Climate Change Will Be Front and Center in 2021, Regardless of the Nov. 3 Results

Companies must be prepared to address climate change in 2021 or risk getting left behind by an accelerating global debate regardless of the outcome of the U.S. elections on November 3. Growing public awareness, proliferating policy proposals, and the opportunity for increased public investment in the wake of the COVID-19 crisis have elevated climate to the top of the economic policy and regulatory agenda globally. Climate is increasingly top-of-mind for corporate shareholders and investors. This momentum will translate into a growing array of policies, regulations and practices in all geographies and at all levels that could reshape the operating environment and investment landscape for industry. Public-private partnerships and initiatives across all sectors of the economy will be essential to devise workable policy models and commercial solutions. Companies have a unique opportunity to step up to constructively engage.

Crowell and Moring International LLC (CMI) and Crowell & Moring LLP will be hosting a climate webinar on December 9 and diving into these issues further over the coming months to help companies and associations navigate this fast evolving landscape. Key areas of activity include: 

Global Policy Landscape

Global climate policymaking is entering a new, more active phase. In recent weeks, China and Japan have announced commitments to be carbon neutral by 2060 and 2050 respectively. Italy and the United Kingdom are expected to make climate a priority as they host the G20 and G7 in 2021, and have formed a partnership to support the 26th UN Framework Convention on Climate Change conference (COP26) taking place November 2021 in Glasgow. The EU is advancing a number of region-wide efforts as part of its European Green Deal, while the World Bank, IMF, and other international stakeholders are emphasizing the importance of a green economic recovery as part of the global pandemic response. Climate is a growing priority across the United States, meaning that action at state and local levels and by the private sector, and potentially more aggressive action at the federal level, is in the cards for 2021. In short, whether or not the U.S. re-enters the Paris Agreement or defines a new domestic agenda to address climate change, companies face a quickly evolving global landscape that will require proactive efforts internally and externally to shape policy trends and maintain competitiveness.

Trade

Climate is expected to be a major topic of debate in global trade and supply chain discussions in 2021. As part of the European Green Deal, the EU is exploring carbon border adjustment mechanisms, with the goal of preventing carbon leakage by putting a carbon price on certain imports. Proposals for companies to take into account climate in their operations and value chains could be incorporated into the EU’s 2021 update to its regulatory framework on corporate governance. The EU could set global precedents as it prioritizes climate disciplines in ongoing trade negotiations, and bilateral and regional FTAs are more likely to include climate-related provisions. More countries will seek to address overproduction in greenhouse gas intensive industries, and countries could explore regional or plurilateral agreements to facilitate flow of climate friendly goods. The United States is likely to provide leadership on these actions if there is a Biden administration and will have to respond to its trading partners’ positions and congressional demands if there is a second Trump administration. As these trade and investment issues bubble up for discussion at global levels, international platforms such as the Asia-Pacific Economic Cooperation (APEC) Forum and World Trade Organization (WTO) could also play growing roles in this policy debate.

Finance

Global standard setters and national regulators are taking the lead in addressing climate related risks in the financial sector. They are considering or implementing climate related risk disclosures and stress testing or other regulatory actions to integrate climate considerations in market decisions. They have formed mechanisms such as the Network for Greening the Financial System, the Coalition of Finance Ministers for Climate Action, the Sustainable Insurance Forum, and the International Platform for Sustainable Finance to consider climate risks and develop policies and opportunities for the private sector to address climate risks. There is also a growing recognition among U.S. regulators regarding climate related risks. A recent Commodity Futures Trading Commission report identified a long list of recommendations for financial regulators and the private sector to undertake to address risks to the financial system posed by climate change and Treasury’s Office of Financial Research has considered both physical risks and transition risks from climate change as posing risks to financial stability. Financial institutions, asset managers, and corporates have also begun to integrate sustainable investment principles and climate related risk disclosures into their corporate and investment strategies. There is likely to be an evolving public and policy debate regarding the appropriate balance with respect to climate action as greater economic and financial research results in greater precision about the need for action.

Tax

Tax policies related to climate will continue to shape the commercial and investment environment in 2021. Tax incentives have been cornerstone of U.S. federal policies to incentivize clean energy. Renewable energy credits, such as the Investment Tax Credit and Production Tax Credit, have been instrumental in building the wind and solar electric production industries. Congress recognized that tax credits were necessary for those projects to become commercially viable. Similarly, Congress enacted a credit for carbon oxide sequestration to encourage enhanced oil recovery (EOR) operators to conduct EOR operations using CO from industrial sources that would otherwise be vented to the atmosphere, or from direct air capture facilities that remove CO from the ambient air. The federal outlook will depend on the outcome of the U.S. elections. Vice President Biden’s tax plan includes proposals to expand several renewable-energy-related tax credits, including expanding renewable energy credits, such as the Section 45Q credit for carbon oxide sequestration. The Biden plan also includes credits for residential energy efficiency and a restoration of the Energy Investment Tax Credit and the Electric Vehicle Tax Credit. Biden’s plan also proposes to end subsidies to fossil fuel companies. President Trump did not release a detailed tax plan, but would likely continue to provide tax subsidies to fossil fuel companies. Some in the renewable energy sector hope that the potential for increased jobs may be attractive to a second-term President Trump and may seek to convince him to extend some of the current energy credits that are scheduled to be phased out. 

Whatever the U.S. federal outcomes, greater climate momentum could translate into increased activity at state levels. California enacted a low-carbon fuel standard (LCFS) in 2007, which required oil refineries and distributors to ensure that the mix of fuel they sell in California meets the greenhouse gas emissions targets. The LCFS aims to reduce dependence of petroleum and improve air quality by decreasing the carbon intensity of California’s transportation fuel pool and providing renewable alternatives. Since then, the California Air Resources Board has adopted additional regulations, including the Heavy-Duty Low NOx Omnibus Regulation issued this summer, aimed at reducing emissions from heavy-duty diesel trucks.

Energy

As global climate and energy policymaking continues unabated regardless of the election outcomes, it is likely to be paralleled by increasing activity from U.S. states, localities, utilities and the private sector in adopting their own clean energy goals. Indeed in the absence of federal climate action, announcements such as California’s recent decision to phase out gasoline-powered cars may become more common. Many major companies have also announced ambitious green energy pledges in 2020, which is likely to continue if not accelerate next year.

That said, the results on November 3 will dictate federal energy policy for at least the next four years. As we’ve previously described, the two candidates’ energy agendas could not be more dissimilar. Former Vice President Biden has proposed a detailed, climate-oriented agenda which includes a mix of spending and regulatory action. Within the first few months, he could introduce a multi-trillion-dollar clean energy package focused on renewable energy deployment, investment in next-generation technologies, and adopting a clean energy standard to decarbonize the energy grid by 2035. A potential Biden Administration could also be expected to use the government’s procurement power and regulatory levers to promote climate goals, for instance by converting the federal fleet to electric vehicles and adopting new regulations on the oil, gas and coal industries. President Trump, on the other hand, would likely continue his deregulatory agenda if re-elected and to emphasize the development of oil, gas and coal assets.

As policy and regulatory momentum accelerates, companies and associations have a window of opportunity now to assess potential opportunities and risks and map out the policy, legal and commercial steps for how they will engage and compete in this evolving environment. 

Register for the December 9 webinar on Climate 2021: Preparing for the Legal, Regulatory, Policy and Shareholder challenges ahead..