U.K. Emissions Reporting Could Hit U.S. Companies

Britain has decided to introduce tough new laws on greenhouse gas disclosures next year that will likely require many businesses in the United States to capture, verify, and report far more data about their emissions of six gases, including carbon dioxide, methane, and nitrous oxide.

The country's coalition government announced last month that starting April 2013 any company with shares listed on the London Stock Exchange will be required to disclose data about their emissions of greenhouse gases.

Companies will have to disclose emissions related to all their business operations, around the world. That will significantly raise the bar in terms of emission reporting, with Britain the first country to introduce mandatory company-wide disclosures.

Since the new rules include overseas business operations, any U.S. company with a U.K.-listed parent—such as the U.S. operations of BP and Royal Dutch Shell—would have to report emissions data back to headquarters for disclosure. What's more, the disclosures will appear in the “directors' report” section of the parent company's financial reports, which means the company's external audit firm will need to sign off on them.

Complying could mean a lot of work for U.S. companies, says Tim Stumhofer, who monitors British government environmental policy as a senior program associate at the Greenhouse Gas Management Institute, a non-profit in Washington, D.C. Those that find themselves caught in the U.K. reporting requirement will have to gather and verify more information about emissions than any of the various U.S. state or federal laws demand, he says.

Requirements such as those from the Environmental Protection Agency and the Securities and Exchange Commission's 10-K climate risk disclosure rules compel U.S. companies to release some data, “but it's fairly basic compared to what happens in Britain already,” says Stumhofer. “There is certainly no corporate-level reporting regime in the United States and no requirement for third-party verification,” which is what the United Kingdom will have next year, he says.

London Stock Exchange companies will have to disclose emissions of gases named in the Kyoto Protocol on climate change, including carbon dioxide, nitrous oxide, methane,  sulfur hexafluoride, hydrofluorocarbons, and perfluorocarbons. The move is aimed at helping the country meet its commitment to cut its carbon emissions to 50 percent of 1990 levels by 2025. The regulations will be reviewed in 2015, with the goal of extending them to all large companies starting in 2016.

U.K. companies already have to comply with a mix of emission disclosure requirements, depending on the nature of their business. The CRC Energy Efficiency Scheme requires greenhouse gas emission disclosures, but they only relate to business conducted in Britain. There are also exemptions and several types of business activity that are not covered.

Big polluters can also disclose emissions under the Climate Change Agreement plan, as a way of getting an energy tax rebate. And those with large industrial plants over a certain size have to comply with the European Union's Emissions Trading Scheme, a cap-and-trade program.

Despite the compliance burden, the government says most companies support the introduction of mandatory, business-wide emission reporting because it will provide consistency.

Simon Chapman, chief economist at the Freight Transport Association, however, questions the benefits of the new plan. “It is difficult to see how making reporting mandatory for the largest companies who are already recording and reporting emissions will create further carbon savings over and above those that could have been achieved through a voluntary approach,” he says.

“It is difficult to see how making reporting mandatory for the largest companies who are already recording and reporting emissions will create further carbon savings over and above those that could have been achieved through a voluntary approach.”

—Simon Chapman,

Chief Economist,

Freight Transport Association

Steve Freeman, director of energy and environmental affairs at the Confederation of Paper Industries, believes the new regime will deliver “more administration for little gain.” The “overwhelming majority” of emissions are already covered by the other reporting requirements, he says.

Freeman says the kind of installation-level reporting used in the EU plan and by the U.S. Environmental Protection Agency in its Carbon Reporting Program, “is more meaningful than company-level reporting.”

The detail needed for company-wide reporting is “difficult both to produce and understand,” he says, noting that government guidance on how to comply with the CRC—which requires business-wide disclosures, but is limited to the United Kingdom—runs for hundreds of pages. Reporting on overseas emissions will increase the compliance challenge significantly, says Freeman.

Debating the Details

But will that part of the plan really go ahead? Susanne Baker, senior climate and environment policy advisor at the Engineering Employers' Federation, a trade body for U.K. manufacturing companies, is doubtful.

The policy has already been subject to government infighting; Britain is run by a coalition, and environment policy is a battleground between its members. “There's been a lot of debate within the government about how far this policy should go, and I don't think that debate is over,” says Baker.

DETAILS ON U.K. MANDATE

Below is an excerpt from the U.K. Department for Environment, Food, and Rural Affairs' release regarding the U.K.'s announcement of mandatory greenhouse gas reports:

All businesses listed on the Main Market of the London Stock Exchange will have to report their levels of greenhouse gas emissions from the start of the next financial year under plans announced by the deputy prime minister at the Rio+ 20 Summit ...

… The United Kingdom is the first country to make it compulsory for companies to include emissions data for their entire organization in their annual reports.

The introduction of the reports, following consultations with leading businesses, will enable investors to see which companies are effectively managing the hidden long-term costs of greenhouse gas emissions. The majority of businesses responding to the consultation support the change and government plans are also backed by leading employer and environmental organizations including the CBI and the Aldersgate Group.

The new regulations will be introduced from April 2013. They will be reviewed in 2015, before ministers decide whether to extend the approach to all large companies from 2016.

Greenhouse gases, such as carbon dioxide, nitrous oxide, and methane are causing climate change leading to global temperature increases, sea level rises, and dangerous changes to patterns of drought and flooding. More than 30 billion metric tons of CO2 are emitted globally each year by burning fossil fuels and the concentration of CO2 in the earth's atmosphere is now higher than at any time in at least the last 800,000 years. The United Kingdom is committed to cutting U.K. carbon emissions to 50 percent of 1990 levels by 2025.

Reporting is the first vital step for companies to make reductions in these dangerous emissions. It is estimated it will save four million metric tons of CO2 emissions by 2021 …

… The decision follows the consideration of extensive evidence and the detailed analysis of consultation responses to gain the views of businesses and individuals, the majority of which opted for a mandatory reporting approach.

Businesses said a compulsory approach would:

Provide the first step in enabling companies to manage and reduce emissions;

Mean more transparency from companies;

Provide a single consistent standard; and

Provide information to the business that could save them money through reduced energy costs.

Source: U.K. Department for Environment, Food, and Rural Affairs.

“We can say with certainty that listed companies are going to have to report, but the detail is to be decided and it's not law yet,” she adds. “Until we see the final regulations, we won't know the scope of reporting, the boundary limits, what gases will be covered, and which business activities.”

That means U.S. companies may not know where they stand until later this year, or early next, she says—the government hasn't said when draft regulations will be available.

Despite the uncertainty about the scope and timing of the regulations, companies should have enough time to comply, says Jamie Devlin, head of client services at Greenstone Carbon, a consultancy.

“If we were going to measure a company's carbon footprint, we could do it from start to finish in three or four weeks,” he says. “So if they really put their mind to it, I don't think the timescale is unrealistic.”

Many companies are already making business-wide emission disclosures on a voluntary basis. “The difference will be if the government is more prescriptive about what has to be included and the methodology used to calculate emissions,” says Devlin.

The U.K. has its own guidelines, but there are other methodologies used elsewhere in the world, such the Greenhouse Gas Protocol. A company might have to take the same base data about its business activity and calculate a figure for emissions using a formula it's not familiar with, “But that's not too big a deal,” says Devlin.

But with emission reporting appearing in the audited section of the company's annual accounts for the first time, whatever companies disclose is likely to be far more “visible” than information they've revealed before, says Devlin.

“Companies will need to make sure carbon reporting is embedded in their other financial reporting procedures,” he argues. “Right now, companies probably don't get this kind of data audited and verified.” In future, they may decide it's too risky not to.