California Bypass

This Week's Trend In Brief:

• Earlier this month, California Governor Gavin Newsom and the California legislature acted as a default national legislature, making an end run around the federal rulemaking process by enacting legislation requiring companies doing business in the state that have more than $1 billion in annual revenues to report Scope 1, 2, and 3 emissions. 
   

• This expansive law is the first in the country requiring companies to report Scope 3 emissions, placing a complex burden on suppliers, vendors, and other small businesses across the country that work with these large companies but do not have resources to meet the reporting requirements.
   

• Democratic lawmakers and climate activists are now using California’s law to pressure the U.S. Securities and Exchange Commission (SEC) to include Scope 3 emissions in its own reporting rule, which has already faced major pushback from Congress and a range of stakeholders concerned the rule would harm business and become an undue pressure point for activists rather than pertinent information for investors.
   

• This is not the first time activists have attempted to bypass federal rulemaking when their favored policies fall flat, as activists across the country have repeatedly fought to establish these policies in sympathetic jurisdictions as a step towards instituting them nationally.
   

• Time and time again, what happens in California does not stay in California, and public affairs professionals across the energy industry will need to understand and contain activist and policymakers pressures there and ensure they do not impact policy debates elsewhere.

Digging Deeper:

 
Earlier this month, California Governor Gavin Newsom and the state’s legislature did an end run around the federal rulemaking process by enacting legislation requiring companies doing business in California that have more than $1 billion in annual revenues to disclose both direct and indirect emissions. The legislation is notable as it requires companies to report not only Scope 1 and 2 emissions but Scope 3 emissions, which include indirect emissions that occur across a company’s entire supply chain and product usage. The legislation was passed ahead of the U.S. Securities and Exchange Commission (SEC) finalizing its own long-debated rule on emissions disclosures, and the law goes beyond the SEC’s proposed rule.
 
Lawmakers, companies, and business trade groups have broadly opposed the SEC rule in its current state, but Democratic lawmakers and climate activists are using the new California law to demand the SEC follow the state’s lead and broaden its rule. California Democrats, including U.S. Senate candidate and Congressman Adam Schiff, recently urged SEC chair Gary Gensler to incorporate California’s policy into the SEC rule, and California State Senator Lena Gonzalez (D) argued the legislation “is international policy” that should be adopted across the globe. California Environmental Voters legislative manager Melissa Romero similarly contended the bill exemplifies “California’s role is as a global leader on climate,” and University of Florida Law School professor Lynn LoPucki called the legislation “a national bill” because “nearly every large company in the United States that does business in California will be forced to report its emissions.” Legislators in New York and Washington have also celebrated the new law for clearing the path toward instituting similar measures in their states.
 
The push from activists and lawmakers comes despite worries from stakeholders who believe the SEC rule would harm small businesses by forcing them to report emissions without the experience and expertise needed to meet the requirements. Many large corporations that operate in California, including Microsoft, Patagonia, and Ikea, declared their support for the California legislation before it was signed, but these companies are among the thousands of public and private companies that already have the infrastructure in place to comply with the new law. Suppliers, vendors, and other small businesses across larger firms’ supply chain worry the law will entangle them in the costly reporting process they cannot afford to handle. Despite these worries, Gensler has indicated he will factor the California law into the SEC’s final rule.
 
The episode follows a familiar pattern in which activists find friendly venues for their favored policies, then use that success to pressure policymakers elsewhere. Congress failed to pass cap and trade legislation in 2010, but climate activists continued to pursue the policy that has since been adopted by thirteen states including California, Massachusetts, and New York. In 2019, environmental activists pressured a Montana judge into rejecting a long-standing nationwide permit for many pipelines in their quest to stop Keystone XL. More recently, after the Biden Administration announced, and subsequently walked back, the idea of banning gas stoves federally, activists continued to pressure states into adopting their own bans on gas stoves despite widespread opposition to the measures.
 
It has become increasingly clear that what happens in progressive states like California do not stay in California – and public affairs professionals cannot afford to ignore this challenge. Activists in California have used this venue-shopping strategy for years, and at least seventeen states have pledged to followCalifornia’s lead on climate policy. The new emissions reporting law in California is the latest example of activists and their allied lawmakers attempting to bypass the federal rulemaking process by establishing these policies in sympathetic jurisdictions as a step towards instituting these policies nationally. Public affairs professionals supporting the energy industry must ensure they understand how activists are leveraging easy wins to secure – or bypass – tough victories elsewhere. By the time it comes to your jurisdiction, it might be too late. That’s why energy industry public affairs teams need a proven playbook to assess risks and anticipate potential concerns so they can stay two steps ahead of the opposition.

Trends in Energy is your weekly look at key trends affecting the energy industry, brought to you by the competitive intelligence experts at Delve. As the political and regulatory landscape continues to shift, reach out to learn how our insights can help you navigate these challenges.