John Eichberger |
March 2024
The global push to reduce emissions, especially those related to carbon, continues to be intense. In the past 20 years, tremendous progress has been made to improve the environmental impact of the transportation sector, although some challenge those claims and argue such progress is insufficient. Clearly, more can be and should be achieved but the progress made to date should be celebrated. This highlights the fact that there remain challenges beyond the technical ability to reduce emissions. For example, how do we measure the reductions and how do we communicate those reductions to the government, the public and business partners? This was really the genesis of the ESG (Environment, Social and Governance) movement and although this concept has become heavily politicized, there remains incredible value for businesses to accurately communicate what they are accomplishing. What is being required, by whom and from whom are questions that need to be understood. This column will try to answer some of these questions.
The Securities and Exchange Commission
More than two years ago, the Securities and Exchange Commission (SEC) published draft rules requiring publicly traded companies to disclose certain climate-related information. After more than 20,000 public comments on the draft rule, the SEC finalized a “streamlined” rule (still almost 900 pages long) on March 6, 2024. As is typical with federal rulemaking, the final rule was quickly met with numerous lawsuits and the Eleventh Circuit Court of Appeals issued a temporary stay order on the rule. Despite these legal challenges, it is generally believed unlikely that the courts would vacate the rules completely, so those expecting to be regulated are continuing to move forward with preparations.
That said, even if the rule were to be vacated completely, many of the potentially regulated companies would still fall under other state (e.g., California), EU, or global sustainability disclosure requirements and frameworks…many of which are much more stringent than the final SEC rules and include up and downstream emissions (referred to as Scope 3, which requires the reporting entity to account for emissions from suppliers and customers that are beyond their immediate control).
The final SEC rule focuses on Scope 1 (direct emissions) and Scope 2 (indirect grid related emissions) and creates a scenario where those that must meet the new requirements will not have to incorporate emissions from third party shippers and service suppliers (Scope 3). Unless, of course, they are doing business in California, the EU, or if they fall under a set of global standards. All of which are under different phases of development but are being aggressively pursued.
Some of the SEC final rule is still unclear. For example, will regulate companies have to account for emissions from hired independent carriers which are not directly owned by the regulated party? If so, this would require even the smallest of privately held fleets, moving goods on behalf of the regulated party, to report emissions to their regulated customer.
Following discussions with our TEI counterparts in Canada, it appears as though Canada is roughly two years away from passing similar SEC requirements. However, large Canadian companies doing business in the EU or California have equally been racing to track emissions and setting reduction goals.
Fuel Suppliers and Fleet Operators
Since the initial proposed SEC rule, fuel suppliers and fleet operators have been preparing for new information-sharing demands on the supply chain. As transportation fuels are a primary source of global carbon emissions (referred to as CO2e, or carbon dioxide equivalent emissions), those that are likely to be regulated are looking to determine, track, report, and set goals for reducing these emissions which result from the regulated party’s fleet or other energy demands.
Large corporations facing reporting requirements often run their own fleets with their own captive fueling stations. Often these companies require in their supply contract that their fuel suppliers report fuel carbon intensities if they wish to continue serving as a fuel supplier. In many cases, fuel suppliers are also being asked to assist with reporting and emissions modeling criteria as well as providing options that can be used to reduce emissions, such as offering certain biofuel blended products that represent a lower carbon intensity than pure fossil fuels.
In addition, some of these corporations are calling upon their suppliers (both manufacturers of goods as well as those who deliver products to their facilities) to participate in and support their efforts to reduce their carbon footprints. For fleet operators transporting products, they are often required to report their carbon emission to their customers or risk losing the service contract.
As a consequence of these requirements being imposed on fleets, it appears that a number of fuel retailers and retail equipment providers are preparing themselves to meet the carbon reporting demands of large, potentially regulated, fleets that are fueling at their locations. This may, in fact, become a selling point to entice fleets to their locations if they can meet the reporting demands.
Because of regulatory and business-to-business obligations, the Transportation Energy Institute (TEI) developed the Carbon Avoidance Tracker to help fuel suppliers and fleet operators quantify and report their emissions to their customers, seeking to answer the question from the opening paragraph – how to measure and report emissions. Sharing accurate supply chain emissions data derived from a transparent process is quickly becoming a critical component of sustainability reporting for many large organizations. [*The Carbon Avoidance Tracker was designed to assist industry while creating revenue which can support TEI’s core research on transportation initiatives.]
The surge in measuring and reporting requirements has created a new business enterprise through which many companies are seeking to offer services for hire. Unfortunately, many of these do not disclose their methodology for measuring emissions and the nature of their reporting may not be fully transparent. There is a need for clarity, common methodology and comparability to ensure that measuring and reporting mechanisms can be trusted and relied upon for both regulatory and commercial purposes. That is one of the reasons TEI sought to provide a resource in this sector – to provide objective, transparent and reliable data to the market.
Big Picture
All of these additional requirements for low carbon transportation energy puts massive pressure on the efforts to access and maintain supply of lower carbon fuels. Yes, new technology vehicles can help, but the overwhelming majority of commercial vehicles operate on liquid fuels, and they have a very long expected life (according to Oak Ridge National Laboratory, half of heavy-duty vehicles sold today will remain on the road in 27 years). Understanding which liquid fuel options can contribute to lower carbon emissions is a critical element to addressing these various obligations.
TEI has been working on this topic for years and has commissioned several related reports. I recommend you take a look at the following published reports:
- Decarbonizing Combustion Vehicles – A Portfolio Approach to GHG Reductions
- Policy Considerations – Emissions Reduction Proposals Affecting Medium- and Heavy-Duty Vehicles
- Future Capabilities of Combustion Engines and Liquid Fuels
- Assessment of Biofuels Policy – Effectiveness of Emissions Reductions
- The Case for Developing an ESG Plan
- The Easiest and Hardest Commercial Vehicles to Decarbonize
And stay tuned for our upcoming report evaluating the economics of biofuels production, in which we look at scalability and the broad effects of low carbon biofuels on the transportation sector and the economy in general.
The move to decarbonize is not going away, despite political winds, and the need to track and report emissions continues to gain momentum. We need a market in which parties can rely and trust the data they are receiving. We need a system that is trustworthy and will allow the transportation sector to report with confidence the additional progress it makes in reducing its emissions.
