First, a national greenhouse gas (GHG) cap and trade system has recently come on line. As Company X had never previously given much thought to tracking or reducing its GHG emissions, it is now facing the difficult choice of either spending large sums on retrofitting equipment within the next year or purchasing expensive offsets from its competitors. No one had really expected the new law to pass, but once California, New York, and Massachusetts began setting up their own GHG regulations, most of the energy industry had pressed the federal government to set up a national system as the preferable alternative.

Second, Company X was named as a defendant in a suit brought by a coalition of attorneys general of coastal states. As a result of rising sea levels, these states were anticipating huge expenses to protect low-lying areas and demanded that large GHG emitters share the cost.

Third, a group of institutional shareholders was suing the company’s board of directors for violating its fiduciary responsibilities. Shareholders had been filing resolutions for several years, calling on the company to explain its GHG strategy, but management had refused to address the issue. Now the company was facing major liabilities. Share-holders were facing large losses and they were looking for someone to take the blame.

Fourth, the insurer that provided Company X with directors’ and officers’ liability insurance had informed the company that it would not provide coverage if the shareholders’ suit was successful, leaving the company largely exposed.

Fifth, Company X was being investigated by the SEC for violating disclosure obligations, since none of the above liabilities were ever discussed in its financial reports.

Is this picture implausible? Surprisingly, it is not. Each of the elements in this picture could well occur within a few years.

A GHG cap and trade system, either on a state or federal level is looking increasingly likely. The northeastern states are already well advanced on a regulatory system for the electric power industry. The Climate Stewardship Act to create such a system has recently been reintroduced in both the House and Senate. It got 43 Senate votes last year, and is almost certain to fare better this year. The European cap and trade system goes live next January, with Japan and Canada not too far behind.

Litigation against major GHG emitters is not as far-fetched as it might seem. The costs involved are astronomical. The real challenge will be linking company actions with the injuries suffered by the plaintiffs. This will not be simple, but then again, no one ever expected the tobacco lawsuits to succeed either. State attorneys general are the most likely plaintiffs, since the states are likely to bear much of the costs and they can sue on behalf of large numbers of people. Companies who claim that they can’t be sued because they were following the law at the time the actions took place are in much the same legal situation as companies that dumped toxic waste in the 1950s when there was no legal standard for handling many of these materials and then found themselves fighting off toxic tort suits decades later.

Given how common shareholder lawsuits have become today, suits based on climate change liability will be almost a given if either of these situations comes to pass. Corporate directors and officers can face liability if they can be shown to have acted with gross negligence of readily available information. As information on climate change is quite widely available, it will be difficult for a corporate official to argue that he did not know this might be a problem.

The idea that insurers might not provide liability coverage for climate change lawsuits is not far-fetched. Swiss Re has already announced that it will withdraw coverage for claims associated with global warming for senior executives of companies that do not adopt adequate climate change policies.

An increasing number of companies currently reference climate change liability in their SEC disclosures. If some of the costs and liabilities discussed in this article occur, they will increasingly be seen as “material” and necessary to disclose.

Now imagine a different scenario. Company Y is a direct competitor to Company X. Some years back, it registered a GHG emissions baseline. Since then, it has applied a policy of including GHG emissions and energy efficiency as a factor in all investment decisions. As a result, Company Y’s GHG emissions have been dropping gradually for some time, with the energy savings going directly to the bottom line. Moreover, Company Y has had less exposure to energy price fluctuations. With the new cap and trade program, the company has been able to sell its reductions to Company X.

Because the company has been diligent in reducing its GHG emissions over time, it was not included in the lawsuit by the state attorneys general. Nor has it experienced any shareholder litigation, since the overall impact of climate change has, in fact, been positive for earnings.

Is such a future possible? I might be wrong about the details. The rules might take a different form and the year might be different, but the writing is clearly on the wall.

Might energy companies soon find themselves having to choose between the paths of Company X and Company Y? In fact, they are making those choices today. Putting effective GHG policies in place can take several years. For better or worse, the choices that companies make today are positioning them for the policy environment they will face tomorrow.

Copyright 2004 CyberTech, Inc.