Download Climate Change Mitigation Efforts and the Effect on Doing Deals in

Climate Change Mitigation Efforts and the
Effect on Doing Deals in the Commercial
Real Estate Sector
March, 2010
Abbi L. Cohen
[email protected]
John M. Ix
[email protected]
© 2009 Dechert LLP
Overview
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Climate change in the U.S. increasingly has become the subject of
litigation, proposed legislation, regulation and, most recently, SEC
disclosure guidance.
•
Although it is too early to predict the full scope and extent of the impacts
from these developments, industry sectors that produce or consume
significant amounts of energy or use carbon-based products need to
start planning for a carbon-constrained world.
•
Commercial real estate is reportedly responsible directly and indirectly
for 35-40% of carbon emissions annually.
•
Those evaluating an acquisition or investment in commercial real estate
will want to develop a basic understanding of the key aspects of the
potential litigation risks, the proposed legislation and regulation of
greenhouse gas emissions and the target’s energy profile in order to
take into account, at least in broad terms, the potential direct and indirect
impacts and, thereby, recognize related challenges and opportunities.
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Global Warming Litigation
•
Attempts to impose limits on greenhouse gas emissions through
means of private lawsuits
– Lawsuits seek injunctive relief and/or compensatory and punitive damages
claiming public/private nuisance, trespass and negligence.
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Until recently, courts have routinely dismissed these suits at the
outset -- on “political question grounds.”
•
But recent executive and legislative actions – and reactions of two
federal appellate courts -- suggest that future cases may get beyond
this hurdle.
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Significant obstacles remain for plaintiffs even if they do survive
initial challenge.
Global Warming Litigation:
Recent Federal Appellate Cases
Connecticut v. Am. Elec. Power Co. (“AEP”)
– Relying on “political question grounds,” the District Court dismissed
an action by eight states which sought to require multiple electric
utility companies to cap and reduce their carbon dioxide emissions.
– A two-judge Second Circuit panel reversed and remanded, holding
that plaintiffs could sue defendants for creating a “public nuisance”
through their emissions of greenhouse gases. 582 F.3d 309 (2d Cir.
2009).
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Global Warming Litigation:
Recent Federal Appellate Cases
Comer v. Murphy Oil USA, Inc.
– Relying on “political question grounds” and lack of standing, the
District Court dismissed a class action by Mississippi Gulf Coast
property owners which alleged that insurance and oil companies
increased global warming thereby strengthening Hurricane Katrina.
– A three-judge Fifth Circuit panel reversed, holding that plaintiffs had
standing to bring claims for public/private nuisance, trespass, and
negligence, and that the claims were not barred by the political
question doctrine. 585 F.3d 855 (5th Cir. 2009).
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Global Warming Litigation:
Recent Federal Trial Court Cases
Native Village of Kivalina v. ExxonMobil Corp.
– Village of Kivalina, approximately 400 residents in northwest Alaska,
sued multiple energy companies to recover at least $400 million in
damages.
– The Village alleged that defendants’ greenhouse gas emissions
contributed to global warming, which caused the sea level to rise and
destroyed parts of the village.
– The district court dismissed the suit on political question and
standing grounds, specifically rejecting the Second Circuit’s analysis
in Connecticut v. AEP, which allowed similar claims to proceed.
2009 U.S. Dist. LEXIS 99563 (N.D. Cal. September 30, 2009).
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Global Warming Litigation:
Where We Are Today
• Massachusetts v. EPA, along with recent actions by the Obama
Administration, Congress and EPA regarding regulation of
greenhouse gases, has contributed to the re-emergence of
climate change litigation.
• Defendants in Connecticut v. AEP and Comer filed for a rehearing
en banc, which could alter the outcomes. If petitions for
rehearing en banc are denied, then defendants could file petitions
for certiorari with the U.S. Supreme Court. Otherwise cases will
move forward in district courts.
• Plaintiffs in Native Village of Kivalina have appealed to the Ninth
Circuit, which is considered to be a friendly forum for
environmental plaintiffs.
• Political question was only a threshold issue in these cases;
plaintiffs in all of these cases will face a tough task in trying to
prove causation.
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The Legislative Attack on Greenhouse Gases
• On June 26, 2009, the U.S. House of Representatives passed the
American Clean Energy and Security Act of 2009 (H.R. 2454)
(the ACES Bill, also commonly referred to as the WaxmanMarkey Bill).
– The ACES Bill would impose a cap and trade program to reduce
emissions by 3% below 2005 levels by 2012, 17% by 2020, 42% by
2030 and 83% by 2050.
– Caps on emissions from individual covered sources would be based
on emissions in specified baseline years. For example,
• As of April 1, 2015, industrial, chemical and petrochemical sources that
emit more than 25,000 tons of GHGs capped at 2014 emission levels.
– Emission allowances would be allocated to covered sources and
sold at auction. Excess allowances could be traded. Covered
sources could bank or borrow excess emission allowances from
other years. Covered sources could acquire “off-set” credits.
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The Legislative Attack on Greenhouse Gases
• On September 30, 2009, Senators Kerry and Boxer introduced in
the Senate a counterpart to the ACES Bill, the Clean Energy Jobs
and American Power Act.
– Like ACES, the Kerry-Boxer Bill relies on a cap and trade program to
reduce emissions. The Senate Bill proposes a 20% reduction below
2005 levels until 85% reduction is achieved.
• In December 2009, Senators Kerry, Graham, and Lieberman
proposed a framework for addressing climate change; the Bill is
expected to be introduced by Spring recess.
– Early reports suggest the proposed bill will include a national target
for reducing GHGs with a customized approach for different industry
sectors.
– For example, the electric utility sector would likely have an emissions
cap and the petroleum industry could face a fuel tax.
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The Legislative Attack on Greenhouse Gases
Building Sector Energy Performance
• Both the Waxman-Markey and Kerry-Boxer Bills have proposals
applicable to buildings. (It’s not clear yet whether Kerry-GrahamLieberman will include similar provisions.) The proposed building
provisions vary in how they would be implemented, but, include
the following:
– Federal building codes for new construction
• require states to meet federal standards
• include energy reduction targets
• commercial codes play a role
– Retrofit program for existing buildings
• both Bills effectively propose the same program, known as “Retrofit For
Environmental and Energy Performance”
• dollars made available to states
• incentives are performance-based; more dollars, greater energy
reduction
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The Legislative Attack on Greenhouse Gases
Building Sector Energy Performance
– Labeling
• Waxman-Markey Bill provides the following:
– applies to new construction only
– requires EPA to develop materials to measure and achieve building energy
performance
– states that adopt federal program would be eligible for funding through
emissions allowances allocated for purposes of cap and trade
• Kerry-Boxer Bill doesn’t address labeling although Senate Energy Bill
proposed by Senator Bingaman does
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The Legislative Attack on Greenhouse Gases
Other Recent Legislative Efforts Regarding
Building Energy Performance
• On March 4, 2010, Senators Markey and Pryor introduced
legislation to promote the installation of energy efficient
renovations in commercial and residential buildings; the proposed
“Building Star” legislation.
– Two part approach through rebates and tax incentives, including:
• rebates to building owners who install or implement energy-efficient
building equipment materials, products and services during 2010
• incentives to be implemented by increasing the Energy Efficient
Commercial Building Tax Deduction (26 U.S.C. 179D) from $1.80 to
$3.00 per square foot
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Federal Administrative Attack
GHG Endangerment Findings
• On April 2, 2007, in Massachusetts v. EPA, 549 U.S. 497
(2007), the United States Supreme Court found that GHGs
are pollutants covered by the Clean Air Act.
• As a result, EPA was required to determine whether or not
emissions of GHGs from new motor vehicles “caused or
contributed” to air pollution that may reasonably be
anticipated to endanger public health or welfare, or whether
the science is too uncertain to make a reasoned decision.
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Federal Administrative Attack
GHG Endangerment Findings
• On December 7, 2009, EPA Administrator Lisa Jackson
announced the following:
– Endangerment Finding: the current and projected
concentrations of six key, well-mixed GHGs in the atmosphere
threaten public health and welfare of current and future
generations.
– Cause or Contribute Finding: combined emissions of these
well-mixed GHGs from new motor vehicles and new motor
vehicle engines contribute to greenhouse gas pollution that
threatens public health and welfare.
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Federal Administrative Attack
GHG Endangerment Findings
• EPA’s action did not impose any requirements itself; it is a prerequisite to finalizing EPA’s proposed GHG emission standards
for light duty vehicles proposed September 15, 2009, likely to be
finalized this Spring.
• By regulating GHG emissions from light duty vehicles, EPA will
trigger Clean Air Act permitting requirements under the
Prevention of Significant Deterioration (PSD) and Operating
Permit (Title V) programs for GHG emissions.
• The Endangerment Findings were immediately challenged in the
DC Court of Appeals. There are at least sixteen pending lawsuits
challenging EPA’s findings.
• There also has been significant Congressional activity to limit
EPA’s authority to rule before Congress otherwise acts on climate
change.
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Federal Administrative Attack
GHG Tailoring Rule
• EPA proposed a rule on September 30, 2009 to “tailor” the
applicability of the PSD and Title V programs to large GHG
facilities emitting over 25,000 tons of GHGs in CO2e per year.
– EPA subsequently announced that the threshold could be increased
to 75,000 tons in the final rule.
• Under the proposed rule, facilities with GHG emissions below
25,000 tons/yr of CO2e would not need PSD or Title V permits in
most instances where EPA issues permits or states/local areas
are delegated federal PSD programs.
• If the tailoring rule is defeated, the 250 ton threshold for CO2e
could result in some commercial buildings needing Title V
permits.
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Federal Administrative Attack
Mandatory Reporting of Greenhouse Gas GHG Emissions
• Final EPA Rule published in the Federal Register on October 30,
2009
• Requires reporting of carbon dioxide equivalents, including
carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), and
fluorinated GHGs, including hydrofluorocarbons (HFCs),
perfluorocarbons (PFCs), and sulfur hexafluoride (SF6)
(collectively, “CO2e”)
• Applies to specified energy-intensive sources and sources with
emissions at or greater than 25,000 metric tons of CO2e per year
in combined emissions
• Final rule does not require facilities to report electricity purchases
or emissions from electricity consumption
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Federal Administrative Attack
SEC Guidance on Climate Change Disclosure
• On February 2, 2010, the SEC issued an interpretative release on
public company disclosure of climate change issues (the
“Release”).
• The Release identifies the following categories of information
companies should evaluate for materiality and disclosure:
– the impact of climate change legislation and regulation
– the impact of climate change international accords
– the indirect consequences of climate change regulation on business
transactions
– the physical impacts of climate change
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Federal Administrative Attack
SEC Guidance on Climate Change Disclosure
• Consider legislative and regulatory developments for disclosure
in MD&A
• Review risk factor disclosure
• Public reporting commercial real estate companies will need to
consider their disclosures, especially if they have properties in
weather sensitive locations or with significant carbon footprints.
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State and Local Energy Initiatives
• In the absence of federal standards, more than 100 states and
local municipalities have taken action with respect to energy use
and/or consumption in the commercial real estate sector focusing
on disclosure of a building’s energy usage and efficiency.
• California is widely viewed as the leader with California Assembly
Bill 1103 (2007) which requires disclosure, as of January 1, 2010,
of a building’s energy consumption history to prospective
purchasers, tenants and lenders.
– Utilities record building energy consumption in a format that is
uploaded to Energy Star Portfolio manager.
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State and Local Energy Initiatives
• Other states, and municipalities like New York City and
Washington, DC, also have focused on energy disclosure .
• Washington, DC: “Clean and Affordable Energy Act of 2008”
– requires energy benchmarking using Energy Star Portfolio Manager
with staggered reporting based on square footage; larger privateowned buildings (i.e., over 200,000 sq. ft.) must report scores now
• New York City: “Greener, Greater Buildings Plan” adopted
December 8, 2009
– requires building energy rating and disclosure for public and larger
buildings using Energy Star Portfolio Manager
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Voluntary Energy Assessment
and Certification Programs
• There has been a proliferation of voluntary energy and
sustainability benchmark and certification programs for
commercial real estate. A number of green building industry
standards are under development (e.g., Capital Markets
Partnership).
– The most well-known programs are EPA’s Energy Star Program
(relied on by a number of state and local initiatives) and the U.S.
Green Building Council’s LEED certification program.
– One of the newest is the International Green Construction Code
announced on March 11, 2010 by the International Code Council, the
U.S. Green Building Council and others.
– In February 2010, members of the coalition for Energy and
Environmental Leadership in Leased Space announced development
of a baseline Environmental and Energy Efficiency Attributes
checklist.
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Voluntary Energy Assessment and
Certification Programs
– There also is a draft ASTM Standard Practice (WK24707) being
developed to give guidance on commercial building energy
performance evaluation and reporting.
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Doing The Deal
• Although the specific questions we should ask an acquisition or
investment target will necessarily depend on the specific property
or company, and the scope, terms and timing of the evolving
legislative and regulatory framework, most industry sectors are
thinking about the effect of climate change and their energy
profiles.
• Prudent investors in commercial real estate, at a minimum,
should be prepared to start the dialogue as well.
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What Are the GHG and Energy Questions You
Should Consider in Due Diligence?
• What is the carbon footprint of the target property?
– Does the property emit more than 250 tpy of CO2e and, therefore, is
it potentially subject to Title V permit requirements if the EPA’s
Tailoring Rule is not finalized or is judicially invalidated?
• Does the location of the property render it sensitive to sea level
rise, extreme weather or other alleged meteorological effects of
global warming?
– Impact on the acquirer’s SEC disclosures?
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What Are the GHG and Energy Questions You
Should Consider in Due Diligence?
• Does the property comply with applicable state and/or local
energy conservation codes?
– Building codes?
– Reporting/disclosure?
– Labeling?
• Is the property subject to mandatory energy efficiency disclosure?
– California? New York City? Washington, D.C.? Other?
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What Are the GHG and Energy Questions You
Should Consider in Due Diligence?
• Does the property comply with any voluntary energy performance
information gathering/disclosure standards (e.g., LEEDS, Energy
Star, International Green Construction Code, and/or Capital
Markets Partnership)?
– If so, how well did it score?
• For new construction, was the building designed consistent with
an energy efficiency target?
• Will a building renovation or addition trigger a requirement to
improve energy efficiency or require a retrofit?
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What Are the GHG and Energy Questions You
Should Consider in Due Diligence?
• Has an energy audit to identify potential savings in energy
consumption been completed for the property?
– How was an energy baseline established?
– How is progress measured?
– What were the property’s electrical, gas and water consumption
amounts and costs for the preceding year?
– What improvements are required in calibration, operation and
synchronization of existing systems?
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What Are the GHG and Energy Questions You
Should Consider in Due Diligence?
• Has a retro-commissioning study been performed for the
property?
– Has it been implemented?
– What is the process for ensuring maximum building system
functionality?
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What Are the GHG and Energy Questions You
Should Consider in Due Diligence?
• If the property is or will be subject to a lease, as between the
landlord and the tenant, who is responsible for complying with
energy conservation codes?
• If the property is or will be subject to a lease, as between the
landlord and the tenant, who will benefit from energy efficiency
investments?
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What Are the GHG and Energy Questions You
Should Consider in Due Diligence?
• Has there been any assessment of distributed generation of
renewable energy, such as solar and wind, for the property?
• Has there been any assessment of the availability of incentives,
credits, grants or loans pursuant to the American Recovery and
Reinvestment Act of 2009 or otherwise to fund technological
changes or energy efficient projects?
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For More Information
• Industry Standards
– USEPA Energy Star
http://www.energystar.gov/index.cfm?c=business.bus_index
http://www.energystar.gov/index.cfm?c=business.bus_bldgs
– USGBC LEED
http://www.usgbc.org/DisplayPage.aspx?CategoryID=19
– ASTM Building Energy Performance Disclosure (All Appropriate
Disclosure)
http://www.astm.org/WorkItems/WK24707.htm
– CMP Green Value Score http://www.capitalmarketspartnership.com/
– American Society of Heating, Refrigeration and Air Conditioning
Engineers http://www.ashrae.org/ ASHRAE 189.1
– Core Energy Code (New Building Institute)
http://www.newbuildings.org/codes-policy/energy-codes
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For More Information
– IECC http://www.internationalcodes.net/2009-international-energyconseravation-codes.shtml
– Building Owners and Managers Association International
http://www.boma.org/getinvolved/7pointchallenge/Pages/default.aspx
– International Code Council Green Construction Code
http://www.iccsafe.org/cs/IGCC/Pages/default.aspx
– Green Globes
http://www.greenglobes.com/
– Institute for Market Transformation – Benchmarking and Disclosure
Program
http://imt.org/benchmarking-and-disclosure.html
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For More Information
– Climate Neutral Business Network
http://www.climateneutral.com/
• International
– European Energy Performance of Buildings Directive
http://www.epbd-ca.org/
http://www.diag.org.uk/key-information/key-documents-.aspx
• State and Local Databases
– Database of State Incentives for Renewable and Efficiency
http://www.dsireusa.org/
– Council of Governments (DC)
http://www.mwcog.org/environment/climate/about.asp
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For More Information
• General
– Columbia University Climate Regulation Tracking Service
http://www.law.columbia.edu/centers/climatechange/resources/epa
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