The proposed rule, “Disclosure of Greenhouse Gas Emissions and Climate-Related Financial Risk,” would impact contractor costs and create responsibility and fraud risks. Because of policy and practical concerns with the proposed rule, the comment period has been extended until February 13, 2023.
On November 14, 2022, the Department of Defense (“DoD”) proposed a rule requiring certain federal suppliers to disclose greenhouse gas emissions (“GHG”) and climate-related financial risks, as well as set science-based targets to reduce greenhouse gas emissions. 87 Fed. Reg. 68312. Under this proposed rule, “significant contractors,” or those with US$7.5M—$50M in federal contract obligations and “major contractors,” those with greater than US$50M in federal contract obligations, would need to invest substantial resources into emissions accounting regimes to comply. The Government is particularly interested in assessing GHG emissions and climate-related risks like disruptive weather events and material cost fluctuations throughout the federal supply chain and the larger US economy, shifting this burden to major contractors in the hopes they will invest in GHG management. The rule would give contractors one year to develop accounting methods before requiring official disclosures. Two years after publication, major contractors will be mandated to complete a GHG inventory including certain emissions, as well as conduct a climate risk assessment and obtain validation of science-based targets. The comment period of the proposed rule change is now open until February 13, 2023.
The proposed rule is part of the Biden Administration’s agenda to combat climate change set out in Executive Order 14057. The rule aims to mitigate these risks while enhancing US competitiveness and economic growth, promoting environmental justice and creating well-paying job opportunities for American workers as well as using public procurement to be a catalyst for adopting new norms and global standards.
The proposed framework would divide greenhouse gas (“GHG”) emissions into 3 scopes:
Scope 1: GHG emissions from sources owned or controlled by the contractor
Scope 2: GHG emissions associated with the generation of electricity, heating and cooling, or steam, if purchased for the contractor’s own consumption but occurring at sources owned or controlled by another entity
Scope 3: GHG emissions that are a consequence of the contractor’s operations but occur at sources owned or controlled by another entity
Major contractors will be required to disclose all three types of emissions disclosures while significant contractors and small business concerns, with more than US$50M in contract obligations, will be required to disclose only Scope 1 and 2 emissions. The completeness and accuracy of those disclosures would impact the responsibility of the disclosing contractor and create False Claims Act and False Statements Act risks.
Aside from the magnitude and complexity of determining emissions and the increased costs to contractors, the rule may exceed the statutory limits of the agencies promulgating the rule. While the Department of Defense, the National Aeronautics and Space Administration and the General Services Administration are granted rulemaking power, it seems unlikely Congress authorized these agencies, each tasked with providing for our military, exploring space and supporting Government operations, respectively, to engage in substantive environmentally-based rulemaking. The comment period for the rule is open until February 13, 2023, after which the agencies will review public comments and determine if, and how, to proceed with a final rule.
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