UNBURNABLE ASSETS: THE EVOLUTION OF CLIMATE-RELATED THREATS TO THE MULTINATIONAL ENERGY COMPANY

• Jurisdiction: United States

Climate Change Law and Regulations: Planning for a Carbon-Constrained Regulatory Environment
(Jan 2015)
CHAPTER 11A
UNBURNABLE ASSETS: THE EVOLUTION OF CLIMATE-RELATED THREATS TO THE MULTINATIONAL ENERGY COMPANY
Tauna M. Szymanski
Attorney
Hunton & Williams LLP
Washington, D.C.

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TAUNA M. SZYMANSKi is an attorney in the air and climate change practice group in the Washington, D.C. office of Hunton & Williams LLP. She advises a variety of clients on climate change-related regulatory and transactional matters in the U.S., the European Union, and globally. She has worked on climate change since 1994 and has structured and negotiated environmental commodity transactions in over a dozen different markets. Early in her legal career, she was seconded for two years to support the carbon trading desk of a major U.S. investment bank in London. She has attended several conferences of the parties to the international climate treaty negotiations, dating back to 2001. In the late 1990s, before law school, Ms. Szymanski served for three years as a U.S.-China government relations consultant, representing Western companies in their efforts to do business in China as China was acceding to the World Trade Organization. Ms. Szymanski has a J.D. from Stanford Law School, where she was the editor-in-chief of the Stanford Environmental Law Journal, a master's in economics and public policy from Princeton University's Woodrow Wilson School of Public and International Affairs, and a B.A. in from Carleton College in international relations and environmental studies. She grew up in China, Hong Kong, Taiwan, Israel, Burma, and Spain as the child of U.S. Foreign Service Officers. She has been recognized by Chambers Global as an "Associate to Watch" in the area of global climate change, as a "Rising Star" by Washington, D.C. Super Lawyers, and as one of five environmental lawyers under 40 to watch by Law360.

I. Introduction

Climate change is not a new challenge for the multinational energy company; the issue has matured in the public eye over more than two decades. The last five years, however, have brought much greater attention to the issue, threatening the bottom line of energy producers from multiple fronts, and threatening to permanently strand "carbon assets"--proven and potential reserves of fossil fuels, including coal, oil, and natural gas. Assets are stranded when they fail to realize their full economic potential. The International Energy Agency (IEA) has stated that two-thirds of proven fossil fuel reserves will need to stay in the ground through at least 2050 if the climate is to remain below the 2 degree Celsius tipping point scientists believe is the threshold for dangerous climate change.¹

Activists and governments have devised creative new ways in their efforts to address climate change and to ensure these assets become stranded, and, like a game of whack-a-mole, companies are facing these efforts on multiple, unceasing fronts. The multinational energy company's response to climate change in the past handful of years has adapted from a strategy to deny that climate change exists (or, alternatively, in some cases to cooperate and advocate for binding caps and to adopt voluntary emission reductions in the meantime), to one that argues that any emission reduction by a single company or a single country will be ineffectual. With few exceptions, there remains little interest in altering business-as-usual for the sake of climate change, and companies unsurprisingly resist attempts to curtail their operations or adjust their business models. The evolution of regulatory proposals and extra-regulatory challenges no doubt will continue, forcing companies to either accede to these threats or to devise equally creative ways to justify maintaining the current business model if they are to avoid the stranding of assets. To date, companies have been largely successful at fending off direct regulatory

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constraints on greenhouse gas emissions, but increasingly are having to contend with indirect efforts to strand carbon assets, including attempts to affect market demand for their product.

But the fact remains that coal supplies 40 percent of the world's electricity generation and is the fastest growing energy source.² The IEA estimates that in 2019, annual global coal consumption will reach a new record of 9 billion tons.³ But the risks and obstacles to growing markets are significant and new markets are finite. Companies are addressing obstacles that threaten market growth and stability in industrialized countries by diversifying geographically, seeking out markets in other countries where such growth is not currently threatened, like China and India. The IEA predicts that developing country demand for coal will offset declines in industrialized countries.⁴

One indicator that the multinational energy company holds the upper hand even in industrialized markets is the recent finding of the shareholder activist organization Ceres. In a review of 10-K filings by the S&P 500, the group found that between 2009 and 2013, climate-related disclosures by public companies declined in both quality and quantity.⁵ From Ceres's perspective, the newer filings "do not . . . meaningful[ly] discuss[] . . . the material risks presented by climate related regulatory developments" and other issues related to climate change.⁶ And to little consequence, because Ceres also found that SEC comment letters to companies questioning a failure to fully comply with the guidance on climate change dropped off precipitously between 2010 and 2013, with 38 comment letters sent in 2010, and zero sent in 2013.⁷ Public companies do not rank climate-related risks highly, and do not fear public opprobrium to the point where they feel the need to pay more than minimal lip service to discussing those risks with their investors.

Despite the fact that climate change has been a concern of policymakers since the early 1990s, few regulations that directly aim to constrain greenhouse gas emissions in the U.S. have been adopted and implemented. Energy companies have succeeded in fending these efforts off such that government and environmental pressure groups are now focused on indirect ways to achieve their goals of mitigating climate change--efforts at altering the cost-benefit calculus for proposed rules, at making environmental impact assessments more difficult, and creatively litigating. Litigation has been one of the more successful tools employed to date, as evidenced by the Sierra Club's Beyond Coal campaign, whose goals include "Retiring one-third of the nation's more than 500 coal plants by 2020; Replacing the majority of retired coal plants with clean energy solutions such as wind, solar, and geothermal; and Keeping coal in the ground in places like Appalachia and Wyoming's Powder River Basin."⁸ The Sierra Club claims that this effort,

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based largely in litigation, has stopped more than 165 new coal-fired power plants from being built and has forced the early retirement of more than 100.⁹

This article describes the evolution of attempts by governments and pressure groups to constrain anthropogenic greenhouse gas emissions over the past two decades, with a focus on the United States, and describes the parallel development of corporate responses to these efforts. It concludes that the multinational energy company has been largely successful in averting direct regulation, but that it must now contend with significant regulatory and extra-regulatory efforts to indirectly strand carbon assets.

II. New Regulatory Efforts and Extra-Regulatory Trends to Address Climate Change

Climate-motivated threats to the multinational energy company have not diminished, and in fact have become more entrenched and sundry over time. Pressure on the multinational energy company continues not only in the regulatory sphere in many countries, but also with increasingly creative litigation strategies, and shareholder and public company-related activism. When climate change first emerged as a public policy issue, efforts focused on market-based solutions. With a few notable exceptions, namely in the European Union, portions of the United States, and China, this approach has not been as popular as proponents have hoped, and some governments are now approaching the issue with more traditional, command-and-control-style mandates. In the United States in particular, several statutes are being used to constrain energy company operations to mitigate climate change in ways not intended by the drafters of those laws. Outside the regulatory sphere, the litigation strategy of climate activists has become more sophisticated and creative as prior efforts have failed.¹⁰ Lawsuits have ranged from suing large greenhouse gas emitters for contributing to Hurricane Katrina,¹¹ to children suing federal and state governments to regulate greenhouse gas emissions to protect the public trust that is the atmosphere,¹² to lawyers representing part of the "environment" itself in an attempt to gain unique standing.¹³ While these attempts have been unsuccessful, energy companies face substantial ongoing risk of being sued on any number of climate-related theories, with plaintiffs seeking both injunctive relief and monetary damages. The risk of climate litigation is difficult to

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price and manage given its uncertainties. And companies must expend significant resources in defending against these lawsuits, regardless of their merits. Non-litigation strategies also abound but generally have been less effective at threatening to strand carbon assets.

A. Regulatory Efforts

1. Direct Carbon Pricing Mechanisms

Drawing on successful prior market-based approaches to regulating pollution, early efforts to address climate change focused on creating a cross-border cap-and-trade system for greenhouse gases. The 1997 Kyoto Protocol adopted a large...