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Climate Change: The Heat Is On

From reporting to trading, utilities try to meet new expectations.
Fortnightly Magazine - January 2004

states. Even as the Bush administration labors to revamp the federal voluntary greenhouse-gas reporting program, also known as the "1605(b) Program," nearly a dozen states and even a handful of localities are moving ahead with their own reporting programs. As large and visible emitters, utilities are likely to face substantial pressure to participate in the voluntary program of each jurisdiction in which they operate.

In addition, a determination by the Environmental Protection Agency (EPA) that it lacks any regulatory authority under the Clean Air Act to address climate change likely will open the door for more states and municipalities to develop climate programs.

The emergence of multiple state and local climate programs could have significant implications for utilities. Although some efforts are under way to coordinate regional, state, and local climate change programs, those programs are likely to vary significantly. Diverse policies could present real problems for utilities. Electricity grids and markets increasingly are becoming regional, if not national in scope. For utilities doing business in multiple states and regions, a patchwork of different state and regional climate policies will complicate business planning and could have significant implications for competition. Moreover, inconsistent state and regional policies related to emissions accounting and crediting systems could inhibit the development of cost-saving emissions trading markets. For these reasons, the proliferation of inconsistent state and local policies eventually could give rise to calls from regulated entities for national greenhouse gas legislation.

The Rise of a Shareholder Movement

Another recent development for utilities is the rise of a shareholder movement aimed at forcing a more progressive corporate response to climate change. A loose coalition of state pension funds, religious funds, and green activists are making the argument that a company's response (or failure to respond) to the risks and opportunities associated with climate change and climate change policies can have a material bearing on shareholder value.

Taking a page from the playbook of the anti-tobacco and anti-apartheid movements, these groups have advocated shareholder resolutions targeted at major energy companies. In 2003 shareholders filed 23 resolutions requesting that companies report on the economic risks and opportunities associated with potential-or, in the view of most of the proponents, inevitable-future greenhouse gas regulation. In the utility sector, advocates have succeeded in getting resolutions considered by shareholders of American Electric Power, Cinergy, PG&E, Southern Co., TXU, and Xcel. These resolutions have garnered 20 to 25 percent support of the shareholders. The proponents have claimed a moral victory in these results, asserting that support for shareholder resolutions on social and environmental matters typically have garnered less than 10 percent of proxy voting.

These shareholder resolutions have attracted coverage in the , , and on CNN. Typically, resolutions have asked the targeted company to prepare a report to shareholders on: (1) the economic risks associated with the company's past, present, and future emissions of greenhouse gas emissions, and the public stance of the company regarding efforts to reduce these emissions; and (2) the economic benefits of committing to a substantial reduction of those emissions.

Though the corporate climate-change responsibility movement may have started