), and Waste Management (landfill gas). The market for biofuels is sensitive to oil prices and demand for transportation fuels, as evidenced by recent bankruptcies and economic distress in the corn-based ethanol industry.

Biofuels are supported by a variety of federal and state mandates, subsidies and tax credits. For example, the Energy Policy Act of 2005 established a renewable fuel standard, and this standard was increased by the Energy Independence and Security Act of 2007. Further, the Food, Conservation, and Energy Act of 2008 provides financial assistance to biorefineries, funding for advanced biofuels and biomass research, biomass crop assistance, and tax credits for cellulosic ethanol production, among other measures. In addition, the American Recovery and Reinvestment Act of 2009 provides for loan guarantees, tax credits, and Department of Energy research related to biofuels and biomass energy.   Ethanol proponents are pressing Congress to further increase the mandate for ethanol use in transportation fuels, but many groups are simultaneously opposing such an increase.

Biofuels are often claimed to be “carbon neutral” (i.e., producing no net GHG emissions), because the plants from which they are derived only emit the same amount of carbon they would have released if they naturally died and decomposed, as compared to fossil fuels that release carbon stored in the earth’s crust that would not have been emitted. But not all biofuels are equal and generic claims of carbon neutrality need further scrutiny. 

Recently, a number of studies have attempted to assess the lifecycle GHG emissions of various biofuels. For example, several studies, including a leading study by the University of Minnesota and a California study performed in association with its low-carbon fuel standard, have concluded that corn-based ethanol may result in minimal net GHG emission reductions or even net GHG increases. This conclusion has been supported by scientists from The Nature Conservancy in a study published in Science that examines the GHG emissions and other environmental impacts of land use changes involved in the production of various biofuels. They conclude that there are significant differences in the “carbon footprint” of different biofuels based on how and where the underlying crops are grown.    In its recent proposed regulations for the National Renewable Fuel Standard, EPA has proposed to require evaluation of GHG emissions over the full lifecycle of various biofuels and to establish life cycle GHG emission reduction thresholds as compared to a lifecycle emissions analysis of baseline petroleum fuels – a requirement that is opposed by corn-based ethanol proponents.

It is clear that advanced biofuels, such as cellulosic ethanol and some types of biodiesel, hold great promise to reduce GHG emissions from transportation and other fuel uses. Such biofuels are clearly part of the solution in mitigating climate change and developing a sustainable energy economy, but careful scrutiny is needed to ensure that the full life cycle GHG emissions and other environmental impacts of biofuels are considered by policymakers and investors.

Posted by Christopher P. Davis, Goodwin Procter LLP

Can Clean Energy Save America?

Posted on December 29, 2008 by Christopher Davis

America, and our new President, face a daunting array of challenges as we close out 2008 and enter the New Year. These include a general economic meltdown, widespread job losses, a collapsing auto industry, unsustainable dependence on foreign oil, climate change and a protracted war in Iraq, among others. Many of these problems relate directly or indirectly to our production and consumption of energy.

The initial focus of the incoming Obama administration is rapid deployment of a massive economic recovery package. Early indications, including the President-elect’s post-election statements and his cabinet-level appointments, suggest that “green jobs” and “green infrastructure” are likely to play a prominent role in Mr. Obama’s efforts to restart the U.S. economy, as reflected in the Presidential transition website.  A number of commentators have talked of a “Green New Deal” as the key to revitalizing our economy. They may just be right.

 

From 2003 through the third quarter of 2008, private U.S. investment in “clean technologies” (mostly alternative energy-related) surged, totaling about $2.5 billion in 2007 and at least $3 billion in the first three quarters of 2008. However, due primarily to the credit crunch and unavailability of project financing for capital-intensive renewables projects such as wind farms, such investment sagged substantially in the fourth quarter. Despite considerable investor interest, many renewable energy projects have been put on hold. This is bad for both the economy and the environment.

There is much that the federal -- and state -- governments can do to help stimulate investment in clean energy, using both carrots (subsidies) and sticks (regulatory mandates). On the subsidy side, government loans or loan guarantees could do much to ease the credit crunch and facilitate the financing of renewables projects. Other tools include expanding tax credits, governmental procurement of renewable energy, increased federal research and development grants for clean energy technologies, etc. Potential mandates include a federal renewable portfolio standard for electric utilities, increased auto fuel efficiency standards, stronger building and appliance efficiency standards and regulation of greenhouse gas emissions via EPA rule or cap-and trade climate change legislation. Such measures could materially improve the economics of alternative energy production and boost efficient energy use.

Governmental and private sector investment in renewable energy and other “clean technologies – including wind, solar, geothermal and tidal power; advanced biofuels, “smart-grid” development, equipment efficiency, energy storage, green buildings, electric cars and “clean coal” technology – can do much to reinvigorate our economy, increase our energy security and reduce our greenhouse gas emissions. Such investment can also help to jump-start American innovation and entrepreneurship, reinvent our declining manufacturing sector, and improve our balance of payments through reduced oil imports and clean technology exports. Moreover, policies that promote sustainable energy production and consumption can help create a shared sense of national purpose to which everyone can contribute.

So can clean energy save America? We may soon get a chance to find out.

Can Clean Energy Save America?

Posted on December 29, 2008 by Christopher Davis

America, and our new President, face a daunting array of challenges as we close out 2008 and enter the New Year. These include a general economic meltdown, widespread job losses, a collapsing auto industry, unsustainable dependence on foreign oil, climate change and a protracted war in Iraq, among others. Many of these problems relate directly or indirectly to our production and consumption of energy.

The initial focus of the incoming Obama administration is rapid deployment of a massive economic recovery package. Early indications, including the President-elect’s post-election statements and his cabinet-level appointments, suggest that “green jobs” and “green infrastructure” are likely to play a prominent role in Mr. Obama’s efforts to restart the U.S. economy, as reflected in the Presidential transition website.  A number of commentators have talked of a “Green New Deal” as the key to revitalizing our economy. They may just be right.

 

From 2003 through the third quarter of 2008, private U.S. investment in “clean technologies” (mostly alternative energy-related) surged, totaling about $2.5 billion in 2007 and at least $3 billion in the first three quarters of 2008. However, due primarily to the credit crunch and unavailability of project financing for capital-intensive renewables projects such as wind farms, such investment sagged substantially in the fourth quarter. Despite considerable investor interest, many renewable energy projects have been put on hold. This is bad for both the economy and the environment.

There is much that the federal -- and state -- governments can do to help stimulate investment in clean energy, using both carrots (subsidies) and sticks (regulatory mandates). On the subsidy side, government loans or loan guarantees could do much to ease the credit crunch and facilitate the financing of renewables projects. Other tools include expanding tax credits, governmental procurement of renewable energy, increased federal research and development grants for clean energy technologies, etc. Potential mandates include a federal renewable portfolio standard for electric utilities, increased auto fuel efficiency standards, stronger building and appliance efficiency standards and regulation of greenhouse gas emissions via EPA rule or cap-and trade climate change legislation. Such measures could materially improve the economics of alternative energy production and boost efficient energy use.

Governmental and private sector investment in renewable energy and other “clean technologies – including wind, solar, geothermal and tidal power; advanced biofuels, “smart-grid” development, equipment efficiency, energy storage, green buildings, electric cars and “clean coal” technology – can do much to reinvigorate our economy, increase our energy security and reduce our greenhouse gas emissions. Such investment can also help to jump-start American innovation and entrepreneurship, reinvent our declining manufacturing sector, and improve our balance of payments through reduced oil imports and clean technology exports. Moreover, policies that promote sustainable energy production and consumption can help create a shared sense of national purpose to which everyone can contribute.

So can clean energy save America? We may soon get a chance to find out.