Increased pressure from shareholders, consumers, and employees has prompted many companies worldwide to evaluate their impact on the environment and take steps to reduce their carbon emissions.
But in the United States, increased federal funding for green energy projects amid a splintered government reaction to making public environmental, social, and governance (ESG)-related commitments has some companies confused as to the best plan of action. In this Insight, Morgan Lewis lawyers detail some of the current trends in corporate sustainability in the United States and Europe.
The past few years have seen a jump in companies either using or committing to using renewable energy. RE100—a global corporate renewable energy initiative where companies commit to 100% renewable energy—has grown to more than 380 members. In 2022, there was a new record in US corporate power purchase agreements (PPA) for a total of 19.9 gigawatts. In Europe, that PPA growth exceeded 8 gigawatts.
In the United States, renewable energy development is incentivized by funding and tax credits provided by the Inflation Reduction Act of 2022, but project development risk remains with higher costs and supply chain challenges, interconnection delays, interest rates, and regulatory risks.
Carbon offsets are an instrument that represents a permanent reduction in greenhouse gas (GHG) emissions or an increase in carbon removal or storage used to compensate for emissions that occur elsewhere. As more than 5,000 companies have set net-zero or science-based targets to reduce carbon emissions, carbon offset projects—such as forest management and conservation, carbon removal projects, and renewable energy development—have risen in popularity. While companies have begun to make changes to their operating structure to limit GHG emissions, some have purchased or plan to purchase carbon offsets in the voluntary carbon markets to offset their unavoidable emissions.
This is an emerging area, and there are concerns over the variability in standards used to verify the offset, the permanence of carbon reduction or removal, and how to register or retire the offset. These concerns are attracting the attention of regulators such as the Commodity Futures Trading Commission, which has signaled that it intends to exercise its enforcement authority over the voluntary carbon markets and investigate instances of fraudulent and manipulative misconduct. The US Securities and Exchange Commission also has included the disclosure of carbon offsets in proposed climate-related disclosure rules.
In 2019, the European Union pledged to reach several emission and renewable energy targets by 2030, including reducing GHG emissions by a minimum of 55%, using renewables for at least 32% of total energy use, and becoming climate-neutral by 2050. The EU Green Deal sets the roadmap for how to achieve these goals with an action plan for transport, energy, agriculture, buildings, and several industries.
In conjunction with the Green Deal, the European Union is relaxing certain rules and regulations to provide faster access to funding and as antitrust rules take account of sustainability goals. At the same time, the EU Emissions Trading System—the world’s first and largest major carbon market that regulates 40% of the EU’s total GHG emissions—is pushing a more ambitious cutting of emissions in certain sectors to 62% by 2030.
While the world’s first carbon tax will enter effect in the European Union, businesses operating in EU countries will face additional reporting requirements under the Corporate Sustainability Due Diligence Directive.
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