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Beyond Policy: How Climate Science is Changing Law and Business

U.S. Capitol

This spring the United Nations Intergovernmental Panel on Climate Change (IPCC) issued its fifth assessment report for governments and policymakers (AR5). The series of reports has trained attention on the risks to ecosystems and economies and made business more sensitive to environmental and regulatory concerns.

Bob Wyman ’80, of Los Angeles, has built a global practice around climate science, good policy, and feasible compliance. Wyman is the chair of the Environment, Land & Resources Department and the co-chair of the Air Quality and Climate Change Practice for Latham & Watkins. He started thinking differently about his work in 2003, when the Environmental Protection Agency (EPA) made two determinations. First, that it lacked authority under the Clean Air Act to regulate greenhouse gases (GHGs) as pollutants. And second, that even if it did have such authority, it would decline to set vehicle emissions standards for GHGs.

Twelve states and three cities brought suit in Massachusetts vs. EPA to force the agency to regulate GHGs. The plaintiffs lost in the D.C. Circuit, but the Supreme Court reversed the decision and remanded the matter to the EPA. Upon reconsideration, the EPA found that GHGs “in the atmosphere may reasonably be anticipated both to endanger public health and to endanger public welfare,” supporting the agency’s regulatory authority.

“The issue is resolved in terms of the law of the United States,” says Wyman. “It is the basis of a regulatory finding made by the top environmental agency in the country, tested in court, and upheld at the highest level. We have to respect that as lawyers and turn our attention now to public policy.”

Industry reaction

Toward that end, in 2008 Wyman started the National Climate Coalition, a multi-industry group that provides input to the EPA on GHG regulation. Its members include companies in aerospace and electronics, automotive, cement, consumer products, electricity generation, manufacturing, oil refining, and renewable energy. The coalition’s goal is to advise the EPA in creating a regulatory regime that avoids economic jeopardy and legal risk.

Bob Wyman '80
Bob Wyman 80

“Industry has long recognized that carbon intensity, the environmental footprint associated with the burning of fossil fuels, would sooner or later be addressed through regulation,” says Wyman. “Our proposal tries to optimize multiple variables. We want legal confidence, on the one hand, and efficiency and incentive, on the other – a carrot and a stick at the same time.”

Though opinions vary among Wyman’s clients on the science behind climate change, the coalition has no doubt the EPA is going to regulate GHGs. Industry should “get ahead of the curve,” says Wyman. “The predominant view is that the human impact on the environment through greenhouse emission is real and serious, and while no one can pretend to know the scale of it, it does warrant large-scale government intervention through regulation.”

Brad Keithley ’76 is the former General Counsel of Arkla, Inc. He helped lead the energy practices of Jones Day and Perkins Coie before starting his own advisory firm in Alaska. “The oil and gas community, frankly, has to accept that climate change is a real concern,” says Keithley. “We have to decide what the right regulatory response is and how extensive it will be.”

So what is the proper balance between protection and production? According to Wyman, “The IPCC is a repository of the mainstream development of the scientific perspective on this issue, and it reinforces the political will to address it. We shouldn’t hide from that fact. We still take action because we recognize that managing uncertainty to protect the public against harm is what we entrust our government to do.”

Wyman, a self-described “free market lawyer with libertarian tendencies,” has been active in climate change policy since the 1992 United Nations Conference on Environment and Development in Rio de Janeiro. He believed then that the U.S. would begin to take an active role regulating energy emissions. “I like minimal government intrusion, but I also believe that these externalities have a cost,” he says. “I like government to come in and mandate the environmental ends you must meet, but not the means to get there. Government tends to get it wrong when they select the means. It opens up avenues for someone to stop any regulation. I’m hoping the EPA will set the performance targets, and not tell states or sources how to do it.”

Better regulation, better business

Ideally, the EPA and states would work together to implement programs that generate a price signal that reflects the environmental impact of carbon. The market could use that price signal to build greater efficiencies in the energy system and transition into a cleaner technology model.

A carbon intensity approach that developed performance standards, sector by sector, would avoid consumption-related or growth-related opposition, according to Wyman. Trading partners who do not meet the standards would pay a tariff. “That’s a regime that the world could prepare for,” says Wyman. “Many businesses would like this issue addressed for the long run because the uncertainty prevents investment in new supplies of energy and in new technologies,” he adds. “Many hundreds of billions of capital are sitting uninvested because of it.”

Weather and Natural Catastrophe total vs. Insured Losses
Click to enlarge chart

While industry is waiting on clear rules for managing carbon output, existing regulations could be improved to promote new construction. “You could have the cleanest power plant in the world but it’s always attacked,” says Wyman. “If it’s a natural gas-fired plant, then it’s usually attacked using the Clean Air Act, or the California Environmental Quality Act, or the National Environmental Policy Act, or the Endangered Species Act. If it’s a solar project, because solar and wind require a lot of land, you have attacks based on water scarcity or species scarcity. NIMBYism is everywhere.”

“It’s hard to demonize industries who are concerned about EPA regulation of greenhouse gases,” says Wyman. “Their positions stem from an understanding that government regulation often imposes costs that significantly exceed the level necessary to deliver the desired environmental benefit.”

It can take years to permit most major capital projects in the United States. Too often, the same projects have been reviewed many times in other parts of the country. Ideally, once the EPA or the states evaluate a particular technology once, the findings and conclusions should be presumptive for other applications to avoid costly and lengthy case-by-case scrutiny.

“Getting the rules of the game worked out, even if they’re not perfect, will unleash capital and allow siting to happen faster,” says Wyman. “Even though businesses and people end up at various places along the continuum in their belief in the science, there is a community of agreement among a critical mass of corporate America that if we have a system that can be done well, it would be beneficial.”

Resources, risk, and opportunity

Brad Keithley ’76
Brad Keithley ’76

Keithley, who has worked in oil and gas since he graduated from the Law School, cites three “huge changes” in the industry. First, the end of the Cold War opened access to many areas of the world, notably China, the Soviet Union, and large parts of Africa. Second, advanced technology allows the industry to develop resources that it previously never considered. And third, the advent of development in the Arctic. “It’s the emerging story of untapped resources. But it’s very challenging trying to access it in the right way to minimize risk and avoid huge costs,” says Keithley.

Keithley is based in Anchorage. He says Alaskans welcome these new opportunities “to grow the economy, employ more people, start more businesses, and have a more broadly based source of revenue for state government.” The new fields promise many years of production, a substantial lift to the Alaska economy, and jobs. “It’s the same way a Lower 48 state would view a new, clean factory,” he says. “That’s how we view new resource development. But it also presents new risks, possibly extreme risks that Alaska has never faced before if an ocean-going vessel or new oil and gas prospect at sea has an accident and starts spilling oil.”

Keithley notes that fracking for new natural gas supplies has also changed the game, and quite suddenly. Setting aside the environmental challenges, few people predicted its scale. Where once the U.S. was a net importer of liquefied natural gas (LNG), fracking has reversed the trade flow. Companies, once interested in LNG projects for import, are now investing in facilities to export LNG worldwide.

Loss events Worldwide, 1980-2013, Munich Re
Click to enlarge chart

Clean tech energy companies need help earning a return on their investment in new clean energy products. Municipal solid waste recyclers need EPA approval to convert it to fuel, even with a zero carbon footprint. “Clients need help in regulatory advocacy, conducting global carbon trades, and planning corporate strategy in the face of an evolving energy market,” says Keithley.

For example, major oil companies are under increasing pressure from shareholder groups to account for the risk that potential restrictions on carbon emissions will decrease the value of their recoverable reserves, especially for the more costly projects in the Arctic and the deep waters of the Gulf of Mexico. In March Exxon agreed to assess the risk to their portfolio and also report on how restrictions will affect the investment return on future projects. “Corporate sympathy to climate concerns is here to stay,” says Keithley. “These are the kinds of issues where smart lawyers can add value.”

Finding solutions

The cause-and-effect debate is central to regulatory intention and opposition. Insurers, however, make and lose money trying to predict the incidence of events and what it will cost them. When it comes to climate science, they care more about the frequency or severity of what may happen than they do about the why.

Glenn Brace ’86
Glenn Brace ’86

Glenn Brace ’86, of London, is the claims director for the Catlin Group, a specialty insurer and reinsurer that has been studying environmental risk. “You’ve got to be really careful because there are many climate change skeptics,” he says. “If you don’t follow rigorous scientific protocols, people are going to call you out on it. We are a business that assesses experience and analyzes for any patterns that will influence rates and our risk appetite. We want our policyholders to know that we are independent, non- biased, and analytical. If you become a campaigner, you can appear to lack that independence.”

Brace says climate change is not currently a pressing issue for insurers because scientists and industry are studying data on different time scales. Typical risk modeling analyzes the past five years or so of claims experience, and insurers ordinarily offer coverage on an annual basis. Climate science, however, covers centuries of data.

World GHG Emissions Flow Chart
Click to enlarge chart

But Brace believes climate change will only become more important to his business. “If the earth changes, as many people predict it will,” he says, “the nature and severity of the hazards policyholders face may change completely. We therefore believe insurers should get involved. We need impartial, scientifically valid data on which experts can base predictions. We probably won’t benefit from it, but our descendants and future policyholders might use that data to better protect their assets.”

Wyman shares this view, which translates across industries and transcends politics. In talking about technology and energy efficiency, Wyman says, “That’s what we should be about, using science and the law to help make our society and our economy work better.”