The New ESG Wave

Environmental, social, and governance (ESG) is a broad and not well-defined term that seems to have become associated with non-financial factors investors use to measure an investment or a company’s sustainability. Companies that may have ignored, resisted, or ‘green-washed’ ESG disclosures may be forced into such disclosures by large investors or the government. It may prove impossible to not be caught up in the coming wave of ESG requirements, both private and public.

As its name implies, there are three ‘pillars’ of ESG. An exact definition of each is difficult as each has been generally described to include any number of factors or criteria. The environmental pillar relates to the impact a company may have on the environment, such as its carbon footprint, including its direct and indirect greenhouse gas emissions, the chemicals involved in its manufacturing processes, or its overall stewardship of natural resources. The social pillar relates to a company’s relationships with its stakeholders or how it deals with people within the company and in the broader community, including diversity programs, hiring practices, and even how a company advocates for social good with its supply chain partners or in the wider world. The governance pillar refers to how a company is led and managed, including how leadership’s incentives are aligned with stakeholder expectations and the types of internal controls which exist to promote transparency and accountability by leadership.

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Hazardous Substance Response Plans Are Coming

Over thirty years after the requirement was first included in the Clean Water Act and after a suit was filed to force EPA to act, EPA has published a proposed rule relating to planning for worst-case discharges of hazardous substances. The comment period is open to May 27, 2022.

The Clean Water Act was amended by the Oil Pollution Act of 1990. As part of that amendment, a provision was added requiring the issuance of regulations mandating that certain facilities prepare and submit a plan “for responding, to the maximum extent practicable, to a worst case discharge, and to a substantial threat of such a discharge, of oil or a hazardous substance.” CWA Section 311(j)(5); 33 USCA 1321(j)(5). Of course, both the EPA and the U.S. Coast Guard have promulgated various regulatory requirements relating to discharges of oil, such as those in 40 CFR Part 112, as well as some requirements relating to hazardous substances. However, according to EPA, no single program covered all the requirements of CWA Section 311(j)(5).

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Is CCUS The Path to Net Zero?

Carbon capture, utilization, and sequestration (CCUS) offer a known and readily available method to reduce the net emissions of carbon dioxide and meet ambitious climate goals. The regulatory framework, and the multiple protections built into it, ensure that it is safe. However, as the number of requests for authorizations of CCUS projects increases, it is uncertain whether that very regulatory framework and the agencies in charge of permitting and regulating the injection of carbon dioxide will facilitate or inhibit our ability to meet those climate goals.     

Upon rejoining the Paris Agreement on January 20, 2021, the United States announced ambitious climate goals: reduce greenhouse gas emissions 50-52 percent from 2005 levels by 2030, create a carbon-free power sector by 2035, and reach net-zero greenhouse gas emissions economy-wide by no later than 2050. The State of Louisiana, through the Governor’s Climate Initiatives Task Force, has also announced its own climate goals: reduce emissions 26-28 percent from 2005 levels by 2025; reduce emissions 40-50 percent from 2005 levels by 2030, and reach net-zero emissions by 2050.

Continue reading “Is CCUS The Path to Net Zero?”

Is CCUS The Path to Net Zero?

Carbon capture, utilization, and sequestration (CCUS) offer a known and readily available method to reduce the net emissions of carbon dioxide and meet ambitious climate goals.  The regulatory framework, and the multiple protections built into it, ensure that it is safe.  However, as the number of requests for authorizations of CCUS projects increases, it is uncertain whether that very regulatory framework and the agencies in charge of permitting and regulating the injection of carbon dioxide will facilitate or inhibit our ability to meet those climate goals.     

Continue reading “Is CCUS The Path to Net Zero?”

Preparing for Enhanced Enforcement in Overburdened Communities

In response to President Biden’s executive order requiring all federal agencies to embed equity into their programs and services, Michael Regan, EPA’s Administrator, directed all EPA offices to “strengthen enforcement of violations of cornerstone environmental statutes and civil rights laws in communities overburdened by pollution.” Internal memoranda were then issued regarding strengthening civil, criminal, and clean-up enforcement in communities with environmental justice concerns.

These internal memos are fairly general in nature but do have enough information to provide some insight into EPA’s direction as to environmental justice and enforcement. Essentially, the overall message is that EPA will use all available statutory and regulatory methods and mechanisms to minimize potential risks from ongoing or historic pollution in or near overburdened communities.

As to enforcement, EPA will increase the number of inspections in overburdened communities, resolve non-compliance using remedies with tangible benefits to that community, such as environmental projects, preventing further pollution, or fence-line monitoring, and increasing engagement with overburdened communities about enforcement cases. EPA’s Office of Land and Emergency Management also announced in December 2021 that it will analyze compliance patterns of Spill Prevention, Control, and Countermeasure (SPCC) and Facility Response Plan (FPC) facilities in overburdened communities and identify locations that are more likely non-compliant in order to focus future inspections and compliance efforts on these areas. In other words, SPCC/FRP facilities with past violations which are located in or near overburdened communities will likely be faced with increased inspections and scrutiny.

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Uh OOOO! More Regulation for Oil and Gas Production

The EPA has published a proposed rule to regulate methane and other emissions from new and existing oil and gas production sites and other portions of the oil and gas industry. The proposed rules are to be revisions and additions to the rules in Subparts OOOO and OOOOa and are the Biden Administration’s first entry into the back-and-forth regulation of this sector during the Obama and Trump Administrations. The proposed rules, however, go farther and are more expansive than even the Obama-era regulations.

The Biden Administration has famously imposed an “all of government” approach to addressing climate change. The effort began on President Biden’s first day when, among other things, he revoked the permit for the Keystone XL pipeline, paused new oil and gas leasing on federal lands, and re-entered the Paris Agreement. These, and other actions, contrasted sharply with the Trump Administration’s full-throated support of oil and gas production. 

According to the U.S. Energy Information Agency, the United States produced more petroleum in 2020 than it consumed and exported more petroleum than it imported, making the United States a net annual petroleum exporter for the first time since at least 1949. As to natural gas, total annual exports generally increased each year from 2000 through 2019 as increases in natural gas production contributed to lower natural gas prices and the competitiveness of natural gas in international markets. In 2019, the United States exported natural gas to about 38 countries and total annual natural gas exports were 4.66 trillion cubic feet, the highest on record, and the United States was a net exporter of natural gas for the third year in a row.  For more information about Trump-era oil and gas production, click here.

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Back to the Future!!

The scope of regulatory jurisdiction over navigable waters and wetlands has again come into question under the Biden Administration. Over the course of four administrations, this jurisdiction has been explained, expanded, enjoined, restricted, and remanded to the point where the public has little confidence in continuity over time. Now, to determine jurisdiction over waters and wetlands, we go back to prior guidance while the future of regulatory jurisdiction is determined through yet another rulemaking.

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Energy Consumption Data During the Pandemic Year Reveals China’s Growth

2020 is a year that most people would likely soon forget, both in terms of personal impacts and the overall economic downturn caused by the pandemic. While it hopefully will prove to be an anomaly, economic and energy usage data and statistics from 2020 still provide some useful insights and glimpses of future issues. BP recently released its annual Statistical Review of World Energy, covering through the end of 2020.

Although declines in use were noted for coal and natural gas, oil had the sharpest decline in global consumption: 9.1 million barrels per day, or 9.3 per cent. The decline is the largest ever seen and accounts for about three-quarters of the total decline in energy consumption. Oil demand fell the most in the US (2.3 million barrels per day), followed by the decline in the European Union of 1.5 million barrels per day. China saw an increase in oil consumption of 220,000 barrels per day.

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How to Ruin a Perfectly Good Oil and Gas Boom

Over the last several years, oil and gas production has risen steadily, setting production records year after year. These increases were driven mainly by production from tight rock formations using horizontal drilling and hydraulic fracturing.

According to the U.S. Energy Information Agency, the United States exported more petroleum than it imported in 2020, making the United States a net annual petroleum exporter for the first time since at least 1949. It also produced more petroleum than it consumed. Crude oil imports, though, were higher than exports. However, some of the imported crude oil is refined into petroleum products, such as gasoline, heating oil, diesel fuel, and jet fuel, and then exported. As to natural gas, total annual exports generally increased each year from 2000 through 2019 as increases in natural gas production contributed to lower natural gas prices and the competitiveness of natural gas in international markets. In 2019, the United States exported natural gas to about 38 countries and total annual natural gas exports were 4.66 trillion cubic feet, the highest on record, and the United States was a net exporter of natural gas for the third year in a row.

Against this backdrop of robust oil and gas production, the Biden Administration was installed on January 20, 2021. President Biden wasted no time reigniting the war on fossil fuels. Among other things, he rejoined the Paris Agreement on the day he was inaugurated, mandated the use of the “social cost of carbon” when monetizing greenhouse gas impacts, and paused new oil and gas leases on federal lands and in offshore waters.

Under the 2015 Paris Agreement, President Obama pledged that the United States’ nationally determined contribution to greenhouse gas emission (GHG) reduction was 26% to 28% below 2005 levels by 2025. President Biden has now announced that the United States will achieve a 50 – 52% reduction from 2005 levels by 2030 and achieve net zero emissions by 2050. In the Fact Sheet released with the announcement, he also announced a goal to reach “100 percent carbon pollution-free electricity by 2035.”

According to the EPA’s GHG Inventory, Table E-2, total GHG were 7,423 million metric tons of carbon dioxide equivalent (MMT) in 2005. Over the 14 years from 2005 through 2019, total GHG emissions dropped to 6,558.3 MMT, a drop of 864.7 MMT and 11.6%. GHG emissions dropped in 2020 due COVID-related economic restrictions but are expected to rise with renewed economic activity.

However, President Biden’s goals place even greater transformative pressure on the economy and creates a great deal of uncertainty as to how his goals will be achieved in the designated time frames. To achieve the goal of reducing total GHG by 50% from 2005 levels (half of 7,423 MMT is 3,711.5 MMT), an additional 2,846.8 MMT will have to be reduced over the next nine years based on the 2019 level of 6,558.3 MMT. Assuming that the entire electrical generation infrastructure can be changed by 2030 or 2035, a realization of the goal of “100 percent carbon pollution-free electricity by 2035” will not achieve the overall 50% goal, as 2019 emissions from fossil fuel combustion for electric power were only 1,606 MMT. Clearly, reductions from many other sectors of the economy will have to be realized.

The social cost of carbon (SSC) is an estimate of the monetized “damages” associated with incremental increases in greenhouse gas emissions. Its use and value were scaled back under President Trump. However, President Biden issued an executive order requiring its use “when monetizing the value of changes in [GHG] emissions resulting from regulations and other relevant agency action.” An interim SSC was released in February 2021 setting the SSC at $51 per metric ton (at a three percent discount rate) with increases to $85 per metric ton by 2050. Thus, there is a “cost” of $51 for every metric ton of CO2 emitted in 2020. Stated another way, preventing the emission of a ton of CO2 yields $51 in societal value or benefit.

The use of an inflated SSC tends to skew a cost-benefit analysis. The addition of costs associated with the emission of carbon will likely always generate a conclusion that the societal benefits of a proposed rule outweigh its costs. Further, the use of the SSC for “other relevant agency action” means that the SSC will be applied beyond rule-making to a variety of new agency actions. Based on this broad language, Interior may factor in the SSC in its decision to resume oil and gas activities on federal lands.

President Biden also issued an executive order requiring that the Secretary of the Department of Interior “pause new oil and gas leases on public lands or in offshore waters.” The “pause” will be in place pending a “comprehensive review” of “potential climate and other impacts of oil and gas activities on public lands and in offshore waters.”

This is not the first time Interior has been engaged in hindering oil and gas activity. In fiscal year 2007, 7,124 drilling permits were approved on federal lands, but by FY 2016 that number had dwindled to 2,184. There was a bit of a rebound by FY 2020 as 4,226 permits were issued. Further, the new Secretary of the Interior, Deb Haaland, has revoked twelve Trump era orders that were focused on promoting oil and gas development on federal lands and in offshore waters because the orders were “found to be inconsistent with, or present obstacles to,” the policies announced by President Biden.

The Department’s web-site states that the “worsening impacts of climate change pose an imminent threat to our daily lives, critical wildlife habitats and future generations” and the “time for bold action is now.” It is likely that the Interior, as part of its “comprehensive review,” will factor in the SSC in its decision to resume oil and gas activities on federal lands.

Interestingly, in order to achieve a “100 percent carbon pollution-free electricity by 2035” and net zero emissions by 2050, a vast number of solar and wind farms will have to be built in a short period of time. Some estimate that an area the size of South Dakota will be required to achieve the 2035 goal and an area the size of five South Dakotas is necessary to achieve the 2050 goal. It is likely that the same federal lands that now support oil and gas development will be utilized to house the large number of wind turbines and solar panels necessary to produce the necessary electricity.

The production and combustion of fossil fuels, including clean burning natural gas, will face obstacles that will curtail growth and likely diminish the levels of current production in order to reach the new GHG emission reduction goals. In announcing the new reduction targets, President Biden did not address the disruption to the oil and gas industry or the economy as a whole which will be associated with such a dramatic decrease in reliance on fossil fuels over such a short time period.

Louisiana Board of Tax Appeals Rules That Chemicals Qualify for Pollution Control Sales Tax Exclusion

The Louisiana Board of Tax Appeals issued an important ruling relating to pollution control devices or systems. For at least two decades, the relevant agencies did not consider chemicals to meet the definition of a pollution control device or system and thus chemicals did not qualify for the applicable exclusion from sales tax. However, the decision, issued on April 14, 2021, found that chemicals used for pollution control, which otherwise meet the terms of the exclusion, could qualify and provide a refund for sales taxes paid.

For sales tax purposes, the term “sale at retail” does not include the sale of a “pollution control device or system.” The statutory definition is “any tangible personal property approved by the Department of Revenue and the Department of Environmental Quality and sold or leased and used or intended for the purpose of eliminating, preventing, treating, or reducing the volume or toxicity or potential hazards of industrial pollution of air, water, groundwater, noise, solid waste, or hazardous waste in the state of Louisiana.” La. R.S. 47:301(10)(l). The regulatory definition is similar but with a relevant difference: “any one or more pieces of tangible personal property which is intended and installed.” LAC 61:I.4302, emphasis supplied.

Monsanto Company operates a facility in Luling, Louisiana (the Luling Facility). Like many industrial facilities in Louisiana, Monsanto utilizes sodium hydroxide, or caustic, to neutralize and control the pH of acidic waste streams. Monsanto uses caustic in its air scrubbers, which are pollution control devices designed to neutralize acid gases. In fact, Monsanto’s air permit mandates that caustic be used in this manner. Monsanto also uses caustic to control the pH of its wastewater prior to discharge and deepwell injection. Again, Monsanto’s discharge and injection permits mandate that the pH be maintained above or within specific levels prior to discharge or injection.

The caustic is received at the Luling Facility in liquid form and placed it into storage tanks. From this central location, the caustic is hard piped to the various scrubbers, tanks, and other equipment. Sensors in each unit determine the pH of the materials and caustic is automatically pumped to the unit to adjust the pH when and as needed.

During an internal tax review, it was determined that Monsanto had paid over $3.9 million in sales taxes on its caustic purchases between 2012 and 2014. Monsanto applied for a sales tax refund. However, when the Louisiana Department of Environmental Quality (LDEQ) received Monsanto’s application for review, it stated that it “does not consider chemicals as parts of pollution control systems … because they do not constitute ‘tangible personal property … installed.’” Based on this, the Department of Revenue (Revenue) denied the sale tax refund and Monsanto appealed to the Board of Tax Appeal (BTA).

In its Order with Written Reasons, the BTA found that Monsanto “is entitled to the claimed refund.” The BTA, noting that it must construe exclusions in favor of the taxpayer and that it does not give deference to LDEQ’s interpretation of the law, disagreed with LDEQ’s “interpretation of the law related to the meaning of ‘installed.’” The term ‘installed’ is not defined in the statute, regulation, or any guidance from LDEQ or Revenue. Finding that the ordinary meaning of the word ‘installed’ is “to set up for use or service,” the BTA found that Monsanto installs the caustic as it sets it up in the storage tanks, uses caustic to neutralize acidic waste, and does so for use in its pollution control scheme. Therefore, Monsanto’s use of the caustic is “within a common and approved definition of ‘install.’”

Taxpayers still have a narrow window in which to seek refunds even though the exclusion was partially suspended from July 1, 2016 through June 2018 and fully suspended between July 2018 until 2025. Taxpayers that have paid sales taxes on chemicals, such as caustic, and which otherwise meet the terms of the exclusion have two opportunities to claim a refund: taxpayers may be entitled to a refund for periods from December 2017 through June 30, 2018 if claimed before December 31, 2021 and taxpayers currently under state audit may be able to claim additional periods prior to December 1, 2017 if the audit is still open.