This week we talk about fuel efficiency, the California EPA, and Scope 3.

We also discuss the EU’s emission reporting efforts, regulations, and business incentives.

Recommended Book: Undue Hate by Daniel F. Stone

Transcript

The California Air Resources Board, or CARB, is a California government agency that resulted from the 1967 merging of the state's Bureau of Air Sanitation and its Motor Vehicle Pollution Control Board. It's part of California's larger Environmental Protection Agency, and its purpose is to make the air cleaner, healthier, and as free of toxins as possible.

Falling under that remit is the setting of vehicle emissions standards: the minimum miles-per-gallon of fuel efficiency vehicles must offer in order to be sold in the state.

And California is the only state that's allowed to set such standards, as the federal US government is generally the setter of such things—but the Clean Air Act of 1967 allows the state to get permission to set its own standards from the US government, and then as long as the EPA doesn't find their standards arbitrary or broadly inconsistent with the goals of the US's ambitions, and as long as they're more ambitious than the US's standards for such things, they must grant that permission.

The CARB only has 16 total members, two of whom are there just for oversight purposes, so they don't have voting powers, and 12 of the remaining 14 are appointed by the governor of California, and are then confirmed by the state senate.

Each of these members are different sorts of air and pollution experts from different regions across the state, except for two members of the public and one person who serves as the Chair of the group.

This group, though small and relatively humble in terms of the powers granted to them, and resources allotted, has an out of proportion influence because other states can choose to adopt the vehicle fuel standards they set, instead of those set by the US government.

And that's important, because California's fuel standards, since 2009, at least, when they won a court case that confirmed their ability to do this, tend to be more ambitious than those set by the federal EPA; the states that choose to use California's standards are often referred to as CARB states, and there are 16 of them, inclusive of California, as of the 2025 regulatory year.

This capability was temporarily truncated in 2019, when then-President Trump decided to take away California's right to set such standards, and the right to set up other popular—in California and other CARB states—programs, like the ZEV mandate, standing for Zero-Emissions Vehicle mandate, which basically said a certain percentage of fleet vehicles had to be zero-emissions vehicles, the percentage increasing each year—he wanted to take the right to set such things away, saying, in essence, a state government shouldn't be able to do so.

This rule was reverse in mid-2021, which gave California back that power to set standards, and though many carmakers, including Ford, Volkswagen, Honda, and BMW stuck with California's earlier standards, even after they were no longer legally required to do so, because of Trump's actions, seventeen states sued the EPA in 2022, saying, basically, that because California's standards have such a huge impact on how vehicles are developed and sold, car companies adhering to them even when not legally required to do so, because they want to keep selling their cars in California, it unfairly gives them power over the industry that other states don't enjoy.

That lawsuit, Ohio v. EPA, is ongoing, but California's influence in this and many other industries—especially in climate-related spaces—continues for the time being.

What I'd like to talk about today is a recent piece of legislation passed by the California government that could have even bigger and broader implications for corporations across the United States, and around the world.

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California's Senate Bill 253, also called SB 253, also called the Climate Corporate Data Accountability Act, was signed into law by Governor Gavin Newsom in early October, and its essential function is requiring that large California businesses track, calculate, and disclose their direct and indirect greenhouse gas emissions.

In practice, that means companies that fit the criteria of making more than $1 billion a year will need to report their emissions.

The compulsory reporting of emissions for big businesses is already a pretty big deal, especially in the United States, but this is broadly the case in most countries around the world, too; some few require it, most don't.

And this law will likely affect more than 5,300 companies, which means it will almost immediately have a profound impact on our capacity to understand who's emitting what, in part by goosing the fortunes of companies doing such tracking and computing and reporting, and that, in turn, means we'll have an easier and less-expensive time, in the near-future, getting this sort of information for other purposes, as well—there's not enough business to keep a bunch of emissions-tracking companies in the black right now, but soon, with all these big California businesses needing their services, that will change dramatically.

It won't be tomorrow, though; under this law, the California Air Resources Board has to adopt reporting regulations by January 1, 2025, the impacted companies must started disclosing their Scope 1 and 2 emissions, publicly, in 2026, and in 2027, they must report their Scope 3 emissions, as well.

Scope 1 emissions are those that a company—let's say Apple—emits directly.

So any emissions created by vehicles the company's staff uses while doing business are Scope 1 emissions.

Scope 2 emissions expand the radius of what we're looking at to include the energy produced to power the things they do—for instance, any emissions produced while generating the energy that keeps the lights on at their offices would be Scope 2 emissions; so that's relatively few or zero emissions if they're using solar panels, but substantially more if they're using electricity produced by a gas or coal plant.

Scope 3 emissions are even broader, encompassing not just in-company, direct activity and the production of the energy that fuels that activity, but also the activities conducted by others on their behalf, all the way up and down the supply chain.

So while Apple doesn't directly control the factories where iPhones are made, the emissions from these factories are within their Scope 3 responsibility, wherever those factories happen to be located and who controls them, as is the fuel burned to ship those iPhones from China to their final destinations.

Some of these emissions are relatively easy to track or estimate, others substantially less so.

It becomes a huge undertaking to keep tabs on the shipping fleet activities of other companies that you hire, though, just as it can be tricky to get accurate numbers from entities run by governments where such reporting isn't required, and where the tracking and reporting of such things is consequently uncommon.

Part of why these companies are being given several years of lead-time, then, is to make sure all the California government's i's are dotted and t's are crossed, but it's also to give them the opportunity to figure out how to track and calculate these things, and to give them the ability to do a decent job of it, despite there not being convenient or reliable ways of accomplishing this in many industries and parts of the world, right now.

Much of this is new territory, and this law, among other things, will stimulate the creation of new tracking and calculating and reporting systems and methods.

Many companies, like Apple and Microsoft and Adobe and other tech giants, in particular, already track their emissions, mostly Scope 1 and 2, with a bare few also attempting to keep tabs on their Scope 3 responsibilities, either for ideological reasons or because they want to get ahead of the ball, seeing the writing on the wall about where this is all going and not wanting to be caught flat-footed if and when new laws arrive that require the tracking of such things, with heavy penalties for the failure to do so.

This law levies a penalty of a half-million dollars on companies that fail to report their emissions, but there are no penalties for the volume of the emissions, themselves.

The idea, then, is that this is a first step toward emissions-related fines, but since we can't really fine companies for hardcore emissions when we can't prove they've got them, first we have to make sure there's reliable, accurate tracking practices in place, and all that tracking must be verified by third-party inspectors, which is something this law does require.

But for the time being, this is mostly an exercise in getting everyone used to this new way of doing things, and ensuring the infrastructure for future tracking-related legislation has been installed.

While this is still a pretty new undertaking, in the US and globally, California is not the first entity to pass this sort of legislation.

The European Union has a new law that requires, beginning as soon as January 2024, that large international companies that raise money on European stock exchanges will need to provide data about their emissions, alongside information about their climate risk exposure and their strategies for addressing those emissions and risks.

It's expected that relatively few companies will fall under the auspices of this EU law in 2024, but that by 2025 more than 3,000 US companies will have to follow these guidelines, and more than 50,000 companies, globally, resulting in an expansion of those aforementioned emissions-tracking and assessment businesses, and a lot more companies, globally, taking these sorts of things into consideration, working these sorts of standards into their business models by necessity, and slowly but surely changing their industries and expectations as a consequence.

EU laws have been incredibly influential across a variety of spaces over the past decade or so—their regulations on internet privacy have forced a slew of standards on many global companies, for instance, as it's tricky to differentiate between customers in different parts of the world, online, and it's often just easier to apply the most stringent rules to everyone, rather than trying to splinter the web into EU users and everyone else.

The EU's emissions rules will likely have a similar impact, as businesses don't want to be cut out of the EU market, and in many cases they'll do the math and realize that it's probably worth the investment to just get their emissions reporting systems set up, now, so they don't have to worry about it later when more penalties for this sort of thing are passed in various countries, and so they're not outcompeted by competitors that did make those investments, earlier on.

And California's new standard is likely to be similarly, if not even more impactful, in part because California is a huge economy—it would be one of the top five biggest economies in the world by GDP, if it were a country—and no one wants to be cut out of that market.

In other words: car companies are willing to play ball with California because they want to sell their cars in California without penalty or obstruction, and corporations are likely to play ball with these hefty emissions standards for the same reason: because they want to do business in California, and the investment, though not nothing, is also not as big a deal as having to move elsewhere, or being otherwise hindered in-state in the future; and having similar rules in both California and the EU doubles the incentive for corporations to get their ducks in a row, emissions-tracking-wise.

Worth noting is that both pieces of legislation, in California and the EU, were watered-down a bit before they became law.

California had a similar bill up for debate in 2022, and that one failed to become law, and there was a last-minute effort in the EU by mostly conservative lawmakers to kill off their law before it could be made real; and both pieces of legislation had to be reduced in impact a bit before arrival, to get enough support and avoid the hazards all that opposition represented.

That said, they're both still stronger than anything else that's ever been passed on this subject in a major economy, and they apply to slightly different types of companies, with the EU hitting more and a wider variety of businesses, while California's law encompasses fewer, larger companies.

Also notable is that the US government is attempting to get a similar sort of bill passed, though its version, like its fuel efficiency requirements, will almost certainly be less aggressive than California's version of the same, and while there are efforts to get Scope 3 emissions in there, at least a little, Republicans are threatening to kill the whole thing, even saying they'll subpoena folks from the EPA if they go for anything too strong, by suggesting that the agency is basically collaborating with EU regulators on climate regulations in an illegal fashion.

The leaders of some major US companies, those that aren't impacted by either of these laws, have said they're keen just to get clarity on all this, and would be fine with more regulation, as long as it's consistent and understandable, and doesn't break the bank; they know it's coming, and they'd like to clear the fog of war that's making things complicated for them, right now.

Others have said that any such requirements are nonsense and that the entire exercise is pointless, and that they will thus fight any such regulation to the bitter end.

That latter group is spending more money on lobbyists and such to influence things, so there's a chance the federal US version of this law will be either delayed for a very long time, or will arrive as a wisp of a hint of its former self—but there's also a decent chance these first two, and other, subsequent versions of this type of law passed in other countries, fill in the gaps for a huge number of corporate entities, resulting in similar outcomes to a US federal law, even if that sort of law isn't passed or is so weak that it doesn't really matter, because they, as a pair, force so many companies to make changes if they want to remain competitive, keep their market valuations stable as investors start to take these sort of calculations into consideration, and to ensure they're able to get insurance and maintain decent ratings, as those systems start to adjust to this new reality, as well.

Show Notes

* https://www.nationalgrid.com/stories/energy-explained/what-are-scope-1-2-3-carbon-emissions

* https://archive.ph/exK7V

* https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=202320240SB253

* https://www.sandiegouniontribune.com/news/california/story/2023-10-07/california-gov-gavin-newsom-signs-law-requiring-big-businesses-to-disclose-emissions

* https://archive.ph/DkXTh

* https://www.greenqueen.com.hk/california-governor-gavin-newsom-signs-landmark-corporate-climate-disclosure-bills/

* https://apnews.com/article/california-climate-change-emissions-disclosure-reporting-companies-123fe15c840b82f960384cbe04f3d955?taid=64ffc13479887800015d66a4

* https://www.ifixit.com/News/81914/california-just-became-the-third-state-to-pass-electronics-right-to-repair

* Mandatory emissions disclosures arrive

* Wins, losses, disasters

* https://apnews.com/article/climate-change-carbon-corporations-damage-pollution-9cb9e7c9feb2a68cb6dc0ae99c5e943a

* https://www.reuters.com/sustainability/sec-chief-says-new-california-law-could-change-baseline-coming-sec-climate-rule-2023-09-27/?stream=top

* https://9to5mac.com/2023/10/11/california-privacy-law/

* https://www.pbs.org/newshour/politics/gov-newsom-signs-new-law-requiring-big-companies-in-california-to-disclose-emissions

* https://www.pbs.org/newshour/nation/analysis-the-potential-global-impact-of-californias-new-corporate-climate-disclosure-laws

* https://www.epa.gov/regulations-emissions-vehicles-and-engines/california-greenhouse-gas-waiver-request

* https://thehill.com/policy/energy-environment/3487755-seventeen-states-sue-epa-for-letting-california-set-vehicle-standards/

* https://climatecasechart.com/case/ohio-v-epa/

* https://en.wikipedia.org/wiki/California_Air_Resources_Board

* https://www.epa.gov/state-and-local-transportation/vehicle-emissions-california-waivers-and-authorizations

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Śrīla Bhakti Vinod Thakur

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