Natural Resources Defense Council • National Wildlife Federation •

National Environmental Trust • Union of Concerned Scientists •

U.S. Public Interest Research Group • World Wildlife Fund •

Minnesotans for An Energy-Efficient Economy

June 5, 2002

Office of Policy and International Affairs

Office of Electricity and Natural Gas Analysis, PI-23

Attention: Voluntary Reporting Comments

U.S. Department of Energy

Forrestal Building, Room 7H-034

1000 Independence Ave., SW

Washington, DC 20585

(Also submitted by e-mail to <ghgregistry.comments@hq.doe.gov>)

Dear Sir or Madam:

Thank you for the opportunity to comment on the topic of global warming
emissions reporting. On behalf of the millions of members of the
organizations listed above, we respectfully submit these comments and
look forward to working with you and Congress in designing an effective
system for accurately and comprehensively tracking global warming
pollution and making that information available to the public.

We concur with President Bush's assessment that the existing voluntary
reporting system operated by the Department of Energy has failed to
provide a credible registry of global warming emissions or reductions.
As detailed in the enclosed report by the Natural Resources Defense
Council, electric power companies -- responsible for two-thirds of the
"reductions" claimed under the current DOE reporting system -- used
inflated baselines and other dubious accounting practices to claim large
emission reductions when in fact they did little or nothing to change
emissions trends. Emissions rose at about the same rate that power
generation increased. For example, seventy percent of the pollution
"reductions" the utilities claimed were based on the routine operation
of nuclear plants. Companies simply credited themselves for avoiding
emissions that would have occurred only if that power had been generated
by purely hypothetical coal-fired plants instead of the nuclear
plants.[^1]

The 1992 reporting system failed largely because the authorizing
legislation was not properly designed to establish a credible,
comprehensive, and accurate inventory of emissions from all of the
nation's major emitters. Consequently, we have been working with members
of Congress on improved legislation to establish a global warming
reporting system that credibly and comprehensively informs business, the
public, and governmental decision-makers.

We encourage the Bush Administration to work with Congress to develop a
more effective reporting system, rather than trying to fix the broken
system that was authorized a decade ago. As you know, the United States
Senate voted last month to establish a new gas reporting system for
global warming pollution as part of the latest energy bill,
demonstrating that Congress is prepared to start over with an improved
system informed by the decade of experience since the failed 1605(b)
system was established.

In short, there is much that the administration can do to foster a
useful, comprehensive, and high-integrity emissions inventory system,
but not within the confines of the voluntary 1605(b) program. The
administration, working with Congress, must start over. The remainder of
our comments address the specific issues raised in the president's
charge and the notice of inquiry within the context of this fundamental
conclusion.

Our comments first address issues pertaining to achieving a
comprehensive and accurate inventory of global warming emissions from
U.S. entities. We then address issues raised by proposals to avoid
penalizing early movers and to give out "early credits" usable against
future cap and trade obligations. Finally, we address additional
elements of a credible entity-wide reporting system.

# I. Building a Comprehensive, Credible Reporting System

President Bush's first charge to the Secretary of Energy, working with
other agencies, is to recommend improvements to "enhance measurement
accuracy, reliability and verifiability" in the reporting of global
warming emissions.[^2] While these are important objectives, they ignore
the more fundamental problems with the voluntary program established by
the Energy Policy Act.

##  A. Require Mandatory Emissions Reporting for Major Emitters

A comprehensive and meaningful emissions reporting system must account
for the global warming emissions of all major emitters. A decade of
experience with the failed 1605(b) program has demonstrated that this
objective cannot be accomplished by a voluntary program. Consequently,
*the number one conclusion that the Department should reach in its
report back to the President is that the country needs a mandatory
emissions reporting system, not a voluntary one.*

The 10-year record of this voluntary program demonstrates unequivocally
that voluntary project-based reduction reporting yields almost no useful
information. Rather, it encourages firms to make filings not on their
entire corporate emissions profile, but on cherry-picked emission
reduction projects. Further, as NRDC's report illustrates, most of these
project-based reports claim hypothetical emissions reductions from
inflated baseline assumptions. As a result, companies make extravagant
reduction claims even as their overall emissions continue to increase
unabated.

The voluntary nature of reporting creates a destructive tension between
the need for rigor and consistency on the one hand, and the goal of
broad participation on the other. The early history of the section
1605(b) guidelines illustrates this tension. In response to any
suggestion that there be rigorous standards for reporting, data quality
requirements, verification requirements, etc., corporate commenters told
the Department that these would only discourage voluntary participation.
In the interests of maximizing participation, DOE dropped virtually all
consistency and quality control criteria, save only a minimal
requirement that submitters describe the basis of their reports, and a
cursory governmental check of the submission's arithmetic.

Even with these minimal requirements, participation has been very low.
Excluding reports filed by electric generators -- who alone are now
required to report their CO~2~ emissions systematically to the
Environmental Protection Agency under the Clean Air Act -- entity-wide
filers under section 1605(b) account for just *four percent* of the
total estimated U.S. emissions inventory.

In pursuing meaningful improvements to "enhance measurement accuracy,
reliability and verifiability" -- an objective we certainly support --
the Department can count on hearing again industry complaints that
supposedly burdensome reporting requirements will discourage
participation. But enhancing participation in a fundamentally
meaningless reporting system is not an objective worth pursuing.[^3]

**B.** **Require Entity-Wide Emissions Accounting**

A meaningful system must require companies to report total global
warming emissions at the company-wide level in order to provide a
complete record of each company\'s activities within the United States.
If entity-wide emissions information is not provided, neither Congress,
the Administration, nor the public will be able to credibly determine
what impact a company's complete activities are having on the
atmosphere. Companies should therefore be required to report their
entity-wide emissions transparently, with data provided facility by
facility and for major components of those facilities. Reports should
account for all global warming emission sources and activities within
the specified organizational and operational boundaries.

An important question is whether there should be an entity-wide minimum
amount of emissions -- a threshold -- below which entities are not
required to report. We recommend against choosing a tonnage number in
the abstract. Instead, the threshold should be set at a uniform level
that ensures that nearly all domestic emissions of global warming
pollutants are reported. Given the inclusion of reporting on downstream
emissions as recommended in Part III below, we recommend that the
tonnage threshold for entity reporting be set at the level that brings
in at least 90 percent of total national emissions.

Further discussion of these issues is found in Part III of these
comments.

**C.** **Limit Project-Based Reporting**

Without full and transparent entity-wide emissions accounting,
project-based reporting weakens the system and undermines the value of
real reductions by providing opportunities for gaming the system and
claiming hypothetical "reductions" while emissions are actually
increasing. Where companies report their entity-wide emissions, there is
no reason to continue providing for a separate registry on a project
basis, since any legitimate project-based activity is automatically
incorporated in company-wide totals and will show up as part of the
firm's changes in total emissions from year to year.

Consequently, within the context of a mandatory entity-wide reporting
system, DOE should recommend to the president that any further
project-based reporting should be limited only to activities occurring
outside of entities that are required or expected to report their
emissions on an entity-wide basis. In other words, a firm that reports
on its entity-wide emissions should not be permitted to file a
free-standing report on a project that is within its own facilities. Nor
should it be permitted to report on such a project that is within the
facilities of another entity-wide reporter.

Any remaining scope for project-based reporting should proceed only with
wholesale reforms of current faulty provisions governing baselines,
leakage, measurement, and verification. As with entity-wide reporting,
the focus of any such project-based reports should be consistent
year-to-year reporting on a project's emissions or (in the case of a
sink project) the amount of carbon sequestered. In addition, it is
essential to gain widespread consensus on methods for setting baselines
that guarantee that reported emission reductions or sequestrations would
not have happened anyway, and that they were not offset by emissions
leakage -- emissions from production or harvesting activities that are
simply shifted outside the project boundary. While rigorous criteria are
needed for both baseline and leakage demonstrations, currently there are
no generally accepted accounting rules covering the accounting and
reporting of project-based reductions in global warming emissions.

Specific additional issues arise with regard to carbon sequestration
projects in the forest and agriculture sectors. First, sequestration in
biological systems is fragile and easily reversed, releasing carbon back
into the atmosphere. As a result, a ton of carbon biologically
sequestered cannot be considered equivalent to a ton of carbon emission
avoided. The benefit of avoiding emissions is permanent, but the benefit
of biological sequestration is only temporary. Reporting and accounting
rules therefore must recognize the temporary nature of biological
sequestration.

Second, biological sequestration projects can lead to land management
decisions that have either positive or negative effects on biodiversity
and ecosystem health, erosion control, air and water quality, resilience
to the effects of climate change, and human health. Any reporting
program that includes these kinds of projects must encourage activities
that enhance these environmental values, and must reject activities that
cause ecological harm. Projects eligible for reporting should be limited
to those that:

-   Promote ecosystem restoration with native species and reduction in
    ecosystem fragmentation to maximize environmental benefits, such as
    watershed enhancement, biological diversity, and resilience to the
    effects of climate change.

-   Exclude harmful forestry practices, such as forest simplification,
    intensive soil disturbance, intensive irrigation, extensive
    applications of pesticides, herbicides or other chemicals, the
    introduction of non-native, invasive, or transgenic species, and the
    creation of non-native concentrations of species such as
    monocultures.

-   Exclude the conversion of, or negative impacts to, watersheds and
    native ecosystems, including native forests, old growth and late
    successional forest areas, wetlands, grasslands, or deserts..

-   Allow for natural fire regimes, and fire as a management
    prescription, in those forest types where fires are an integral part
    of the ecosystem, and avoid fire suppression to obtain carbon credit
    in these areas.

-   Promote long-term ecological and carbon sequestration benefits by
    having a minimum project length of ten years, and longer as
    necessary for specific project types.

**D.** **Measure Emissions, Not Emissions Intensity**

The notice of inquiry asks whether emissions should be reported on a
mass basis or an intensity basis. Any meaningful emissions accounting
system must work first and foremost on the basis of the total quantity
of what is emitted to the atmosphere, as opposed to a rate-based or
"intensity" approach. The economy can expand indefinitely, but the
atmosphere cannot expand at all. As the president's February 14 policy
book acknowledges, effectively limiting global warming will require us
to slow, stop, and reverse the total quantity of emissions. It is not
enough simply to improve intensity while total emissions continue to
grow. Thus, the only meaningful reporting system is one calibrated in
tons, not rates or intensity measures that obscure the actual impact of
a company's emissions on the atmosphere.

**E.** **Make Information Publicly Available**

The notice of inquiry asks for comment on whether emission data and
supporting technical information should be available to the public.
Implicitly, the notice acknowledges the lack of credibility of emissions
reports that are backed by data that is kept confidential. The notice
asks whether filers seeking some form of baseline protection or credit
should be required to waive the confidentiality of information in their
filings.

To respond to this question, we must first contrast section 1605(b) with
other environmental laws. Section 1605(b) as written does provide for
protection of data that meets civil law standards of business
confidentiality. This provision should be contrasted with provisions in
the Clean Air Act and other environmental statutes that, in the
interests of the credibility of public governmental decisions, exempt
"emissions data" from confidentiality protections. See, for example, 42
U.S.C. section 7414(c). Long-standing regulations define "emission data"
under those laws expansively to include engineering, operational, or
economic information that is necessary to support or verify the reported
end-result numbers on emissions. See, for example, 40 C.F.R. section
2.301. These provisions appropriately place the integrity of public
decisions ahead of the interest of businesses in the confidentiality of
emission data.

DOE should recommend to the president that legislation for a new
mandatory emissions reporting system include provisions like those in
the Clean Air Act and other current environmental statutes assuring
public availability of emission data, including necessary supporting
information. Without this design feature it will be impossible for trust
to be placed in submissions from companies and other filers.[^4] In this
regard, the Senate energy bill strikes the right balance, requiring all
emission data and supporting information to be publicly available,
except in the rare instances when national security might be
jeopardized.

**F.** **Focus on United States Emissions**

The design of a credible U.S. emissions reporting system is not the
proper forum for developing international policy on climate change.
Allowing reports to be filed on project activities taking place outside
the United States presupposes policy decisions that the Congress has not
yet made regarding awarding credit for actions taken abroad in future
domestic programs. Further, there is the potential that actions American
firms take abroad will be double-counted in the programs that other
nations undertake to address global warming pollution, whether under the
Kyoto Protocol, the Framework Convention on Climate Change, or their own
domestic programs. Consequently, a credible reporting system should be
limited to accounting for activities within the United States.

**G.** **Place the Environmental Protection Agency in Charge**

Global warming is a threat to the nation's environment and public
health. As such, EPA should have primary responsibility for emissions
monitoring, measurement, verification, and data collection. EPA
currently receives and maintains reports on CO~2~ emission data
submitted by electric generating entities under the Clean Air Act and
EPA carries out fuel economy tests on new motor vehicles under the CAFE
law that provide emissions data on this sector. These are the only
comprehensive, entity-wide reporting systems currently in place for
global warming pollutants. Under the Toxic Release Inventory program,
EPA receives and maintains similar emission reports by each major
emitter of toxic chemicals.

EPA has an established track record of maintaining systems to track both
emissions and allowances under the Clean Air Act's acid rain program (as
well as the related production allowance system for ozone-depleting
chemicals under Title VI of that Act). The EPA data systems support a
robust emissions trading system under the Clean Air Act that allows
businesses to deal in a credible commodity with near 100% compliance.

## II. No Authority For Penalty Protection and Credit for Early Action 

President Bush also called on the Department and other agencies "to
recommend reforms to ensure that businesses and individuals that
register reductions are not penalized under a future climate policy, and
to give transferable credits to companies that can show real emission
reductions."[^5] This appears to be a request for legislative
recommendations, because the administration has no authority under
section 1605(b) or any other current law to ensure penalty protection or
to give out transferable credits.

The effective way to encourage companies to reduce emissions now,
instead of waiting, is to enact and implement legislation to limit the
nation's global warming emissions. A meaningful global warming control
program that established emissions caps and deadlines and came into
effect with appropriate lead time would provide tangible market-based
incentives for action now. Thus, the Department should recommend to the
president that in order to create incentives for real investments in
emission reductions, new legislation should be enacted to place
emissions under a cap as early as is feasible.

This is quite different, however, from legislation addressed solely to
the issue of no-penalty or early-credit legislation. Unwilling to
address mandatory emission controls, the president is apparently
suggesting that the penalty protection and early credit rules be
legislated in advance, without knowing when and how the total quantity
of global warming emissions will be capped. Instead of trying to
legislate rules for rewarding early action in a policy vacuum, however,
an effective global warming reporting program should confine itself
simply to collecting credible, complete, and comprehensive emissions
information. Without any special rules enunciated at this point, this
information will allow Congress to ensure equitable treatment for
companies that take early action.

In addition, the president's directive mixes together two very different
issues with quite different solutions: penalty protection and credit for
early action. These distinct issues are discussed further below.

**A. Penalty Protection**

The fear that companies may be penalized for early action in the
allocation of emissions allowances in a future climate program arises
primarily from an unwarranted assumption as to how such a program will
allocate allowances. Most options for allocating allowances under a cap
present absolutely no risk of penalizing early movers. Such a risk
arises at all only if it is assumed that a future system will
grandfather allowances to firms based on their emissions at a particular
moment. The simplest way to avoid the risk of penalizing early movers is
to choose an allocation approach other than grandfathering.

There are at least two other ways to allocate emissions allowances under
a cap. One is through an output-based allocation subject to periodic
updating. For example, electricity producers could be allocated
emissions allowances in proportion to their output (e.g., kilowatt-hrs
of electricity production) in the previous year. A second approach is to
allocate allowances to members of the public (e.g., electricity
consumers) and provide for electricity generators to acquire those
allowances from the public (through auctions, brokers, or other means).
In neither case is a firm's allocation dependent on its emissions level
in 2002 or any other base year before the first compliance deadline. As
a result, a firm cannot be disadvantaged in any way by reducing its
emissions now, or at any time before the program kicks in. There simply
is no issue of penalizing early movers.

The single most effective step the administration could take to increase
confidence that a future system will not penalize early actors would be
to state a strong policy commitment against grandfathering emissions
allowances in future legislation to limit global warming pollution. We
would strongly support such a position. But the fact is that even this
statement would not definitively resolve this question, because the
administration lacks the power to deliver on such a commitment absent
new legislation that establishes a schedule for limits on emissions.[^6]

> **B. Credit for Early Action**

The second objective -- permitting companies to earn credits that count
against a cap before a cap is even agreed -- is a much more
controversial proposition. As we will show below, the administration has
no legal authority to recognize or guarantee such credits under existing
law. We note further that there would be no such legal authority under
the Senate energy bill's reporting provisions, which expressly reserve
the recognition of any such credits to a future Congress.

If such credits were to be considered by a future Congress, it would be
necessary to decide many questions, including whether they are to be
drawn from within a pre-established cap, or whether they expand the cap.
In our view, these are fundamental questions that should be decided
part-and-parcel with determining that cap. These questions cannot and
should not be addressed piecemeal by an administration unwilling to
address the question of the cap.

First, it is clear that section 1605(b) confers no authority on the
administration to give credits against future global warming emission
limitations to companies that have made filings under that section. In
fact, the 1992 EPACT legislation pointedly rejected proposals made at
that time to confer credit status on reported reductions.

It is a general rule that today's Congress cannot validly enact a law
that binds a future Congress to following a particular approach on a
legal or regulatory matter. Some commentators have previously argued
that the administration could evade this general rule and confer credits
-- even without any new legislation -- by entering contracts with
companies, citing *United States v. Winstar,* 518 U.S. 839 (1996). The
contract, so the theory goes, would obligate the government to pay
damages if a future Congress failed to recognize the supposed credits in
legislation imposing limits on global warming pollution. This case
simply does not support so sweeping an executive power to bind the
Congress on a matter concerning which it has not yet legislated.[^7] It
is also worth noting that during the previous administration, the
Justice Department took the position that *Winstar* could not and should
not be used as authority for an early credit program. The Department
specifically warned that such an approach could expose the government to
large financial liabilities

Further, it is worth emphasizing that after the passage of section
1605(b), subsequent Congresses have repeatedly declined to promise
credit against future obligations to curb global warming emissions. An
early credit proposal by the late Senator John Chafee failed to be
enacted in the late 1990s. And in the current Congress, as noted, the
Senate energy bill expressly reserves any grant of credits or baseline
protection to a future Congress enacting the limitations against which
the credits might be used.

A future Congress will determine the size of a cap on global warming
pollutants and the timetable for meeting that cap. The Congress will
decide the basis for allocating emissions allowances under that cap. It
will decide whether to encourage any specific activities, past or
then-contemporaneous, with specific allocations of allowances, and it
will decide whether any such allocations will come out of the cap or on
top of it. The administration cannot and should not prejudge these
issues.

These, of course, are the important issues that the administration has
not yet been willing to address. It is this delay that is really
responsible for any hesitation companies currently feel regarding
whether to reduce emissions now. The way to resolve those hesitations is
to chart the course for the future, not to avoid it. The administration
may choose to continue to avoid these key issues. But in the meantime,
we will not support efforts to give firms emissions credits before
assigning industries appropriate responsibilities to curb their global
warming pollution.

# III. Additional Guidance on Successfully Designing a Reporting System

This section provides more detailed input on how to deal with some of
the many important decisions regarding the development and
implementation of reporting guidelines. Many of these points have been
considered by businesses, non-governmental organizations, government and
inter-governmental organizations that have collaborated in the Global
warming Protocol Initiative operated under the umbrella of the World
Business Council for Sustainable Development and the World Resources
Institute.[^8]

A.  **What Should be the Standards for Developing Accounting and
    Reporting Guidelines?**

The following four standards were developed based upon established
financial accounting and reporting practices:[^9]

-   **Complete** - Account for all global warming emission sources and
    activities within the specified organizational and operational
    boundaries. Any specific exclusions should be stated and justified.

-   **Consistent** - Allow meaningful comparison of emissions
    performance over time. Any changes to the basis of reporting should
    be clearly stated to enable continued valid comparison.

-   **Transparent** - Address all relevant issues in a factual and
    coherent manner, based on a clear audit trail. Important assumptions
    should be disclosed and appropriate references made to the
    calculation methodologies used.

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-   **Accurate** - Exercise due diligence to ensure that global warming
    estimates have the precision needed for their intended use, and
    provide reasonable assurance on the integrity of reported global
    warming information.

A company's reporting system and individual annual reports should
require sign-off at the CEO or board level certifying that these
standards have been applied. This will ensure expectations are clearly
set to promote the highest possible degree of rigor and credibility of
the reported information.

## B. At What Levels Should Entities Report?

The reporting entity should be an entire company or organization, not an
individual facility or a portion of a company, in order to enable a
comprehensive view of the total global warming emission levels within a
company's control. Current 1605(b) guidelines define the term "reporting
entity" as "any U.S. citizen or resident alien; any company,
organization, or group incorporated under or recognized by U.S. law; or
any U.S. Federal, state, or local government entity." For clarity, a
specific distinction must be made between company/organization and
facility-level reporting, specifying that reporting should be done at
the company or organization level.

The GHG Protocol recognizes, however, that for the purposes of effective
internal global warming management, both companies and facility scale
information are important. The GHG Protocol arranges calculations and
reporting standards in such a way as to accommodate both levels. Global
warming emissions are calculated at the level of a source (e.g., a
boiler), aggregated at the facility scale, and then rolled up to
corporate level in the final inventory. We therefore recommend a
reporting system with layers of information beginning, at a minimum, at
the corporate level supported by more detailed information at the
facility and source levels.

**C. How Should Emissions from Partially Owned Entities Be Reported?**

We recommend that global warming emissions from partially owned entities
(e.g. joint ventures, partnerships, alliances, etc.) be reported in a
manner that is consistent with the reporting entity\'s financial
reporting practices. This should include reporting global warming
emissions on the basis of both financial control[^10] and equity
share[^11] in order to achieve maximum transparency and utility for
decision-makers.[^12]

Requiring reporting on the basis of both approaches (financial control
and equity share) at this stage provides future policy makers with an
opportunity to choose the most appropriate method when designing further
global warming policies. Clear explanations of these data (i.e. details
of shared ownership percentages, contact information for other parties
sharing ownership) are necessary to avoid potential double-counting of
data and to provide another means of verification (for example,
comparing two companies' reports regarding a shared facility).

In addition, taking a longer-term perspective, it is likely that global
warming emissions will constitute assets and liabilities that need to be
translated into dollars and included in a company's financial balance
sheets. Thus it is important to design global warming accounting and
reporting systems that are consistent with the way entities report other
financial assets and liabilities.

## D. How Should Upstream and Downstream Impacts Be Addressed? 

We recommend that the reporting system require each entity to report
both its direct emissions[^13] and its indirect emissions from the
import of electricity, heat or steam.[^14] Two other categories of
mandatory reporting should be required. First, firms that make
energy-consuming products that are used downstream should be required to
estimate the emissions resulting from the use of those products by
businesses and consumers who purchase them. This should include both
direct and indirect emissions resulting from product use (e.g., direct
emissions from burning gasoline in vehicle, indirect emissions from
electricity use by a refrigerator). Likewise, firms that distribute
fuels that are burned downstream should be required to estimate the
emissions resulting from combustion of those fuels.

Each of these accounts -- direct emissions, indirect emissions,
downstream product-use-phase emissions, and fuel-use-phase emissions --
must be reported and maintained separately in the reporting system. This
separation is essential in order to structure future programs that
assign responsibility or allocate allowances and credits in ways that
avoid double counting.

Requiring entities to report their indirect emissions from
purchased/imports of electricity, heat and steam will help motivate them
to take advantage of opportunities for improved energy efficiency,
increased use of renewable energy sources, or co-generation options. In
addition, it would avoid creating perverse incentives, e.g., to
outsource power production to an entity with emissions below reporting
thresholds.

Requiring entities to account for emissions from the use of their
products will encourage them to make such products more energy
efficient. Likewise, requiring fuels distributors to account for
emissions from combustion of their fuels will encourage them to consider
marketing lower carbon fuels (e.g., by blending renewable fuels into
gasoline) or incentivizing more efficient products.

**E. Which Global Warming Pollutants Should the System Cover?**

The global warming reporting system should require reporting on six
global warming gases: carbon dioxide, methane, nitrous oxides,
perfluorocarbons (PFCs), hydrofluorocarbons (HFCs) and sulfur
hexafluoride. The rational for including these six gases (versus CO~2~
only) is that, although non-CO~2~ gases are released in smaller
quantities, they do have higher global warming potentials than CO~2~ and
represent important reduction opportunities for many entities.
Additionally, there are some operations such as waste landfills, coal
mining, and natural gas distribution where non-CO~2~ gases constitute a
large part of their global warming emissions.

The reporting system should not include other substances such as CFCs,
tropospheric ozone, and black soot unless an international scientific
consensus, as expressed by the Intergovernmental Panel on Climate Change
(IPCC), recommends their inclusion in national global warming
inventories at a later date.

> **F. How Should Entities Adjust for Structural Changes?**

Entity\'s base year emissions should be adjusted for structural changes
when there is significant impact on the reporting consistency of the
organization's total emissions. This may include accounting for the
cumulative effect of a number of small acquisitions or divestitures.
While adding some complexity, this approach aligns with financial
accounting practices, and provides a more meaningful basis for measuring
performance over time. These adjustments are needed to prevent firms
from lowering their apparent emissions profile by outsourcing production
to other entities (especially to non-reporting entities) or by
relocating production facilities overseas.

**G. Should Global warming Calculation Tools Be Provided?**

The use of accurate, standardized calculations tools is essential to the
integrity and verifiability of the reported data, and it is our
recommendation that the reporting system provide and require the use of
best practice calculation tools and include an emissions factor
database. If reporting entities choose not to use the calculation tools
provided by the reporting system, they must be required to make their
calculation tools available for review and to justify and gain approval
for alternative methods.

H.  **How Should Information Be Made Publicly Available?**

We recommend that the reporting system be designed as a user-friendly
internet accessible electronic database for use by the public. The
database should give the public ready access both to end-result emission
data and to supporting information needed for verification. As discussed
in Part I, supporting data needed to verify end-result emissions numbers
must be publicly available without regard to claims of business
confidentiality, as is currently the rule under the Clean Air Act and
other key environmental statutes. An exception should be allowed for
keeping confidential the rare data that would compromise national
security.

The public should be provided with direct and easy access to global
warming information in a timely fashion. It has been demonstrated that
mandatory public reporting of emissions in an internet accessible
database stimulates and drives organizations to take voluntary actions
to reduce their emissions (e.g., US Toxic Release Inventory).

####### Should the Reporting System Adopt Materiality Thresholds?

We have already discussed the need to identify an entity-wide tonnage
that triggers the entity's obligation to report, which we recommend be
set at the level necessary to assure inclusion of at least 90 percent of
U.S. global warming emissions.

The question may also be asked whether there should be a threshold for
individual emission sources within a reporting entity -- i.e., are there
some emission sources a reporting entity need not report. We recommend
against setting such internal thresholds. The GHG Protocol does not
support the use of thresholds according to the logic that if the company
calculates the emissions to establish whether they meet thresholds, the
burden in adding them to the reported inventory is extremely small.
Another line of reasoning finds absolute thresholds (expressed as a set
number of units rather than as a percentage) particularly problematic in
that they represent varying levels of significance for larger and
smaller companies. Finally, there is the possibility that thresholds may
encourage accounting loopholes or the use of less accurate calculation
tools in order to minimize the amount of emissions a company has to
report.

I.  **Should Independent Verification Be Mandatory?**

We support the need and requirement for independent verification of
global warming information since Congress may decide to use the
information in the future to ensure equitable treatment of companies
that reduce their emissions in the near term. However, there are
currently no credible generally accepted standards governing the
verification of global warming emissions. Therefore, these standards
will need to be developed together with accreditation standards for the
verifiers.

\* \* \*

Thank you for considering these comments. We look forward to the
opportunity to participate further in the administration's development
of policy on these issues. For your convenience, Mr. Symons and Mr.
Doniger can serve as points of contact.

Sincerely,

David Doniger

Policy Director, Climate Center

Natural Resources Defense Council

[ddoniger@nrdc.org](mailto:ddoniger@nrdc.org/(202) (202) 289-2403

Jeremy Symons

Manager, Climate Change & Wildlife Program

National Wildlife Federation

<symons@nwf.org> (202) 939-3311

Debbie Reed

Legislative Director

National Environmental Trust

<DReed@environet.org> (202) 887-8853

Aaron Rappaport

Washington Representative for Global Warming

Union of Concerned Scientists

<arappaport@ucsusa.org> (202) 223-6133

Katherine Morrison

Staff Attorney

U.S. Public Interest Research Group

<kmorrison@pirg.org> (202) 546-9707

Katherine Silverthorne

Deputy Director, Climate Change Program

World Wildlife Fund

<katherine.silverthorne@wwfus.org> (202) 822-3469

J. Drake Hamilton

Science Policy Director

Minnesotans for an Energy-Efficient Economy

[[hamilton@me3.org]{.underline}](mailto:hamilton@me3.org) (651) 726-7562

[^1]: NRDC, *Reported \"Reductions,\" Rising Emissions: The Failure of
    Voluntary Commitments and Reporting to Reduce U.S. Electric Industry
    CO~2~ Emissions* (Nov. 2001). A copy is enclosed with these
    comments. The report is available at:
    <http://www.nrdc.org/globalwarming/reductions/reductions.pdf>

[^2]: Global Climate Change Policy Book,
    [www.whitehouse.gov/news/releases/2002/02/climatechange.html](http://www.whitehouse.gov/news/releases/2002/02/climatechange.html)
    (p. 2 of print out)

[^3]: The only other strategy available for simultaneously raising
    emissions accounting standards and increasing voluntary
    participation is to offer inducements such as protection against
    being penalized in future allocation decisions, or the recognition
    of credits against future requirements. We will demonstrate in Part
    II of these comments that the administration does not, and should
    not, have authority to offer either of these inducements.

[^4]: We agree with the implication in the notice of inquiry that one
    essential requirement for the credibility of any system of credits
    for early action is the public availability of data currently
    eligible for confidentiality protection under section 1605(b). We do
    not endorse the waiver concept outlined in the notice, however,
    because of our underlying fundamental concern, as we will make clear
    in Part II, that DOE does not have authority to give out guarantees
    of credit under existing law. However constructive the waiver
    suggestion, the credit proposal fails for larger reasons.

[^5]: Global Climate Change Policy Book,
    [www.whitehouse.gov/news/releases/2002/02/climatechange.html](http://www.whitehouse.gov/news/releases/2002/02/climatechange.html)
    (p. 2 of print out)

[^6]: Congress has no more power than the president to resolve this
    issue short of full cap and trade legislation. Neither the emissions
    reporting provisions in the Senate energy bill nor the emissions
    reporting bill pending in the House (H.R. 4611) provide a
    "no-penalty" guarantee. H.R. 4611 goes as far as it is possible to
    go by expressing a Congressional policy -- not binding on a future
    Congress -- not to use the grandfathering approach to allocation
    that leads to an early-mover penalty.

[^7]: *Winstar* upheld a bank's suit against the government for
    breaching a contract in unique circumstances that do not apply here.
    In *Winstar*, a thrift regulatory agency had a statutory obligation
    to pay out insurance to depositors in failed savings and loans. In
    order to avoid this financial cost during the savings and loan
    crisis, the thrift agency contracted with healthy savings and loans
    to take over the failing institutions. The inducement to the healthy
    savings and loans was a contractual promise of a favorable but
    controversial regulatory treatment (namely, a deliberate
    over-valuation of the rather dubious "goodwill" of the failed
    institutions). The contract purported to bind the discretion of the
    regulatory agency, but made not mention of money damages if a future
    Congress changed the law. Congress later amended the law to cancel
    this unusually favorable accounting treatment. Winstar, finding
    itself with unexpected liabilities, sued seeking damages from the
    government for breach of the contract. An essential factual element
    leading to Winstar's success was that the contract allowed the
    government to shift its original financial liability (to pay deposit
    insurance) onto the backs of Winstar and other thrifts. While
    nothing could curtail the right of Congress to amend the law so as
    to cancel the favorable accounting treatment the thrift agency had
    promised the healthy thrifts, it would have been unjust to allow the
    government to keep the benefit of the bargain with those thrifts
    once Congress had done so. *Winstar,* then, is best seen as a
    retrospective action to prevent an outcome that was far from
    planned, and that would have been unjust.

    In this setting, the administration starts with no legal obligation
    to procure early emission reductions. Neither the companies nor the
    administration could point to a "credit-or-damages" contract as
    shifting a pre-existing governmental burden onto the back of a
    private entity. Rather, the administration would be deliberately and
    prospectively entering essentially collusive contracts to box
    Congress into conferring a regulatory benefit Congress has thus far
    withheld, or to give them money damages at taxpayer expense if
    Congress balked. *Winstar* does not confer this power on the
    administration.

[^8]: Further information on *The Global warming Protocol Initiative: A
    corporate accounting and reporting standard* is available at
    [www.ghgprotocol.org](http://www.ghgprotocol.org/).

[^9]: For further information see *Id.,* chapter 1.

[^10]: Financial control is defined as the ability of a party to direct
    the operating policies of an entity (usually it is assumed that a
    party has financial control if it owns more than 50% of the voting
    interests -- the party would then report 100%of emissions from
    entities where it has such control).

[^11]: Under equity-share reporting, each party would report emissions
    in proportion to the percentage of its economic interest in or
    benefit derived from the operation.

[^12]: *GHG Protocol Initiative,* chapter 3.

[^13]: Direct emissions are emissions from sources that are owned or
    controlled by the reporting company, e.g. emissions from factory
    stacks, manufacturing processes and vents, and from
    company-owned/controlled vehicles.

[^14]: Indirect emissions are emissions that are a consequence of the
    activities of the reporting company, but occur from sources owned or
    controlled by another company, e.g., emissions from the production
    of purchased electricity.