On December 1, the Department of Energy (DOE) and the Department of the Treasury (Treasury) published highly-anticipated proposed rules that will significantly impact China’s and other covered nations’ roles in the battery supply chain for electric vehicles (EVs) sold to U.S. consumers. The proposed DOE Interpretive Rules and proposed Treasury Regulations interpret the term “foreign entity of concern” (FEOC) in the same manner for purposes of the Battery Manufacturing and Recycling Grant program under the Bipartisan Infrastructure Law and the EV credit under section 30D of the Internal Revenue Code introduced by the Inflation Reduction Act (IRA). The proposed rules take a more nuanced approach than the proposed and final rules that appeared in the context of the CHIPS and Science Act over the past year (discussed here, here, and here), but nevertheless purport to adopt bright-line rules. As we have previously noted, adopting a different approach to such term in section 30D is justified to balance the IRA’s dual policy goals of onshoring and “friendshoring” the U.S. EV battery supply chain while making credits sufficiently available to accelerate the electrification of the U.S. consumer vehicle fleet.
COP28 Day 2–3 Recap: The World Climate Action Summit and Expanding Commitments to Climate Financing
What You Need to Know.
- After the opening day, action at COP28 shifted to the World Climate Action Summit (WCAS), where world leaders convened to deliver national statements and carry out initial negotiations on the Global Stocktake and expanding climate financing. Concurrently, business leaders and philanthropists gathered at the Business and Philanthropy Climate Forum to discuss how the private sector and philanthropy can contribute to climate action.
COP28 Day 1 Recap: A Call for Action and Historic Decision on Loss and Damage Funding
What You Need to Know.
- After a year of preparation and months of anticipation, the twenty-eighth annual United Nations Conference of Parties to the United Nations Framework Convention on Climate Change (COP28) opened in Dubai on November 30, 2023. Live and recorded coverage of the plenary sessions can be found on the UNFCCC COP28 website.
- UN Climate Change Executive Secretary Simon Stiell opened the conference with a powerful call to action and reminder of what is at stake at COP28. “Remember this. Behind every line you work on. Every word or comma you wrestle with here at COP. There is a human being, a family, a community, that depends on you. Turn the badge around your necks into a badge of honour, and a life belt for the millions of people you are working for. Accelerate climate action. Teach it to run.”
- With a standing ovation from attendees, delegates approved the operationalization of a fund to assist developing countries in responding to economic and non-economic loss and damage associated with the adverse effects of climate change. COP28 President Dr. Sultan Ahmed Al Jaber praised the approval of the loss and damage fund—the first time a decision has been adopted on the first day of any COP—as setting “a clear ambition for [delegates] to agree [to] a comprehensive, ambitious GST [Global Stocktake] decision over the next twelve days.”
- The fund will initially be hosted by the World Bank for an interim period of four years, at which time an independent assessment of the World Bank’s performance as a host will be conducted. World leaders must now nominate and appoint a board to operationalize the fund. The UNFCCC also must formulate and post a final decision reflecting today’s approval.
- Funding commitments for the loss and damage fund are mounting, with contributing countries facing a mix of peer pressure and political constraints. National contribution pledges to date include: UAE ($100 million); UK ($51 million); US ($17.5 million); Japan ($10 million); European Union ($245 million, including $100 million pledged by Germany).
Calculating and Reporting Greenhouse Gas Emissions: A Primer on the GHG Protocol
Laws and regulations that require companies, both private and public, to disclose their greenhouse gas (GHG) emissions continue to expand in the European Union and in the United States. Under the EU Corporate Sustainability Reporting Directive (CSRD), beginning in 2025, EU-based public companies and large EU-based private companies will be required to report all material Scope 1, 2, and 3 GHG emissions as set forth in the European Sustainability Reporting Standards. In the United States, California recently passed landmark climate-related disclosure legislation that will require U.S. companies that do business in California and have greater than $1 billion in annual revenues to file annual reports publicly disclosing their Scope 1 and 2 GHG emissions beginning in 2026 and Scope 3 GHG emissions in 2027. This legislation is expected to be joined by the U.S. Securities and Exchange Commission’s (SEC) proposed climate-related disclosure rule. Initially proposed in March 2022, if finalized, the SEC rule would require public companies to disclose their Scope 1 and Scope 2 emissions and material Scope 3 emissions. And later this year, world policymakers, activists, and business leaders will convene at COP28 to discuss global progress towards achieving the net-zero GHG emissions targets set by the Paris Agreement.
The Greenhouse Gas Protocol (GHG Protocol) sits at the center of all these efforts. Established by the World Resources Institute and the World Business Counsel for Sustainable Development in 2001, the GHG Protocol establishes comprehensive standards for private and public entities to calculate and report their GHG emissions and track progress towards their emissions targets.
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Commerce Final Rule Heightens Uncertainty as to How Treasury Will Interpret “Foreign Entity of Concern” for EV Credits Under Section 30D of the Inflation Reduction Act
On September 22, the Commerce Department published a final rule implementing the national security-related restrictions and obligations on recipients of incentive funds under the CHIPS and Science Act of 2022 (the “CHIPS Act”). The final rule clarifies in some respects, and substantially expands in other respects, the definition of “foreign entity of concern” that appeared in Commerce’s proposed rule, issued in March.
When Commerce issued its proposed rule, the Treasury Department cross-referenced Commerce’s definition of “foreign entity of concern” in Treasury’s concurrently proposed regulations for the CHIPS Act’s tax credit under section 48D of the Internal Revenue Code. We commented at the time that if Treasury were to adopt that same definition for the section 30D electric vehicle (EV) credit under the Inflation Reduction Act (the “IRA”), there could be a significant reduction in the number of vehicles eligible for such credits relative to market expectations. Treasury issued proposed regulations for other aspects of the 30D credit one week after the CHIPS Act guidance, but did not include an interpretation of the term “foreign entity of concern,” and to date has yet to do so (though it has signaled an intent to do so later this year).
California Legislature Passes Landmark Climate Disclosure Laws: Spotlight on SB 253
Last week, the California Legislature passed two bills comprising the core of a landmark “Climate Accountability Package.” Together, the two bills will impose extensive new climate-related disclosure obligations on thousands of U.S. public and private companies with operations in California. Senate Bill 253 (SB 253) would require companies with greater than $1 billion in annual revenues to file annual reports publicly disclosing their Scope 1, 2 and 3 greenhouse gas (GHG) emissions. Senate Bill 261 (SB 261) would require companies with greater than $500 million in annual revenues to prepare biennial reports disclosing climate-related financial risk and describing measures adopted to mitigate and adapt to that risk.
Yesterday afternoon during an appearance at Climate Week NYC, Governor Newsom told the audience emphatically, “of course I will sign those bills.” When he does, many more companies will be required to improve the accuracy, completeness and rigor of their GHG reporting and climate risk disclosures. Because of the complexity of GHG reporting, we have focused the remainder of this post on SB 253. Please see our separate post on SB 261 here.
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California Legislature Passes Landmark Climate Disclosure Laws: Spotlight on SB 261
Last week, the California Legislature passed two bills as part of the state’s landmark “Climate Accountability Package.” If signed by Governor Newsom as anticipated, the two laws—Senate Bill 253 (SB 253) and Senate Bill 261 (SB 261)—will usher in significant climate-related disclosure requirements for thousands of U.S. public and private companies that do business in California.
SB 253 and SB 261 mark the most extensive emissions- and climate-disclosure laws enacted in the United States to date. SB 253 requires companies with greater than $1 billion in annual revenues to file annual reports publicly disclosing their direct, indirect, and supply chain greenhouse gas (GHG) emissions, verified by an independent and experienced third-party provider. SB 261 requires companies with $500 million in annual revenues to prepare biennial reports disclosing climate-related financial risk and measures they have adopted to reduce and adapt to that risk, with the first report due by January 1, 2026.
This post focuses on SB 261’s climate-related financial risk disclosure requirements. You can find our post on SB 253’s GHG emissions reporting requirements here.
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The First Year of the Inflation Reduction Act
On August 16, 2022—one year ago today—President Biden signed the Inflation Reduction Act (“IRA”), the most significant clean energy and climate law in U.S. history. As we described in a series last summer, the IRA created durable tax credits and other fiscal programs to revitalize domestic manufacturing and incentivize clean energy solutions in nearly every sector of the economy. The IRA’s one year anniversary is a key opportunity to take stock of what the law has propelled and what is expected around the corner.
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ISSB Issues Inaugural Global Sustainability Disclosure Standards
On 26 June 2023, the International Sustainability Standards Board (the “ISSB”) issued its inaugural International Financial Reporting Standards (“IFRS”) Sustainability Disclosure Standards (the “Standards”), heralding progress in the development of a global baseline of sustainability-linked disclosures. The Standards build on the concepts that underpin the IFRS Accounting Standards, which are required in more than 140 jurisdictions, but notably not in the United States for domestic issuers subject to regulation by the Securities and Exchange Commission (“SEC”), which must apply US Generally Accepted Accounting Principles (“US GAAP”). Despite broad investor appetite for transparent, uniform and comparable disclosure rules, the scope of required sustainability disclosure and timing for adoption of the SEC’s pending climate disclosure rule remains unresolved.
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Much-Anticipated Proposed Regulations on the 30D EV Tax Credit Have Finally Arrived—but Leave a Key Question Unresolved
Today, the Department of the Treasury and IRS made available for public inspection proposed regulations on the new clean vehicle credit under the Inflation Reduction Act of 2022, as codified in section 30D of the Internal Revenue Code. These proposed regulations will be published in the Federal Register on April 17, 2023, and the due date for comments will be 60 days after the publication (or Friday, June 16, 2023).