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MEMORANDUM

To: Docket EPA-HQ-OAR-2009-0925

From: Lisa Grogan-McCulloch, EPA/Climate Change Division an d Ruth Mead and Amanda Baynham, ERG

Date: March 5, 2010

Subject: Review of Non-Federal Existing Greenhouse Gas Reporting Pr ograms Requiring Reporting of Parent Company Ownership

EPA has reviewed several non-federal reporting programs to de termine whether they require facilities to provide information on their parent company or companies. These programs include one voluntary program (The Climate Registry (TCR)), t wo regional programs (The Regional Greenhouse Gas Initiative (RGGI) and Western Climate Ini tiative (WCI)), and two state programs (California and Delaware). The TCR reporting pr ogram is based in part on the reporting protocol developed by the World Resource Institute (W RI). EPA studied these programs to determine whether aspects of the ownership re porting requirements in each program could be adopted by the Federal Mandatory Greenhouse Gas Repo rting Program. EPA was particularly interested in how each of these programs defined the corporate entity for reporting purposes. The results of this analysis are summarized i n this memorandum.

World Resource Institute and The Climate Registry

The World Resource Institute (WRI) in collaboration wi th the World Business Council for Sustainable Development (WBCSD), and representatives fro m industry, government, and nongovernment organizations developed a protocol for reporting gr eenhouse gases. The goal was to provide industry and governments with internationally accept ed accounting and reporting standards for the reporting of greenhouse gas (GHG) emission s. The WRI protocol focuses on entity-wide reporting at the highest organizational leve l, rather than the facility-level reporting required in the final Mandatory Greenhouse Gas Reporting Rul e. The complexity of many business relationships often makes it difficult to determi ne the organizational boundaries for reporting entity-wide emissions. To ensure a consistent approach is taken by all reporters, WRI developed two approaches for determining the organizational b oundaries: the equity share approach and the control approach. 1 The protocol recommends reporters select one of the two approaches and apply the same approach throughout their organiz ation.

Equity Share Approach : Reporters using the equity share approach report GHG emi ssions based on the equity share of the facilities. For faciliti es that are wholly owned, the reporter reports 100% of the emissions. For facilities partially owned, e missions are reported based on its equity share in the business. For example, if Corporation X owns 40% of the shares in Company Y, then 40% of the emissions from Company Y are attributed to Corporation X.

1 World Resources Institute and World Business Council f or Sustainable Development, “The Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standar d”, www.wri.org , February 1, 2010.2

Control Approach : Reporters using the control approach report all GHG emissions from facilities that are under their control (i.e., 100% of a facility’s emissions are attributed to the reporter if the reporter controls the facility and 0% of a facility’s emissions are attributed to the reporter if the reporter has an ownership interest in the facility but does not control the facility).

Control is defined as either:

• Operational Control: Where the reporter has full author ity to introduce and implement its operating polices.

• Financial Control: Where the reporter has the ability t o direct the financial policies and has an interest in gaining economic benefits from the others activities. Financial control exists where the reporte r has the right to the majority of the benefits of the operation, regardless of how t hose rights are conveyed. For example, reporters should report 100% of emissions from fr anchises and subsidiaries where they have financial control. For joi nt ventures, reporters should attribute the emissions based on their equity sha re.

These two approaches were later adopted by The Climate Re gistry (TCR), which is a voluntary reporting program to which organizations report emissions fr om their facilities in the U.S., Canada, and Mexico. TCR allows any type of entity to re port (e.g., corporations, institutions, organizations) and, consistent with the WRI protocol, re commends organizations report at the highest organizational level. Reporters must select from two reporting options. Under the first option, emissions are reported using both the equity cont rol and financial control approaches recommended by the WRI protocol. Under the second option, emissions are reported using only the WRI control approach. Both options require facilit ies to report emissions using the WRI control approach in order to avoid double counting and enable comparisons between reports. TCR recommends reporters use the first option and report emissions separately for the two approaches. Reporters using the second option are expecte d to submit a list of their equity investments where that information is already publicly av ailable (e.g., publicly traded companies) and for which the reporter has ownership inter est but does not have financial or operational control of the other entity. This list sho uld include the percentage ownership and the identity of the legal entity that has control of the other entity. Although TCR encourages facilities to report at the highest organizational level, entities that are owned by other organizations may report emissions to TCR provided the ent ities that own them are not also reporting emissions to TCR (e.g., a subsidiary may repor t emissions where the parent company does not). In such situations, TCR requires the reporter to disclose its parent company and submit a corporate organization chart showing the reporter’ s relationship to its parent company

and other subsidiaries. 2

The goals of the WRI and TCR approach differ from the go al of the Mandatory Greenhouse Gas Reporting Rule in that WRI and TCR are defining organization al boundaries within which greenhouse gas emissions will be reported. The goal of thi s proposed rule, on the other hand, is to determine the highest-level U.S. parent company or parent companies of a facility or supplier. Therefore, EPA determined that while the top down approac h of WRI and TCR is appropriate for

2 The Climate Registry, “General Reporting Protocol for the Voluntary Reporting Program”, Version 1.1, May 2008.3

their purposes, it could not be applied to the Mandatory G reenhouse Gas Reporting Rule’s bottom-up approach where emissions data is collected at t he facility-level for direct emitters of

GHGs.

Regional GHG Reporting Programs

EPA reviewed two regional GHG reporting rules to determine w hether these programs require reporting of company ownership. These included the Regional Greenhouse Gas Initiative (RGGI) and Western Climate Initiative (WCI).

RGGI is a market-based CO 2 trading program modeled on the Acid Rain Program, in which

facilities must hold sufficient CO 2 allowances at the end of each year to cover their CO 2 emissions. There are currently ten participating stat es (Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, N ew York, Rhode Island, and Vermont). These states implement annual auctions in whi ch entities (called applicants) may purchase CO 2 allowances through a competitive bidding process.

Although RGGI does not require individual facilities to repor t information on their parent company or ownership hierarchy, it does require some reporti ng of company ownership by those organizations that submit bids in the annual auctions. Under RGGI, applicants that want to bid in the auction must first disclose in their applicatio n any corporate associations (including U.S. and international companies) with other applicants partici pating in the bidding process. RGGI defines two types of corporate associations “direct” an d “indirect”. An applicant has a “direct corporate association” with another applicant if one of the applicants:

 Holds more than 20% of any class of listed shares, the r ight to acquire such shares, or any option to purchase such shares of the other applicant.

 Holds or can appoint more than 20% of common directors of the other applicant.

 Holds more than 20% of the voting power of the other applic ant.

 Controls more than 20% of the other applicant’s affairs through some other means.

“Indirect” associations are defined as situations where a pplicant A has a direct corporate association with another party and the other party has a direct corporate association with applicant B. The purpose of requiring applicants to discl ose corporate associations is to guard against any one corporation receiving more than 25% of the total annual CO 2 allowances. Therefore, applicants that do not have a “direct” or “ind irect” association with another applicant are not required to report their company affiliations. 3

This approach is appropriate for RGGI where the purpose is t o assure a fair and equitable auction

of CO 2 allowances. However, this approach would not necessaril y yield information on the highest-level U.S. parent company. Therefore, it would n ot meet the needs of the Mandatory Greenhouse Gas Reporting Rule, where the purpose of the pro posed reporting of parent companies is to enable emissions reported at the facilit y level to be aggregated at the U.S. parent company level.

3 Regional Greenhouse Gas Initiative, “Auction Notice for CO 2 Allowance Auction 7 on March 10, 2010”, January

12, 2010.4

Similar to RGGI, WCI is a regional program that when fully implemented will use a marketbased cap and trade program to reduce GHG emissions. WCI i s a partnership of U.S. states, Canadian provinces, and Mexican states. Currently, seve n U.S. states and four Canadian provinces have committed to the program, with a further s ix U.S. states, two Canadian provinces,

and six Mexican states as observers. WCI started a GHG reporting program in 2010; however, the cap and trade program is still in the planning stages an d is expected to begin in January 2012. WCI members finalized a greenhouse gas reporting rule in 2009, whic h has been adopted by member states. Under the WCI reporting rule, the “owne r and operator” of a facility would be required to report GHG emissions annually. The rule does not define the term “owner and operator” and does not currently require reporting of eithe r parent company or company ownership hierarchy. 4

State Mandatory GHG Reporting

Currently, only two states, California and Delaware, requi re reporting of parent company

information. Both the California and Delaware mandator y reporting programs are similar to the federal mandatory reporting program in that they require reporting of emissions at the facility level for direct emitters of greenhouse gases. Although bot h require reporting of parent company information, neither rule limits reporting to the U.S. parent company. The California reporting rule requires facilities to report the parent company or parent companies for the facility. In addition to this information, the annual report must also include a list of all other California facilities that emit greenhouse gas emissions from fuel c ombustion (excluding combustion for space heating) that are owned or operated by the parent co mpany. This list can be provided either by the individual facilities or by the parent com pany. The list must include both facilities that are directly owned and operated by the parent company and facilities that are owned and operated through a subsidiary of the parent company (see §95104(a )(8) of title 17, California Code of Regulations). The rule does not include a definit ion of parent company. However, California advises facilities to report the highest level parent company in the ownership hierarchy. 5 Because of the larger number and greater diversity of f acilities reporting under the Mandatory Greenhouse Gas Reporting Rule, EPA decided a defini tion should be included in the proposed rule amendments to the Mandatory Greenhouse Gas R eporting Rule to ensure consistency in reporting.

In the Delaware reporting program, the parent company repor ted in annual facility emissions reports is the highest level company that directly owns a t least 50% of the voting stock. 6 This definition is similar to the definition of parent company used in the Toxics Release Inventory (TRI) program under the Emergency Planning and Community Right -to-Know. However, EPA is concerned that adopting this definition may lead to confusion in situations where no single

4 Western Climate Initiative, “Final Draft Essential Requirements for Mandatory Reporting”, May 7, 2009 ( http://www.westernclimateinitiative.org/component/remos itory/Reporting-Committee-Documents/Draft-EssentialRequirements-for-Mandatory-Reporting---Final-Draft-(May- 7-2009)/, accessed March 2, 2010)

. 5 Correspondence with Mr. Douglas Thompson, California Air Resources Board, Climate Change Reporting Section, February 1, 2010.

6 Delaware Department of Natural Resources and Environ mental Control, Division of Air and Waste Management Quality, Air Quality Management Section, “Emissions In ventory Definitions and Structure”, revised March 7, 2006 ( http://www.awm.delaware.gov/AQM/Pages/AQMEmissionInventor y.aspx ,.accessed March 2, 2010).5

company owns 50% or more of a business entity. For exam ple, this definition would not address a situation where a facility is owned by multiple owner s none of whom own 50% or more of the voting stock. As discussed in greater detail in the pre amble to the proposed rule amendments, because the definition does not address all possible owner ship situations, EPA believes this definition would lead to reporting inconsistencies.

Conclusion

After reviewing the various approaches to ownership reporting under these five non-federal reporting programs, EPA concluded that none of them provided an approach that would meet all of the goals of this proposed rule amendment. As discuss ed in greater detail in the preamble to the proposed rule amendments, EPA concluded that the appro ach taken by the TRI program represented the best model for meeting the specific goal s of the federal reporting program, and is therefore proposing a slightly modified definition of U .S. parent company from that of the TRI

program.