The proposed rule is part of the Biden administration’s larger environmental agenda, but it comes with costs for contractors.
The Biden administration is looking to make covered federal contractors disclose their climate emissions, in a move that is in keeping with its broader environmental agenda but could place some heavy financial and administrative burdens on contractors, according to experts.
The Federal Acquisition Regulatory Council published a proposed rule in the Federal Register on Monday in support of executive orders on climate-related financial risks and federal sustainability, which the administration said covers about 85% of the emissions associated with the federal supply chain. In addition to addressing greenhouse gas emissions, this proposal will “protect the federal government’s supply chains from climate-related financial risks,” the White House said. Already more than half of federal contractors are sharing climate-related information, which is part of a world-wide movement, the White House added. Public comments on the proposal are due by January 13, 2023.
“Social justice and climate change, big picture wise, what we’ve seen is that the Biden administration really is making every effort to be pervasive…[and] to make this a culture movement versus just a contracting movement,” said Stephanie Kostro, executive vice president for policy at the Professional Services Council, a trade association that represents over 400 companies that contract with the federal government. This proposed rule has been anticipated for a while, she told Government Executive, as the administration issued an advanced notice of proposed rulemaking on it about a year ago that received about 35,000 responses, many of which the administration incorporated into the new proposal.
“The positive side” is that the proposed rule provides definitions of terms that they were looking for, Kostro said.
Specifically, the draft rule uses a variety of widely adopted standards from third parties for climate goals and puts “major federal suppliers” into two buckets: “significant contractors” (received more than $7.5 million, but not over $50 million in federal contract obligations in the previous fiscal year) and “major contractors” (received more than $50 million in the previous fiscal year). Both types of contractors will be required to publicly disclose direct emissions from their company’s owned or controlled sources (called “Scope 1” by the widely adopted Greenhouse Gas Protocol Corporate Accounting and Reporting Standard) and indirect emissions from the company’s purchased energy, such as heat or cooling generated offsite (called “Scope 2”).
Major contractors would also be required to publicly disclose “relevant categories of Scope 3 emissions, disclose climate-related financial risks, and set science-based emissions reduction targets,” said a fact sheet from the White House. Scope 3 emissions are all other indirect emissions that aren’t included in Scope 2 that are related to the companies’ activities.
“The other side of the coin [with the proposed rule] is the room for improvement,” Kostro said. The executive order that prompted this rule didn’t mention “significant suppliers,” so “it’s going to be expensive and potentially difficult for them to comply with,” said Kostro.
Certain groups are exempt from the proposed rule and small businesses that have over $7.5 million in annual contracts only need to report their Scope 1 and Scope 2 emissions.
Overall, “I think there is a recognition within the executive branch and, often more specifically the administration, that climate change action is expected,” Kostro stated. “ From a government contractor perspective, what we’re going to look for is [whether] the government [is] willing to reimburse companies for taking the steps they are requiring? Because it is expensive and there can be that tension between, when you’re making a business decision,” environmental factors as well as efficiency and effectiveness. “I think the companies are willing to take the steps that the government is requiring, but there is an acknowledgement that it's expensive.”
The timeline for the new rule has been delayed and spread out over a two-year ramp up period to give contractors time to get ready, but Kostro said she thinks it's still “aggressive.”
Markus Gerhard Speidel, associate at the law firm Morrison & Foerster LLP, wrote in a recent post on the proposal, “Pursuing emission reduction strategies can also prove to be good for business, leading to cost-savings, brand enhancement, and increased innovation. As part of the puzzle, contractors should consider their own supply chains and plan to flow down requirements.”
Jonathan Adler, the Johan Verheij Memorial Professor of Law and director of the Coleman Burke Center for Environmental Law at the Case Western Reserve University School of Law, wrote that “just as courts were skeptical of the Biden administration's attempt to require federal contractors to vaccinate their employees, they may be skeptical here,” as both yield their authority from the Federal Property and Administrative Services Act. Adler, whose research was credited for inspiring the litigation to challenge the Affordable Care Act in federal courts, added, “Part of the problem is that the Supreme Court has never resolved the question.”
Todd Overman, chair of the law firm Bass, Berry & Sims PLC’s government contracts practice group and managing partner of its Washington, D.C., office, pointed out that as broken down in the proposal, this proposal “will be costly both financially and administratively.”
Specifically, as estimated in the proposal, “the average major contractor who does not yet publicly disclose emissions or reduction goals should expect $460,603 in costs for the initial year and $414,725 annually thereafter. The average significant contractor is estimated to incur over $63,000 in initial costs, and roughly $48,000 annually thereafter,” Overman said in a statement to Government Executive, noting that this can vary among organizations. “From an administrative perspective, contractors must delegate employees with finding, organizing, and reviewing emissions data while working with external consultants to assist with the inventories. Additionally, contractors will have to become familiar with a variety of new standards which will further absorb employee hours.”
Lastly, “this rule is likely a harbinger of what is to come for the private sector at large as the [Securities and Exchange Commission] finalizes its own requirements for climate disclosure rules,” which would apply to public companies, Overman added. The process to promulgate that rule has been complicated by technical issues, pushback from industry and a Supreme Court decision over the summer possibly putting up roadblocks, Bloomberg Law reported.