Click here to read the full story with sidebars.

Click to read the Online Exclusive: States Take the Climate Change Lead With Renewable Portfolio Standards

Click to read the Online Exclusive: LEED Certification: A Q&A

Two years ago, things seemed simpler in the climate change realm–President Bush postponed or blocked most governmental action on greenhouse gas emissions. Even one year ago–well, things seemed simpler then, too. President Obama was in office fresh off a campaign that vowed to address climate change, the Supreme Court had directed the EPA to regulate greenhouse gases, and advocates of emissions limits were optimistic that action was on the horizon. But things aren’t as clear today. In the face of a recovering global economy and, at home, a Congressional stalemate in the health care reform fight, comprehensive action on climate change seems like a long shot in the short term–but on all fronts, the battle rages on.

Part 1: After Copenhagen

Hope for a binding global climate change treaty greeted the nearly 200 delegate countries as they arrived in Copenhagen in December 2009 for the highly anticipated meeting of the United Nations Framework Convention on Climate Change (UNFCCC). But after nearly two weeks of political wrangling, it was pretty much lost.

The convention was supposed to resolve the question of what happens after 1997′s Kyoto Protocol expires in 2012. But over the course of two weeks, the dialogue devolved into chaos.

What emerged from the talks was a three-page accord giving delegate countries a Jan. 31 deadline to submit nonbinding pledges to reach self-imposed targets for greenhouse gas (GHG) emission reduction by 2020. President Obama arrived during the final hours of the Copenhagen talks and met with Russia and a group of developing nations known as the BASIC countries (Brazil, South Africa, India and China) to hammer out what eventually became the Copenhagen Accord.

In a perfect scenario, the UNFCCC would have departed Copenhagen with a legally binding treaty that required specific emission reductions from member nations, all aimed at keeping the global temperature increase less than 2 degrees Celsius. With less than half of the delegate countries submitting nonbinding reduction targets at press time, the result of the talks was far from perfect.

Adding to the tumult, Yvo de Boer, the UNFCCC’s executive secretary, announced his resignation Feb. 18. He will return July 1 to the private sector, where he said in a statement that he believes “real solutions” to climate change can be achieved.

Yet experts are mixed on whether the Copenhagen talks were a failure. On the one hand, there are those pledges, nonbinding as they may be, to curtail emissions within the decade. But on the other hand, no one multinational body is enforcing those pledges.

“If you regard success as being a legally binding treaty with absolute reduction targets, you can safely say [the talks] were a complete failure,” says Michael Hutchinson, a partner at Mayer Brown’s London office. “It has left a bitter taste in the mouth for a number of parties.”

But Jennifer Smokelin, of counsel at Reed Smith and a delegate during the first week of Copenhagen talks, thinks it’s still too early to measure the accord’s success.

“The conference had its flaws,” she says. “But the proof of the accord’s success will be how it’s operationalized under the framework convention.”

From Kyoto to Copenhagen

Following the controversial legacy of the Kyoto Protocol, the Copenhagen talks had ambitious territory to cover. The protocol, adopted in 1997 and enacted in 2005, was the last binding document drafted by UNFCCC regarding climate change.

Although 37 industrialized countries and the European Union (EU) agreed to 5 percent GHG reductions between 2008 and 2012, the U.S. pulled out of the treaty in 2001, in part because it didn’t set targets for developing countries such as China and India. President George W. Bush said the protocol’s required emission cuts would irreparably damage the U.S. economy in the face of unchecked industrial growth in China and India.

Obama has said he thinks opting out of the Kyoto Protocol was a mistake he hopes to rectify by keeping the U.S. actively involved in the development and implementation of future climate change treaties. But critics say Obama could have played a much more significant leadership role in Copenhagen than his 11th hour arrival permitted.

“I don’t know that the U.S. was prepared or in a position to be a leader at the conference,” says Lawrence Demase, a partner at Reed Smith who was a delegate during the second week of the Copenhagen talks. “Obama came in at the last second and pulled a core together, which suggests he could have been more of a leader.”

The accord itself is a very limited document, Demase says. While it is the basis for an agreement between countries, he calls it merely “an agreement to accept the proposition of trying to prevent a 2 degree rise in temperature. There are no enforcement provisions.”

In addition to the nonbinding emission-reduction submissions, the accord asks industrialized nations to commit to jointly contributing $30 billion in adaptation and mitigation resources to developing countries between 2010 and 2012. By 2020, the accord requests a combined total of $100 billion a year in funding for developing countries. It provides no framework as to how the funding would be collected or delivered.

The U.S. has pledged “in the range” of 17 percent emission reductions from 2005 levels by 2020. In contrast, the EU has promised an aggressive 20 percent reduction of 1990 GHG levels. If other developed countries followed suit, however, the EU has pledged to slash their emissions by 30 percent of 1990 levels. But none of these numbers come as big news, as they were consistent with earlier statements made by those parties’ heads.

High Stakes

Because Copenhagen resulted in individual pledges as opposed to a unified treaty, some predict that the trend in global talks will be smaller, piecemeal agreements and rule tightening.

The EU is ahead of the game, having taken aggressive measures since Kyoto to lower emissions, including forestry initiatives (known as “carbon sinks” because the trees soak up CO2), promoting biofuels and renewable energy, and creating an EU-wide carbon-trading scheme. But because the EU has already made such drastic moves, Smokelin says it will be more difficult for them to make further reductions.

“The EU has cut the fat,” she says. “The U.S. and Canada haven’t had operating GHG reduction legislation, so the easy cuts are still out there. The tougher cuts are what are left for the EU.”

Those tougher cuts could have a significant impact on the EU economy, she says. Power use would be a likely target, which would increase the cost of electricity, thereby making countries with cheaper energy more attractive to business. Smokelin says that might force a debilitating protective tax on items produced in nations with a lower energy cost.

“When you see trade protection,” she says, “you see the end of a global marketplace.” Before that would happen, the EU would likely scale back its ambitious reduction goals.

Yet the balance between the costs and benefits of mitigation versus adaptation are very delicate in that part of the world. Europe simply doesn’t have as much land to develop should some of the more dire climate change scenarios come to fruition.

“It makes economic sense [for the EU to mitigate] at a much lower level,” Smokelin says. “In the U.S., if the temperature rises, maybe we can’t grow wheat in Oklahoma, but then we can grow it in South Dakota. They’ve been building dykes in Holland for 250 years. If the sea levels rise, they don’t have anywhere to go.”

But despite the EU’s aggressive approach to reductions, Hutchinson says the power in policy talks seems to be shifting east–in particular to China, with the EU being cut out of the negotiations. “The EU thought it created the most incentive,” he says. “It would increase its commitment to reductions and that would provide incentive for other countries to get involved. But the EU was ignored.”

Demase says he too doesn’t see the EU serving as a major leader in upcoming talks. “Nothing changed [in Copenhagen] until Obama showed up,” he says. “Nothing may have happened if he hadn’t shown up.”

Follow the Leader

Because the U.S. is one of the globe’s greatest GHG emitters, its role in continuing climate talks is critical. If the U.S. doesn’t reach consensus on a climate bill of its own, other countries may begin to resent the leadership Obama showed at the end of Copenhagen, says Madeleine Tan, a partner at Kaye Scholer.

“It could be an excuse to say, ‘U.S., you’re a big industrial country. What gives you the right to tell other people to cut back?’” she says.

Though they have already submitted emission reduction targets, neither China nor India have indicated whether they will associate with the accord, the U.N.’s equivalent to an endorsement. They didn’t associate with the Kyoto Protocol because they felt the required cuts would unfairly impact their economies, which rely heavily on manufacturing, before they had the chance to grow to the levels of developed nations. China is now the largest GHG emitter in the world, according to the Netherlands Environmental Assessment Agency.

Though China agreed to be more energy efficient, it would not fully commit to GHG reduction targets, which Tan says led to some disappointment from countries hoping it would cooperate a little more. But she says those efficiency targets are nonetheless impressive. They include the promise to increase the use of fossil fuel alternatives by 15 percent and replant nearly 100 million acres of forests by 2020.

Unlike the Kyoto Protocol, U.S. involvement in the Copenhagen Accord won’t hinge on China and India’s participation–or lack of it. Should China, India and other developing nations ultimately decide not to associate with the accord, the State Department says the U.S. will continue to associate with it.

“[Our emission reduction submission] is consistent with what President Obama announced back in November,” said Todd Stern, the State Department’s special envoy for climate change, in a February press briefing. “So I don’t think it’s a question of the U.S. saying ‘Never mind.’”

In November, the next round of UNFCCC talks is scheduled to take place in Cancun, giving delegates a short reprieve to reflect on what happened in Copenhagen. With the tumultuous state of domestic climate change legislation, the U.S. contribution to global policy may very well remain uncertain, though experts don’t discount the impact of regulation in the absence of legislation.

“Other countries have stepped up to the plate, but the U.S. has not,” Smokelin says. “But we’re going to have to do something by midcentury. We can either go on an easy diet now or a drastic diet in 2040. Either way, it’s going to happen.”

Part 2: Unsettled Forecast

How and when the U.S. will address climate change is another story. Looking at the future of domestic policy is like peering into a kaleidoscope reflecting an ever-changing pattern as the pieces shift, collapse and reappear.

Just a few months ago, the image seemed much clearer. The House had passed the Waxman-Markey bill, which established a cap and trade system for reducing carbon emissions. The EPA had declared greenhouse gases (GHGs) a danger to public health and was moving full speed ahead on a regulatory regime under the Clean Air Act (CAA). President Obama had pledged in Copenhagen to reduce U.S. GHG emissions by 17 percent by 2020. Some Washington observers were alarmed that business faced the imminent double whammy of new legislation and new regulation.

But early this year, the picture shifted in both Congress and the EPA. The Waxman-Markey approach fell victim to the political winds in Washington. Fearing voters would turn on any legislator supporting anything tagged as threatening economic recovery, Republicans and Democrats alike walked away from cap and trade.

In February, facing growing Congressional sentiment to ban EPA control over carbon emissions and a spurt of lawsuits challenging its authority to do so, EPA Administrator Lisa Jackson backed off of a March 31 deadline to trigger regulation, announcing a one-year delay.

“It appears one thing will happen, and then the winds of politics blow and it doesn’t happen,” says William Stewart, a member of Cozen O’Connor and author of “Climate of Uncertainty,” a 2009 book about climate change policy. “But a majority of people, and a supermajority of policymakers and a supermajority of scientists think something should be done.”

For those advocates of climate change controls, a ray of hope remains. At press time an unlikely tripartisan coalition of senators was reportedly in the final stages of patching together a bill meshing the converging goals of two disparate groups of senators–those who believe the nation must move forward now on greenhouse gas controls, and those who fear dependence on foreign oil threatens U.S. security. Both environmental groups and various business sectors were furiously lobbying for their respective interests.

“I do think [the coalition bill] is likely to reinvigorate and dominate the climate debate in the short to midterm,” says Mary Beth McGowan, a government policy adviser at Dykema Gossett.

Negative Forces

That debate lost steam as a result of a confluence of factors that hit Capitol Hill after the House passed the Waxman-Markey cap and trade bill in June. Most significantly, the election of Sen. Scott Brown, a Republican in the traditionally Democratic state of Massachusetts, broke the Democrats’ filibuster-proof majority in the Senate and set off panic among those seeking re-election in November. The changing political tides created political gridlock in the Senate, tied up the administration’s first priority, health care reform, and pushed Democrats to focus on short-term job creation. That put climate change further back on the legislative agenda.

Factors outside Congress also had an impact. The Copenhagen talks failed to produce binding emissions targets. “Climategate” revealed that some leading climate change scientists had exchanged e-mails about concealing certain data. Along with a few errors uncovered in a 3,000-page research report by the Intergovernmental Panel on Climate Change, the scandal gave fuel to climate change skeptics. So did a freak Washington winter that repeatedly dumped snow on the Capitol.

Then three multinational corporate giants–BP, ConocoPhillips and Caterpillar–pulled out of the U.S. Climate Action Partnership (USCAP), a lobbying coalition of major companies and environmental organizations that endorsed an economywide cap and trade program. The departing companies cited concerns over the direction of pending climate change legislation, particularly concessions to the politically potent coal industry.

“The departure of a number of Fortune 500 companies from USCAP dealt a real blow to
proponents of cap and trade in that it is difficult for them to hide behind corporate America in the form of USCAP, which was a pretty diverse group,” says James Barnette, a partner at Steptoe & Johnson.

Despite the setbacks, President Obama has continued to push for broad legislation he says would have the combined effect of stimulating the U.S. economy with “green jobs” while living up to the pledge he made in Copenhagen. But with cap and trade now “deader than Elvis,” in Barnette’s words, “the remaining question is whether they may be able, on a bipartisan basis, to put together a package of provisions that will be difficult for Republicans to argue will have a horrific effect on the U.S. economy.”

Revival Vehicle

The most likely vehicle for that package is Senate legislation co-authored by a Republican, Lindsey Graham of South Carolina; a Democrat, John Kerry of Massachusetts; and an independent, Joseph Lieberman of Connecticut. At press time, the details had not been announced. But the Washington Post, citing unnamed sources, said the senators were weaving together several provisions: phasing in a cap on power plant emissions; subjecting motor fuel to a carbon tax, with proceeds used to develop electric vehicles; expanding domestic oil and gas drilling offshore; and providing federal assistance for new nuclear power plants and for carbon sequestration and storage projects at coal-fired utilities.

Another possibility is a “cap and dividend” provision giving money from the sale of carbon allowances directly back to consumers. That idea, initially proposed by Sen. Susan Collins, R-Maine, and Maria Cantwell, D-Wash., has some political appeal. And the bill overall is designed to allow lawmakers to campaign on the politically popular idea of reducing dependence on foreign oil by increasing domestic oil production and nuclear and alternative energy sources.

“Sen. Graham talks about saving America from foreign threats by making us energy independent,” says Gerard Waldron, who recently rejoined Covington & Burling as a partner after serving as a Congressional aide on energy and climate change. “Even in this political winter, if people see this as an issue important for U.S. national security, they will work on it.”

As a result, some experts think it is possible that such legislation–a hybrid energy independence/climate change bill–will be able to garner 60 votes, be reconciled with the House bill’s much stronger carbon control elements, and become law this year.

“If you have an overlapping of the energy security folks and the climate folks, you have a concentration of people with a common interest in developing alternative energy,” Stewart says. “It’s very plausible and probable that something like that gets done.”

But the clock is ticking, and many Congressional experts think it’s too late in this election year to move such a major bill.

“The Senate calendar is too crowded, and incumbents are too worried about challenges from the left and right, to allow for consideration of major climate change legislation this year,” says Payson Peabody, of counsel at Dykema Gossett, adding that some pieces such as renewable power standards could be attached to other legislation.

Others feel that the “something for everyone” approach of the expected legislation leaves it vulnerable.

“[The Lieberman/Graham/Kerry] bill certainly is being crafted to help get support,” says Patrick Raher, a partner at Hogan & Hartson. “However, that same flexibility is likely to raise very significant concerns with [environmental organizations] and may well be in direct conflict with the president’s statements in Copenhagen. Thus I see no chance for legislation in this election year.”

Regulatory Regression

Another thing that won’t happen this year is EPA enforcement of GHGs from utilities and industrial facilities under the CAA, though the long-term outcome is as murky as the legislative picture.

The impetus for regulation started with the Supreme Court’s 2007 opinion in Massachusetts v. EPA. In a case involving vehicle emissions, the high court rejected the agency’s contention that it had no authority to regulate greenhouse gases under the CAA and ordered it to determine whether GHGs endanger public health and welfare.

After the Bush administration buried EPA’s initial finding that GHGs do pose a public health hazard, the agency finally issued its “endangerment finding” on Dec. 7, 2009, triggering regulation under the CAA. In the meantime, the administration had reached an agreement with automakers on an emissions control standard that would phase in starting with the 2012 model vehicles. In order to meet that deadline, auto companies needed regulations by March 31, 2010.

While there was agreement on so-called mobile source emissions from vehicles, regulation of GHGs from so-called stationary sources such as utility and manufacturing plants was much more contentious. The EPA itself said the complex provisions of the CAA made it an inappropriate tool for carbon controls, adding that it would prefer Congress write new legislation to achieve the same end. Some perceived this as an attempt to blackmail Congress into passing a cap and trade bill. Others said the agency was simply carrying out the Supreme Court’s mandate.

In addition, there were practical problems with the March 31 deadline. CAA regulation would require companies to obtain state permits for GHGs to construct or modify facilities, just as they currently do for certain other pollutants.

“There really wasn’t sufficient time, and many parties, including people in industry and permitting authorities, were concerned because there were no firm guidelines on how to implement permitting requirements for greenhouse gases,” says Cynthia Faur, a partner at Quarles & Brady.

Congressional opposition quickly escalated. Sen. Lisa Murkowski, R-Alaska, introduced a “resolution of disapproval,” a rarely used procedure that can block federal agency rules from taking effect. While there was scant chance President Obama would sign such a resolution, it garnered many supporters. Then in February, eight Senate Democrats sent Jackson a letter saying EPA’s planned regulation of stationary sources would jeopardize the economic recovery by tying up plant construction and expansion in the CAA’s complex and litigious permitting process. And four lawsuits filed in the D.C. Circuit challenged the endangerment finding and EPA’s authority to regulate GHGs, while several petitioners asked the EPA to reopen its assessment of GHG hazards in light of Climategate.

In the face of this growing storm, Jackson on Feb. 22 replied to the senators’ letter and delayed any regulation of stationary source CO2 emissions for a year, while sticking to the March 31 deadline for GHG standards for motor vehicles. Rather than triggering an obligation for stationary sources to obtain clean air permits starting in 2010, Jackson said the EPA would start phasing them in beginning in 2011.

“There are a couple of explanations as to why EPA indicated it was going to slow down on stationary source regulation,” according to Seth Jaffe, a partner at Foley Hoag. “The simplest is that the pressure from Congress on the endangerment finding persuaded EPA that it had to demonstrate it could compromise in order to avoid an embarrassing Congressional vote. On the merits, EPA may have heard the comments and been persuaded that a lot of kinks had to be worked out before rolling out GHG regulation more broadly.”

Jackson also signaled that only very large polluters would initially be subject to the CAA rules and that “the EPA does not intend to subject the smallest sources to Clean Air Act permitting for greenhouse gas emissions any sooner than 2016.”

More specifics are expected by early April, but Raher believes that the new threshold for industries to fall under EPA regulation of GHGs is likely to be between 50,000 and 100,000 tons of emissions per year, more than double the originally proposed standard. “This would eliminate any sources except large utilities, steel plants, coke ovens, refineries, cement plants and aluminum sources,” he says.

But Jackson’s letter left many unanswered questions about what the final EPA regulations will be. “For business there is a tremendous amount of uncertainty, and certainty is needed for businesses to grow and move out of this recession,” Faur says. “Where we have this type of uncertainty, it’s very difficult to make decisions because people need to understand what the cost structure of their decisions is going to be.”

But some in Congress want an even longer delay in regulation. On March 4 Democrats from coal-producing states introduced bills in the House and Senate to delay EPA greenhouse gas limits for stationary sources by two years to give lawmakers more time to craft legislation. And court challenges are expected to continue, albeit with environmentalists rather than industry groups taking the lead.

“The administrator is trying, as she should, to buy industry time to allow for legislation and to plan for implementation if there is no legislation,” Raher says. “She cannot, however, stop [environmental organizations] from attacking permit applications during that time frame, and she certainly cannot stop them from challenging the immediacy of the public health finding.”

Raher agrees that this leaves many businesses in a tight spot.

“The auto industry is the only industry that knows what it has to do and has enough time to do it,” he says. “The rest will be thrown into a litigation quagmire, not knowing what to do.”

Part 3: Open Air, Open Books

Public companies might face another quagmire in the form of new disclosure rules, although the hints it was coming date back years. In recent weeks New York Attorney General Andrew Cuomo has been busy mulling a run for governor and playing clean-up on Wall Street, but actions he took a few years ago have proved instrumental in another climate change battleground: the push for disclosure of the impact of climate change on public companies’ business and operations.

Climate change-related shareholder resolutions, although relatively rare to this day, were creeping up in numbers among high greenhouse gas (GHG) emitters in the 2007 proxy season. Meanwhile, various state officials and environmental groups were formally petitioning the SEC to require greater disclosure on risks associated with climate change.

In September 2007, Cuomo’s office subpoenaed five major national energy companies for information on how they analyze climate change risk and disclose those risks to investors. That led to a milestone agreement with Xcel Energy in August 2008. Similar agreements with Dynegy Inc. and AES Corp. followed. They were the first-ever binding and enforceable agreements requiring a major energy company to disclose such risks to investors and a bellwether of what was to come, which Cuomo recognized even then.

“This landmark agreement sets a new industrywide precedent that will force companies to disclose the true financial risks that climate change poses to their investors,” Cuomo said in a statement announcing the Xcel settlement. “Coal-fired power plants can significantly contribute to
global warming and investors have the right to know all the associated risks.”

On that last point at least, the SEC is now in agreement.

SEC Spotlight

In January, after several years of being petitioned to do so, the SEC pitched in on the climate change disclosure issue, voting 3-2 to issue interpretive guidance on existing disclosure rules as they apply to “business or legal developments relating to the issue of climate change.” It also announced a spring roundtable to take input from public companies, after which it may release additional guidance.

The announcement was the result of a number of threads coming together, says Kevin LaCroix, a partner in OakBridge Insurance Services and creator of the blog the D&O Diary. LaCroix cites the Cuomo subpoenas as well as the new administration, the Supreme Court’s holding in Mass. v. EPA and the National Association of Insurance Commissioners’ (NAIC) move to require insurance companies to disclose to their regulators any climate risk exposure to their businesses.

The SEC diminished its role in the climate change debate, however: “We are not opining on whether the world’s climate is changing, at what pace it might be changing, or due to what causes,” SEC Chairman Mary Schapiro told an open agency meeting before the vote. “Nothing that the Commission does today should be construed as weighing in on those topics.”

Still, the SEC’s guidance is a milestone in the climate change field.

Although the agency declined to issue new rules on climate issues, the interpretive guidance it released in February “should not be taken lightly,” says David Mittelman, a partner at Reed Smith. “The SEC has issued only one or two interpretive releases a year over the past two decades. By placing a spotlight on the issue of climate change, the SEC is serving notice on public companies to consider whether disclosure is needed.”

Specifically, the agency highlighted two broad areas as potential triggers of disclosure requirements. Companies will have to assess the risk to their business or operations of the physical impacts of climate change–the requirement would apply to scenarios where, for example, climate change-fueled hurricanes could threaten a company’s coastal operations or climate change-aggravated forest fires could destroy a lumber company’s assets.

“It relates to the fact that insurance companies might face significant losses from what would be climate change-related storms or weather conditions. That’s been brought into the types of things companies might have to look at for climate change disclosures,” says Mark Thimke, a partner at Foley & Lardner.

The second broad category is policy-related effects, which the SEC outlined as climate-related legislation and regulation, impact of international accords and indirect consequences of regulation or business trends. It would cover the material financial effects of legislation that imposed a cap and trade program or a carbon tax, the cost of compliance with EPA regulations, the risk of litigation over related issues or even damaged public perception over climate change issues that leads to financial harm.

With the state of EPA regulation and comprehensive climate change legislation in disarray, Thimke says companies will have to make some assumptions in their statements. “We don’t know whether there will be a climate bill, and we don’t know what the parameters would look like,” he says. “But we can assume what the effect would be if there’s a cap and trade system and if the law requires certain reductions by 2020 and grants certain allowances to certain industries.”

Existing Foundation

LaCroix finds it critical that, rather than issuing new guidelines or modifying old ones, the SEC has opted to provide guidance on existing SEC filing guidelines–specifically, two provisions it has long used to regulate public company disclosures on environmental liabilities and management discussion and analysis.

“The SEC itself has already, on numerous occasions, brought enforcement action against various public companies for their failure to comply with traditional environmental disclosures focusing on traditional environmental concerns,” LaCroix says. “My concern is, given that track record [and after issuing the February 2010 guidance], will the SEC now use those guidelines for the basis to bring enforcement actions? Only time can tell, but it’s not a big jump.”

Private shareholder litigation claiming inadequate disclosures would be another possibility. In the traditional environmental context, such claims are numerous. Shareholder suits are “the big unknown” in the disclosure discussion, says Craig Moyer, a partner at Manatt, Phelps & Phillips.

“For a shareholder derivative lawsuit to be brought,” he says, “plaintiffs need to show a drop in share value and link that to climate change or failure to disclose climate change. We haven’t yet seen any of these cases, but that will be something the plaintiffs bar will consider.”

If investors do turn to climate change-related securities litigation in this area, LaCroix says individual executives may be a target, if the past is any indication. “In traditional corporate securities litigation, where the allegation is misrepresentations to your investors about environmental liability, those suits almost invariably name not only the company itself but also individuals,” he says.

Despite the speculative nature of such suggestions, boardrooms of energy-producing or energy-dependent companies should already be having conversations about climate change-related disclosures if they want to avoid future litigation.

“There’s been enough out there for some time about the potential for either cap and trade or a carbon tax that anyone that hasn’t planned for it, and as a result doesn’t do well economically, is a potential target for a D&O lawsuit,” Moyer says. “We’ve seen a sustained wave of nuisance suits, and my suspicion is that the next wave will be D&O suits.”

Part 4: Courting Change

Among that wave of climate change-related nuisance suits, a few stand out. In one, a group of Mississippi Gulf Coast residents and landowners seek damages from major corporate emitters of greenhouse gases (GHGs), which they claim exacerbated global warming. They say increased temperatures led to raising sea levels and worsened the severity of Hurricane Katrina, which damaged or destroyed the plaintiffs’ property. In another, a coalition of state attorneys general–representing 77 million people–are suing a group of power companies, seeking to make them cap and reduce their greenhouse gas emissions on grounds that GHGs cause global warming, which can lead to irreparable property damage and presents health and safety hazards.

Despite their different backgrounds and the different forms of relief they seek, the cases are being mentioned in the same breath these days as they make unprecedented forward movement on the common law claim that GHG emissions of the defendants are a public nuisance. That’s a somewhat novel claim, and in numerous cases it has met dismissal on grounds that the matter is a nonjusticiable political question.

They still face hurdles, but the claims have gone further than ever in these two cases–a cause for uncertainty for carbon-emitting companies, either direct or indirect, which could be affected by similar litigation.

“Most of us looked at these cases as little more than a curiosity. Most people thought they didn’t have legs,” says William Stewart, a member at Cozen O’Connor. “You saw federal courts dismissing on the basis of political question and causation, and it looked like it was going into form. Then everything changed in a second.”

Smoking Gun

The change came in September 2009 from the 2nd Circuit, which vacated a district court’s dismissal on political question grounds of Connecticut v. AEP, the case seeking injunctive relief. Judge Peter Hall’s opinion applied a quote from a landmark water pollution case to the climate change arena. “It may happen,” Hall wrote, “that new federal laws and new federal regulations may in time pre-empt the field of federal common law nuisance. But until that comes to pass, federal courts will be empowered to appraise the equities of the suits alleging creation of a public nuisance by greenhouse gases.”

Shortly after that, in October 2009, the 5th Circuit–without relying on the 2nd Circuit’s reasoning–made a similar reversal in Comer v. Murphy Oil, the Mississippi Gulf case, allowing three claims to go forward, and dismissing the rest for lack of standing. But AEP and Comer have merely overcome the motion to dismiss phase, and defendants are appealing the circuit court decisions.

Defendants in Comer v. Murphy petitioned for en banc review, which the full 5th Circuit granted Feb. 26, indicating possible disagreement with the original three-judge panel that heard Comer–and the possibility of a circuit split. Stewart isn’t confident that the claims can hold up to scrutiny. “They represent pretty intimidating rulings for companies in certain sectors, but there’s reason to believe they may not hold up,” he says.

But in the meantime, the defendants face the prospect of discovery. “There doesn’t seem to be a quick solution to the litigation proceeding, and the case is going forward and discovery is going to begin,” says John Ferroli, a member at Dykema Gossett. “You have to wonder if those defendants are looking at themselves a bit like the tobacco industry, on the verge of having to hand over all kinds of information. If there’s a smoking gun, as there arguably was with discovery in the tobacco industry, linking power companies’ products knowingly to climate change, it could prove fairly damaging to the industries affected.”

While the appellate rulings in AEP and Comer are a step forward for plaintiffs, they are far from home free. “None of the battles have really been won,” says Cynthia Faur, a partner at Quarles & Brady. “While there have been courts that allowed public nuisance cases to go forward, there are still courts denying them.”

Proof and Politics

In Native Village of Kivalina v. Exxon, probably the most visible public nuisance case behind Connecticut v. AEP and Comer v. Murphy, Alaskan villagers claimed two dozen energy companies contributed to global warming, which melted sea ice that protected Kivalina’s coastline from storms, leading to severe erosion. They seek hundreds of millions of dollars in damages to relocate their village.

The U.S. District Court for the Northern District of California last year granted a motion to dismiss the case on political question grounds and for lack of standing. Judge Saundra Brown Armstrong’s opinion acknowledged the 2nd Circuit’s ruling in AEP but declined to adopt its reasoning that “well-settled principles of tort and public nuisance law” were appropriate for such “new and complex problems” as climate change.

“This court is not so sanguine,” Armstrong wrote in response. “While such principles may provide sufficient guidance in some novel cases, this is not one of them.”

Armstrong did note that the facts of Kivalina and AEP were different. Still, the political question doctrine will likely resurface as the 2nd and 5th Circuit decisions are appealed against the backdrop of potential legislation and EPA regulation.

“The U.S. government is showing an interest in occupying this field either legislatively or administratively,” Ferroli says. “It doesn’t bode well for success at the Supreme Court for these cases.”

Climate change torts also have faced extremely difficult issues of causation–claimants have to prove that companies weren’t just negligent but that their GHG emissions were an unreasonable interference. The global nature of climate change also presents another problem, as do the facts that living things emit carbon, and factories dating back to the beginning of the Industrial Revolution emitted carbon. The full 5th Circuit will surely consider such issues in their review of Comer. Such high bars could mean a long stretch of appeals ahead.

“If the 5th Circuit reverses, then we will have a split between the 2nd and the 5th Circuits,” says Adam Kahn, co-managing partner at Foley Hoag. “In the short term, a split would further increase the uncertainty about whether these nuisance suits can proceed. In the medium term, a split could increase the likelihood that the Supreme Court will be presented with the opportunity to decide the issue for itself.”

And going by past rulings, the high court will set a high bar for plaintiffs. “The Supreme Court has consistently allowed public nuisance cases to be dismissed involving interstate water pollution, both before and after the Clean Water Act, and air pollution cases have not been significantly more successful,” Ferroli says.