Contractor Emissions Rules Near Release, Navigating GOP Hurdles
The Biden administration is on track to finalize emissions disclosure requirements and other climate reporting mandates for federal contractors as soon as this summer, despite Republican roadblocks intended to derail the initiative.
The Defense Department plans to have a draft of the final rules by July 17, even as a Republican-led effort bars the agency from requiring emissions disclosures for months, according to US government records. The White House is expected to give the regulations a final look soon after. It has up to three months to review rules before they’re issued, but the process can move much faster depending on the regulation, with some receiving a green light within days.
The rules—as proposed in 2022—would establish the Biden administration’s most extensive reporting requirements on companies’ carbon footprints to date. Contractors would need to report greenhouse gas emissions from their direct operations, energy use, supply chains and products, among other sources. Emissions data connected to the production and use of US government airplanes, ships, tanks and other military equipment, for example, may be subject to disclosure.
The pending regulations would add another layer to a complex web of emerging climate disclosure requirements poised to affect large, US companies. They would follow Securities and Exchange Commission rules released in March that require more limited emissions disclosures from public companies, including those that are contractors. The SEC has placed its new rules on hold amid legal challenges. Contractors with operations in California and the EU also could face separate sets of emissions reporting requirements.
The proposed federal contractor rules came after President Joe Biden ordered the US government in 2021 to have a net-zero carbon footprint by 2050. They would cover thousands of companies, including contracting giants Lockheed Martin Corp., Raytheon successor RTX Corp. and General Dynamics Corp. They led federal contractors in revenue from work for the US government, bringing in more than $125 billion collectively in fiscal 2023, according to Bloomberg Government data.
“The impacts will be greatest at the level where the government investment is the greatest,” said Kendra Perkins Norwood, a Reed Smith LLP partner and former NASA budget and procurement official.
A Defense Department spokesperson didn’t respond to requests for comment. Representatives of the General Services Administration and NASA, which also are involved with the rulemaking, told Bloomberg Law all three agencies continue to work on the regulations. But they didn’t give a timeline for issuing the rules, beyond seeking to have draft final regulations by the summer deadline.
CONGRESSIONAL THREATS
Democrats in communication with agency officials working on the contractor rules expect few changes from the proposed regulations, despite a Republican-backed measure that prohibits the Defense Department from requiring emissions disclosures until Dec. 22.
And Republicans aren’t done. Rep. Jodey Arrington (R-Texas) introduced a bill last year that would effectively kill the rule. That measure passed a House committee and awaits a vote before the full chamber, or inclusion in a broader must-pass piece of legislation, like the annual National Defense Authorization Act.
Arrington could not be reached for comment.
Even if Arrington’s bill receives a vote before the full House or is included in the National Defense Authorization Act, it won’t survive, said Rep. Sean Casten (D-Ill.), who is working with other congressional Democrats to support the rules.
The current political dynamics in the House are such that Speaker Mike Johnson (R-La.) needs Democrats to pass any legislation, even though Republicans hold the majority with 217 seats. The bill to quash the rules is a poison pill, Casten said.
“We could pass robust policies: a smart NDAA with no dumb riders that would get 310 to 330 votes on the floor,” Casten said in an interview. But “that is a path that guarantees you will be opposed by the majority of the Republican caucus.”
Casten and other members of a Democratic coalition led by Sen. Elizabeth Warren (D-Mass.) in April encouraged the agencies working on the contractor rules to finalize them quickly. The rules would strengthen supply chains and the country’s national security, the coalition said, signaling to the agencies the rules are a priority—especially if political power shifts after the November election.
“Corporate lobbyists and extremist Republicans will do anything to protect massive corporations, but this is a commonsense rule that the Biden administration should finalize as soon as possible,” Warren said in a statement to Bloomberg Law.
BIG BUSINESS
The Defense Department, GSA and NASA released their reporting plans for contractors in November 2022, less than a year after the SEC proposed its initial climate disclosure requirements for public companies. The SEC’s March 2022 proposal—much more ambitious than the final rules now on hold—would have directed large companies to disclose what are known as Scope 1, 2 and 3 emissions, similar to the planned contractor reporting requirements.
Scope 1 and 2 emissions come from companies’ direct operations and power usage. Scope 3 emissions stem from supply chains, sold products and other indirect sources.
A company with $50 million or more in federal contracts would have to report Scope 1, 2 and 3 emissions, under the contractor rules. A contractor that receives between $7.5 million and $50 million from federal procurement only would need to make Scope 1 and 2 disclosures.
The SEC ultimately abandoned plans to require Scope 3 disclosures, following intense lobbying, and litigation threats, from business groups and Republicans.
Voluntary emissions disclosures from large, public company contractors vary. Lockheed Martin and RTX, the two biggest US government contractors, both reported their Scope 1, 2 and 3 emissions in their most recent sustainability reports. General Dynamics, the third largest contractor, only reported Scope 1 and 2 emissions.
General Dynamics doesn’t disclose Scope 3 emissions because of government policies and procurement requirements that are out of its control, according to the company’s latest sustainability report. The contractor, for example, has no power over the emissions consequences of its armored fighting vehicles, which must meet certain specifications to work correctly on the battlefield, the company said in its report.
A General Dynamics spokesman declined to comment.
Scope 3 emissions usually make up 75% to 90% of a company’s carbon footprint, providing a clearer picture of the pollution it causes, said Cynthia Hanawalt, director of the financial regulation practice at Columbia University’s Sabin Center for Climate Change Law.
“This is important information if the goal is to understand a company’s true impact on climate change,” Hanawalt said
The US Chamber of Commerce and other business groups, as well as Republican attorneys general from West Virginia, Texas and other states, repeatedly urged the SEC and the agencies working on the contractor rules to abandon their emissions disclosure plans.
The SEC instead limited emissions reporting requirements in its March rules to Scope 1 and 2 disclosures. The agency paused the watered-down regulations in April, after the Chamber, Republican attorneys general and other business and conservative interests sued to stop them.
Chad Whiteman, vice president for environment and regulatory affairs at the Chamber’s Global Energy Institute, declined to comment on whether his organization would sue over the contractor rules. But Whiteman maintained that the proposed rules would exceed the legal power of the US government, which cannot use contracts to further climate policies under federal law.
“There’s a lot of work that they would need to do and just to even get to the point where they can re-propose something,” Whiteman told Bloomberg Law.
Source: Bloomberg Law