Full Disclosure: Using Transparency to Fight Climate Change

Congressional leaders are finally working seriously on long term-approaches to counter climate change. But all the major proposals leave a critical policy gap because they would not take effect for at least five years. Meanwhile, U.S. greenhouse gas emissions continue to increase, and company executives continue to make decisions that lock in the emissions of future power plants, factories, and cars.

Congress could fill that policy gap now by requiring greater transparency. In the immediate future, legislating product labeling and factory reporting of greenhouse gas emissions would make markets work better. Such disclosure would expose inefficiencies and allow investors, business partners, employees, community residents, and consumers to compare cars, air conditioners, lawn mowers, and manufacturing plants. As people factored that information into everyday choices, company executives would have new incentives to cut emissions sooner rather than later. Greater transparency would also help jump start whatever cap-and-trade or other regulatory approach emerges from the current congressional debate. A carefully constructed transparency system is therefore an essential element of U.S. climate change strategy. Such a system would fill a legislative void and provide immediate benefits as Congress continues its debate.

Congress is debating long-term approaches to climate change. Barbara Boxer (D-CA), chair of the Senate Environment and Public Works Committee, and John Dingell (D-MI), chair of the House Energy and Commerce Committee, are holding wide-ranging hearings, and Speaker Nancy Pelosi (DCA) has created a select committee to coordinate climate change action in the House. Three major bills propose variations on a cap-and-trade approach to cutting greenhouse gas emissions. All combine industry emission limits or “caps” with government-created markets for trading emission permits. The bills differ mainly in the progressive severity of caps and in how they are set. The most ambitious proposal, introduced by Boxer and Sen. Bernie Sanders (I-VT), proposes caps that would reduce emissions to 80% below 1990 levels by 2050.

Ironically, though, even if the 110th Congress approves some variation on a cap-and-trade approach, the new law will not create any immediate incentives for manufacturers, power providers, factory farms, and other major contributors to reduce emissions. If President Bush signed such legislation in 2008, his action would only signal the beginning of another debate over the rules that would govern the system. That debate is likely to be long and acrimonious because the fine print of the regulations will determine which companies are the real winners or losers from government action. Regulations will govern the mechanics of trading emission permits, the allocation of “caps” among industries and companies, and the timing of compliance—all costly and contentious issues for energy-intensive businesses.

Such delay may be inevitable but its costs will be high. Even conservative projections conclude that U.S. greenhouse gas emissions will continue to increase rapidly during the next decade and will produce increasingly serious consequences. The administration’s latest climate action report, circulated in draft, projects that a 19% increase in emissions between 2000 and 2020 will contribute to persistent drought, coastal flooding, and water shortages in many parts of the country and around the world. That increase could be as high as 30% under a business-as-usual scenario. The U.S. Environmental Protection Agency (EPA) reports that carbon dioxide emissions, the most common greenhouse gas, increased by 20% from 1990 to 2005, and emissions of three more potent fluorinated gases, hydrofluorocarbons, perfluorocompounds, and sulfur hexafluoride, weighted for their relative contribution to climate change, increased by 82.5%. The United States still holds the dubious distinction of being the world’s largest producer of greenhouse gases.

Each large contributor to increasing U.S. greenhouse gas emissions has a unique story. Carbon dioxide emissions from generating electricity, responsible for 41% of total U.S. emissions from fossil fuel combustion in 2005, continue to increase faster than energy use because dramatic increases in the price of natural gas have led some power providers to increase their reliance on coal. The most recent estimates of the federal Energy Information Administration project that such emissions will increase 1.2% a year from 2005 to 2030. (The burning of petroleum and natural gas results in 25% and 45% less carbon emissions per unit respectively than does the burning of coal.) Power companies are investing now in facilities that will shape the next half-century of electricity generation—and the next half-century of greenhouse gas emissions. Many of the more than 100 new coal-fired power plants on the drawing boards will have useful lives of 50 years or more.

Carbon emissions from the incineration of municipal solid waste, not even including paper and yard trimmings, increased 91% from 1990 to 2005 as more plastics, synthetic rubber, and other wastes from petroleum products were burned. Carbon emissions from cement manufacture increased 38% as construction activity increased to meet the demands of the growing U.S. economy. Carbon emissions from the burning of gasoline, diesel fuel, and jet fuel to power cars, trucks, planes, and other forms of transportation increased 32% during the same period because of increased travel and “the stagnation of fuel efficiency across the U.S. vehicle fleet,” according to the EPA.

Executives will need powerful incentives to alter current plans in order to make significant reductions in greenhouse gas emissions any time soon. Most are understandably reluctant to place their companies at a competitive disadvantage by making bold and often costly emission-cutting moves unilaterally. In fact, the prolonged congressional debate may make executives more reluctant to act early since their companies may reap large emission-cutting credits once regulations take effect. So far, neither the administration nor Congress has come up with any way to reduce greenhouse gas emissions in the next critical years.

A carefully constructed transparency system would mobilize the power of public opinion, inform choice, and help markets work better now. Requiring disclosure for each proposed and existing major factory and power plant as well as for each new car, truck, furnace, refrigerator, and other energy-intensive product would expose their relative carbon efficiencies as well as their total contributions to such emissions.

Once disclosed, emissions data could be used by mayors and governors to design and carry out emission-reduction plans; by local zoning and permitting authorities to place conditions on the construction or alteration of plants; by investors to more accurately predict material risks; by consumers to choose among cars, air conditioners, and heating systems; and by employees to decide where they want to work. Environmental groups, industry associations, and local and national media could use the information to help to pinpoint the most inefficient factories and cars.

Equally important, shining a light on factory and product emissions would allow chief executive officers (CEOs) and their business partners and competitors to see for the first time their relative efficiency and to put pressure on bad actors. Requiring CEOs to sign off on annual reports would ensure that that information worked its way to the top of the managerial ladder. The collective effect of new information and changed choices would create incentives for managers to take feasible steps toward reducing greenhouse gas emissions sooner rather than later.

Requiring such reporting is politically feasible. A transparency requirement could break the political logjam that has held up climate change legislation in Congress. Transparency often has broad appeal to both Democrats and Republicans because it empowers ordinary citizens, strengthens market mechanisms, and allows executives to choose what actions to take in response. Many corporate leaders would support transparency because it would reward companies for reducing emissions early, help them manage their own risk, and provide them with data on which to base their response to a future cap-and-trade requirement.

The critical prerequisites for an effective transparency policy are already in place. That is important because transparency policies do not always work. Public indifference, battles over how to measure progress, or the absence of real opportunities for investors, consumers, or disclosing companies to take meaningful action can turn a well-intentioned policy into a meaningless paperwork exercise. To be effective, transparency policies need consensus metrics, feasible emission reductions, interested consumers of information who have real choices, and the support of at least some disclosing companies able to improve products and practices.

Metrics for measuring greenhouse gas emissions are good enough to support a disclosure system and will get better. An internationally accepted protocol to measure and report emissions has been tested in a variety of real-world settings including markets such as the European Union’s cap-and-trade system, the Chicago Climate Exchange, and California’s greenhouse gas registry. A new profession of auditors has already emerged to certify the accuracy of company reporting of such emissions.

There are signs that key groups are ready to weigh emissions in making routine decisions. Investors have shown increasing interest in factoring into their stock purchases risks associated with climate change. AIG, Goldman Sachs, and other U.S. investment firms support a London-based carbon disclosure project that aims to meet the needs of institutional investors for information about company emissions. The project is supported by 280 investment groups with assets of more than $41 trillion, according to the project’s Web site. In 2005 and 2006, climate change issues also produced the largest number of nonfinancial shareholder resolutions in the United States. Executives of the California Public Employees’ Retirement System, one of the nation’s largest pension funds, said that they supported such resolutions at General Motors and Ford in order to improve the transparency of environmental data.

Leading U.S. corporations already preach the benefits of transparency, and some have sought competitive advantage by voluntarily disclosing company-level emissions. A coalition of firms and environmental groups that includes General Electric, Alcoa, Duke Energy, Environmental Defense, the Natural Resources Defense Council, and the World Resources Institute in a climate-action partnership has recommended the creation of a national registry of greenhouse gas emissions. Wal-Mart, Home Depot, Boeing, American Express, and other large U.S. companies have joined the London-based carbon-disclosure project. Likewise, state governments and consumers have shown increasing interest in greater transparency. In May of this year, a group of 31 states launched a multistate greenhouse gas registry to which companies, utilities, and government can voluntarily report their emissions.

A few companies in the United States and Europe have undertaken costly carbon labeling of products, banking on the idea that consumers care enough about such emissions that reporting low emissions will boost sales. Footwear manufacturer Timberland recently assigned “green index” ratings to shoes that report the amount of greenhouse gases released in their production. In the United Kingdom, the supermarket chain Tesco is launching labels that specify the carbon footprint of thousands of its products and reports that it will spend nearly $1 billion over the next five years to stimulate “green consumption.” The Carbon Trust, an organization funded by the British government to help businesses reduce their carbon emissions, is helping companies devise carbon labels for brand-name products such as Walkers snacks and Boots shampoos. The British government recently unveiled a plan to develop standard metrics for greenhouse gas emissions of products and services as a first step towards a green labeling system that would guide consumers’ and businesses’ choices. In the United States, polls show broad public concern about climate change: 90% of Democrats, 80% of independents, and 60% of Republicans favor immediate government action, according to a New York Times/CBS poll released in April 2007.

Members of Congress are beginning to heed demands for better information. A recent proposal by Senators Amy Klobuchar (D-MN) and Olympia Snowe (R-ME) would add greenhouse gases to the factory-by-factory toxic chemical disclosure requirement.

Reducing emissions is also feasible. Although some substantial cuts in greenhouse gas emissions must await technological advances, others can be achieved with existing technology, as European companies, now subject to cap-and-trade restrictions, have demonstrated. For example, British Petroleum, the world’s third-largest oil company, cut carbon emissions by 10% between 1998 and 2002 by introducing new energy-efficiency measures and by creating an internal emissions-trading scheme among its 150 business units in more than 100 countries.

Government action is needed. Voluntary disclosure will not create incentives for broad emissions reductions for three reasons. It does not allow investors, employees, or consumers to compare all major products and facilities. It cannot assure standardized metrics. And it cannot provide enforcement to ensure that reporting is accurate and complete. As state and private initiatives multiply, only a national reporting requirement can level the playing field for disclosers by ensuring consistent reporting. When public risks are serious, legislated transparency offers the permanence, legitimacy, and accountability that increase the chances that disclosed information will truly serve policy priorities.

Likewise, disclosure of company-level emissions, rather than disaggregated factory and product emissions, is not enough. When companies have dozens and sometimes hundreds of business lines, the reporting of total emissions does not give consumers and investors the information they need to discern relative efficiencies and trends and to incorporate new information into decisions.

A time-tested policy tool

The power of transparency has worked in the past to reduce harmful pollution. After a disastrous chemical accident at a pesticide plant in Bhopal, India, in 1984, killed 2,000 people, Congress required U.S. companies to disclose their toxic emissions factory by factory and chemical by chemical. When they saw the first numbers, shamefaced executives promised immediate reductions. CEOs of Monsanto, Dow Chemical, IBM, and other major companies made commitments to cut toxic pollution by as much as 90% within a few years. The EPA later credited that simple disclosure requirement with reducing reported toxic pollution by as much as half in the 1990s. Both positive and negative lessons learned from toxic chemical disclosure can provide a template for structuring transparency to reduce greenhouse gas emissions.

Using transparency requirements to reduce public risks is no longer unusual. In recent years, Congress has frequently constructed transparency systems to reduce specific health, safety, and environmental risks. In addition to toxic pollution reporting, automobile safety ratings, nutritional labels, drinking water quality reports, workplace hazards reporting, and dozens of other laws have been enacted in recent years that aim to create specific incentives for companies to improve their products and practices. At best, such policies mobilize market forces and empower the choices of consumers, investors, employees, and business partners with relatively light-handed government intervention.

In fact, the United States has fallen behind other countries by not requiring factory reporting of greenhouse gas emissions. Plants in the European Union have been required to disclose their greenhouse gas emissions since 2000 as part of a larger pollution-reporting system. Energy, metals, minerals, chemicals, waste management, paper, and other major industries report emissions if they rise above certain thresholds under guidelines set up by each nation. Reports are aggregated in a user-friendly European Pollutant Emission Register (EPER) Web site. Citizens can search at by inserting a factory name and greenhouse gas, or by placing their cursor on a geographical area of interest and zooming in. They can compare emissions from different factories, view satellite images of factories, and find out whom to contact.

The European Union’s (EU’s) reporting requirements have become more rigorous over time, suggesting that greater transparency is gaining broad support. At first, the EU required reporting every three years (2001 and 2004 data are available), but now requires annual reporting. It has also expanded the scope of reporting to disclose more sources of emissions, including road traffic, aviation, shipping, and agriculture. Early evidence suggests that EPER information is used by local and national administrators, businesses, environmental groups, and the public at large. Factories are also required to report their carbon emissions under the EU’s cap-and-trade system, launched in 2005, in order to verify emission levels and administer allowances. Those reports are available at http://ec.europa.eu/environment/ets/.

The EU also mandates the disclosure of carbon dioxide emissions and fuel consumption by car model in order to inform consumers’ choices. Car dealers are required to feature this information in their showrooms, either on posters or Web sites, and to post rankings of their car models by carbon emissions, with greener models at the top of the list. Some countries aggregate this information on Web sites. The UK Vehicle Certification Agency, www.vcacarfueldata.org.uk, provides an example. European subsidiaries of U.S. companies are already required to report factory and automobile emissions under these rules.

The United States’ closest neighbors are also moving ahead in requiring factory reporting of greenhouse gas emissions. In 2004, Canada began requiring large contributors to greenhouse gases (factories that produce more than 100,000 tons of greenhouse gas) to disclose emissions every year. Additional factories have reported voluntarily. In 2001, Mexico required electronic disclosure of greenhouse gases by factory and chemical, with results available at . Cement companies, several iron and steel companies, and the nationalized oil and gas company Pemex also report under a voluntary program that was launched to provide company-level data while the mechanics of required disclosure were being worked out.

How would factory and product disclosure lead to reductions in greenhouse gas emissions? Transparency policies rely on a fortuitous chain of reaction. Managers of companies whose products or processes are large contributors to greenhouse gas emissions disclose those emissions using standardized metrics. Consumers, investors, job seekers, community residents, and government officials use that information to make decisions about what products to buy, what companies to invest in, where to work, and whether to grant permits to new or expanded businesses in their neighborhoods or cities. Perceiving these changed preferences, executives reassess the costs and benefits of emissions and make whatever reductions they believe would improve their company’s competitive position.

Managers respond to transparency policies for three reasons. First, disclosure requirements sometimes provide information that is new to managers themselves and that suggests opportunities to enter new markets or reduce waste. Managers may see opportunities to develop low-carbon products and services or to employ greenhouse gas wastes in manufacturing, for example. Second, disclosure can create new competitive risks, by reducing demand for carbon-intensive products, for example. Third, disclosure can create new reputational risks and benefits as investors and consumers compare factories and products.

What can go wrong? Transparency policies can fail for many reasons. People often simply do not notice or understand new information. Even when they do notice it, they may not factor it into key decisions. If many consumers and investors do vote with their wallets for lower emissions, companies still may fail to discern the reason for their changed choices. And, of course, even if companies accurately track changes in preferences, they may nonetheless decide not to reduce emissions.

The architecture of transparency is therefore critical to its effectiveness. Principles of effective design can reduce the chances of transparency failure.

• Provide information that is easy for diverse audiences to use. To be factored into everyday decisionmaking routines, information must be provided at a time and place and in a standardized format that encourage its use by companies, investors, customers, business partners, and the public at large. Emissions information sent to customers with their utility bills, highlighted on product stickers, posted at factory entrances, and featured on company Web sites is accessible; information in government file drawers or complex databases is not. A rating system assigning stars, letter grades, or colors to cars or factories would enable consumers and investors to assess emissions information more readily. User-friendly Web sites maintained by neutral organizations can help ensure that data are available quickly and can be aggregated for fair comparisons. Because each user has different information needs, time demands, and capacity to understand technical terms, Web sites should allow people to compare the emissions and the relative efficiency of factories, power plants, new car models, and heating and cooling systems by asking specific questions.
• Strengthen groups that represent users’ interests. Advocacy groups, analysts, entrepreneurial politicians, and other representatives of information seekers have incentives to maintain and improve transparency systems. Policymakers can design systems to formally recognize the roles of such user groups in oversight, evaluation, and recommendations for improvement.
• Design in benefits for disclosing companies. When leading companies perceive benefits from improved transparency, policies are more likely to prove sustainable. Chemical companies aimed to avoid stricter pollution rules and reputational damage and to gain a competitive edge when they drastically reduced toxic pollution in response to new disclosure requirements and sought to broaden requirements to include other disclosers.
• Match the scope of disclosure to the dimensions of the problem at hand. To be fair and comprehensive, emissions reporting would have to include all major emitters—government agencies as well as companies—for their operations in the United States and abroad. Disclosure of emissions from subsidiaries based outside the United States would prevent the transfer of polluting operations to countries with less transparency and would provide a snapshot of company-wide greenhouse gas emissions that investors could use in their calculations to offset risks. Disclosure should cover stationary facilities and mobile sources and should also include both direct emissions and indirect emissions that result from the use of electricity. It should include both emissions per units of economic output and total tons of greenhouse gases, with a CEO certification of the accuracy of reports to ensure top-level attention.
• Design metrics for accuracy and comparability.Successful policies feature metrics that are reasonably well matched to policy objectives and allow users to easily compare products or services. Achieving comparability can involve difficult tradeoffs because simplification may erase important nuances and standardization may ignore or discourage innovation. Inevitably, disclosure systems start with imperfect metrics. The important question becomes whether those metrics improve over time. Greenhouse gas metrics are already good enough to support trading markets, and U.S. power plants already report carbon dioxide emissions as part of an established cap-and-trade system for acid rain pollution. Over time, the development of more sophisticated sensors (already used by power plants in the United States for monitoring carbon dioxide emissions) will fine-tune initial estimating techniques.
• Incorporate analysis and feedback. Transparency systems can grow rigid with age, resulting in a tyranny of outdated benchmarks. Generously funded requirements for periodic analysis, feedback, and policy revision can help keep emissions disclosure supple and promote adaptation to changing circumstances. The National Academy of Sciences or another impartial oversight group could be charged with periodically assessing the fairness and effectiveness of the disclosure requirement and its metrics, and regulators could be required to consider those impartial recommendations.
• Impose sanctions. Corporations and other organizations usually have many reasons to minimize or distort required disclosures. Information can be costly to produce and even more costly in reputational damage. As a result, substantial fines or other penalties for nonreporting and misreporting are an essential element of successful systems.
• Strengthen enforcement. Sanctions are not enough, however. Legal penalties must be accompanied by rigorous enforcement to raise the costs of not disclosing or disclosing inaccurately. Building in an audit function is one way to ensure ongoing attention to accurate reporting. The fact that there is still no systematic mechanism for auditing toxic pollution data provided by companies means that no one knows for sure how accurate or complete that data is.
• Leverage other regulatory systems. The power of transparency is strengthened when it is designed to work in tandem with other government policies. Emissions disclosure can be constructed to reinforce cap-and-trade regulation and possible future carbon taxes, for example. Transparency usually serves as a complement to, rather than a replacement for, other forms of public intervention.

The information wars will continue, of course. There will be struggles over how to measure emissions from dispersed sources such as agriculture and other land-based activities. There will be questions about whether estimates of emissions are good enough and whether or when to use sensors for precise measurements. There will be debates about whether facility and product reporting gives away trade secrets.

Nonetheless, a carefully constructed transparency system is an essential and currently neglected element of an eventual portfolio of U.S. measures to counter climate change. In the near future, it also fills a serious policy gap by providing immediate incentives for reductions of greenhouse gas emissions, in a politically feasible first step.