It’s no secret that the Biden administration is committed to pushing an ambitious climate change agenda. From supporting aggressive efforts to increase the adoption of electric vehicles to support 100 percent renewable sources for the electric grid by 2030, the administration has made it clear that reducing greenhouse gas emissions is a priority. In his recent State of the Union address, the president stated, “We’re rebuilding for the long term.”
But overlooked in the climate change discussion is the top-down regulatory push from federal agencies to create strict, complex — and frankly duplicative — mandates on how public companies disclose their greenhouse emissions and those of others in their supply chain. In fact, in January, the Securities and Exchange Commission published a regulatory agenda that included the commission’s new climate disclosure proposal that’s been described as one of the biggest changes to corporate disclosures in decades.
Another similar proposed rule from the Federal Acquisition Regulation Council — made up of representatives from the Department of Defense, General Services Administration and NASA — would require federal contractors to submit detailed measurements of their greenhouse emissions to qualify for federal work. While cutting emissions is a good thing, using the administrative state to advance a political agenda on climate is misguided and inappropriate. This unnecessary regulation would also have serious unintended consequences.
First, sustainability is a growing market trend that doesn’t need government intervention. With the SEC reporting that 90 percent of America’s 500 largest companies by market capitalization already publish information about their climate risk disclosure, it’s clear that American companies and investors are playing a crucial role in spurring climate change reporting and transparency.
Second, the rule carries massive costs. While the SEC places overall compliance costs for its new reporting rule at $10.2 billion yearly, the disclosure rule being pushed by the FAR Council would cause $3 billion in new public costs over 10 years.
For energy companies, these costs could be even higher. Oil and gas companies will face a staggering amount of paperwork at a time when the United States has made tremendous strides toward energy security and our fossil fuels sector continues to grow. Creating strict new requirements on emissions reporting could have a chilling effect on energy production, disproportionally targeting our nation’s energy companies when we desperately need energy production. Even President Biden acknowledged that oil isn’t going away anytime soon.
Third, requiring reports on Scope 3 provisions, emissions from activities not owned or controlled by the reporting company, won’t create the reliability and comparability regulators claim it will. Collecting this data is difficult and comes with an inherent lack of certainty, especially since many companies will be forced to report on emissions from suppliers.
The SEC acknowledges the unprecedented nature of disclosing indirect emissions that result from activity within a company’s value chain and the challenges they will face in collecting and reporting the information. That’s likely why most of the nation’s largest asset managers don’t support mandatory disclosure of Scope 3 emissions, as reported by Morningstar.
Public companies that are heavily energy intensive will have special difficulty under the proposed rule, especially considering that the FAR Council proposal requires companies to establish science-based emissions reduction targets that align with SBTi, a nonprofit group that explicitly shuns oil and gas companies. It seems entirely inappropriate to allow a non-governmental entity to set the standard for emissions-reduction targets for private companies. After all, many companies already employ science-based emissions targets, and there are other alternatives to SBTi’s target methodologies.
Because of the rule’s many problems, there can be no question that these reporting and transparency rules will be challenged in court. In fact, West Virginia Attorney General Patrick Morrisey has threatened to sue the SEC if it requires companies to report on greenhouse gas emissions. He’d be on solid ground since the Supreme Court decided in June 2022 that agencies need explicit permission from Congress to create regulations that have major economic or political effects.
Efforts to cut emissions are laudable, but there is a right way and a wrong way to do so. These financial regulations will only reduce competition, saddle American businesses with excessive compliance costs, and continue the missions creep that is already plaguing the U.S. economy. The administration should pull the plug on these misguided rules.
