Cleaning Up Carbon

Smokestacks and Mirrors
The same holds true for businesses that restrict corporate travel, or those, like DuPont, that manufacture carbon-friendly products. While such efforts represent a budding business opportunity, they also pose an accounting issue. Catania, of Whirlpool, which manufactures a host of energy-efficient appliances, says there has been a "regular dialogue" among companies, energy providers, and policymakers about so-called double counting of reductions.

Those conversations could become more heated if businesses face monetary fines for going over mandated CO₂ limits — or have to pony up for climate allowances. Says Rick Bennett, vice president of environmental health and safety at UTC: "There is a big battle looming over who gets the credit."

Large carbon emitters that lose out may have no choice but to rethink their business models or product mixes. Automakers top that list. In its 2005 annual report, Ford indicated that if substantial increases in gas-mileage standards were imposed or if state greenhouse-gas regulations were not overturned, the company may be forced to take various "costly actions that would have a substantial adverse effect on our sales volume and profits." The company went on to note that it might have to curtail production of high-margin vehicles like luxury cars, restrict engine offerings, and increase production of fuel-efficient cars.

Carbon concerns are beginning to color all sorts of corporate decisions. For example, before Whirlpool acquired Maytag for $2.7 billion in 2006, Catania says the company ran projections to see what effect the purchase would have on the company's stated CO₂ reduction goals. At Exelon Corp., Phillip Barnett, senior vice president, corporate financial planning, says the power producer examines the carbon footprint of a potential acquisition during due diligence. "It's part of the evaluation of risk and opportunity," he says, "part of our economic analysis."

In some cases, carbon due diligence can lead to surprises. In 2004, DuPont sold off its fiber business, which included Invista, a nearly $7 billion specialty fibers operation. Rittenhouse says the unit was divested, in part, because of the operation's large carbon footprint. More recently, the potential acquirers of Texas utility TXU, including Kohlberg Kravis Roberts, agreed to terminate the applications for 8 of the power producer's 11 proposed coal plants in Texas. Those plants would have had to pay at least $917 million a year in environmental compliance costs, according to Ceres, a network of investors and public-interest groups focused on sustainability issues.

Sweat Suits
Going forward with such controversial deals is sure to bring out the lawyers. In fact, attorneys of all stripes are already queuing up to sue businesses over global warming.

In Mississippi, a group of local residents has filed a class-action lawsuit against oil companies, utilities, and coal producers. The suit claims that the defendants' carbon emissions contributed to global warming, which spawned Hurricane Katrina, which then destroyed the litigants' homes. Don Goldberg, a senior attorney at The Center for International Environmental Law, predicts that U.S. corporations may also be sued over climate change by foreign entities. Those suits — from indigenous peoples, island nations, and other parties — might be linked to violations of international environmental treaties or human-rights laws.

States are also getting in on the act. In the first such case, eight states sued five utilities for allegedly pumping 650 million tons of carbon dioxide into the atmosphere. The case was dismissed, but observers expect a slew of others. The attorney general of California, for one, is currently seeking damages from the Big Six automakers for allegedly contributing to global warming and thus harming the state's ecosystem. Says Carey: "States are doing things because the federal government hasn't."

Some observers believe it will be difficult for states to pin the climate rap on individual companies. "We're talking about a global situation," says a spokesperson at the Insurance Information Institute. "Establishing causality is about as tenuous as it gets."

Risk experts point out that early litigation in some other celebrated state lawsuits was also laughed off as ludicrous. "Some lawyers say it's legally impossible to make the connection between global warming and corporate liability," notes the University of Wisconsin's Anderson. "But I heard this sort of argument in the tobacco and asbestos cases."

John Goff is technology editor at CFO.

Up in Smoke

Because insurers typically exclude pollution-related liabilities from general liability, umbrella/excess, and directors'-and-officers' policies, corporations would likely have to rely on internal cash flow to pay damages stemming from climate-related lawsuits. A case pending before the U.S. Supreme Court, however, could get companies off the hook.

In the suit (Massachusetts v. Environmental Protection Agency), 12 states, 13 environmental groups, two cities, the District of Columbia, and American Samoa are attempting to get the EPA to regulate carbon-dioxide emissions. The plaintiffs argue that CO₂ is a pollutant and therefore falls under the agency's regulatory purview as defined by the Clean Air Act. The EPA challenges the assertion.

• « previous
• 1
• 2
• 3
• 4
• next »