Permitting Reform Package Passes as Part of Debt Ceiling Deal

The past year’s long wrangling between Republicans, Democrats, and the White House on permitting reform finally made progress this month when Congress enacted significant reforms to the National Environmental Policy Act (“NEPA”) as part of the legislation to increase the debt ceiling. Prior to this legislation, the core statutory framework of NEPA had remained relatively unchanged for 50 years. Building from Rep. Garrett Graves’ (R-LA., 6th Dist.) “Building United States Infrastructure through Limited Delays and Efficient Reviews” (“BUILDER”) Act of 2023, the permitting reform title of the Fiscal Responsibility Act of 2023 (“FRA” or “legislation”) tackles four key areas:

(1) reforming NEPA to make the federal environmental review process simpler and quicker;

(2) directing a study of the existing capacity of our transmission grid to reliably transfer electric energy between distinct regions and subsequent recommendations to improve interregional transfer capabilities within the grid;

(3) streamlining permitting for energy storage projects; and

(4) congressional ratification of the Mountain Valley Pipeline.

Several of the reforms to NEPA codify changes to the Council on Environmental Quality (“CEQ”) NEPA implementing regulations made during the Trump Administration.

While these provisions are intended to yield significant benefits for projects requiring federal approvals or funding, the actual impact will depend substantially on how the reforms are implemented, and there remains considerable interest in other aspects of permitting and siting reform making further legislative action likely.

Key NEPA Reforms

The FRA includes numerous changes to NEPA. We have highlighted several key changes here.

Narrowing the Scope of “Major Federal Action”

The term “major Federal action” is the trigger for requiring environmental review under NEPA – federal actions that qualify as a “major Federal action” must be considered under NEPA. The new legislation narrows the definition of what constitutes a “major Federal action” by limiting the term to actions that the lead agency deems are “subject to substantial Federal control and responsibility.” The legislation does not define this phrase, leaving substantial room for agency interpretation. Building on this general concept, the amendments codify the regulatory definition of a “major Federal action,” with modifications. As now defined, certain federal actions will be excluded from the scope of a major federal action, including:

  • non-federal actions (i.e., private or state actions) “with no or minimal Federal funding”;
  • non-federal actions (i.e., private or state actions) “with no or minimal Federal involvement where a Federal agency cannot control the outcome of the project”;
  • funding assistance consisting exclusively of general revenue sharing funds, where the federal agency does not have “compliance or enforcement responsibility” over the use of those funds;
  • “loans, loan guarantees, or other forms of financial assistance where a Federal agency does not exercise sufficient control and responsibility over the subsequent use of such financial assistance or the effect of the action”;
  • Small Business Act business loan guarantees under section 7(a) or (b) of the Small Business Act or title V of the Small Business Investment Act of 1958;
  • federal agency activities or decisions with effects located entirely outside of the jurisdiction of the United States; and
  • non-discretionary activities or decisions that are made in accordance with the agency’s statutory authority.

The meaning and application of these exclusions to specific actions will be subject to interpretation and likely litigation going forward. For example, what constitutes minimal funding—a threshold dollar amount or a percentage of the federal funding contribution in relation to overall project cost—is not clearly identified under the revisions. Resolution of this question will be critical to determining what actions are subject to NEPA review going forward. Given the recent dramatic increase in federal funding opportunities from the Inflation Reduction Act and Infrastructure Investment and Jobs Act, determining what actions are subject to NEPA review based on the level of federal funds involved is likely to become a more frequent and important question.

Scope of Review

When an agency action constitutes a “major Federal action,” the FRA also focuses and limits the scope of the NEPA review in two key ways.

First, the legislation modifies the statute’s existing, broad language requiring that “major Federal actions” significantly affecting the quality of the human environment include a detailed statement on the “environmental impact of the proposed action.” The revised language statutorily limits environmental review of environmental effects to those that are “reasonably foreseeable.” This change follows from a provision of the Trump Administration’s 2020 NEPA rule—later removed by the Biden Administration—which sought to eliminate long-used concepts of direct, indirect, and cumulative effects and instead focus on effects that are reasonably foreseeable and that have “a reasonably close causal relationship to” the proposed action or alternatives. Although the new statutory language does not go as far as the Trump Administration’s rule, which required a “close causal relationship,” it does follow the trend in case law to only require evaluation of reasonably foreseeable impacts. What project-specific impacts are “reasonably foreseeable” is still likely to be the subject of litigation.

Second, the FRA also makes changes regarding the alternatives analysis, often considered the heart of NEPA review. The legislation clarifies that agencies are to consider a “reasonable range” of alternatives to the proposed agency action, and that such alternatives must both be “technically and economically feasible” and “meet the purpose and need of the proposal.” This seems to codify long-standing guidance from CEQ contained in its 40 Most Asked Questions Concerning CEQ’s NEPA Regulations. In addition, it directs that, in assessing the no action alternative, agencies must include an analysis of any negative environmental impacts of not implementing the proposed action. Whether an agency has met its obligations under NEPA to consider “alternatives to the proposed action” is a frequent source of controversy and litigation, particularly for the authorization of large infrastructure and energy projects.

These changes should both help focus environmental reviews and reduce costs and delays associated with challenges to agencies’ alternative analyses and emphasize the importance of properly defining the “purpose and need” of a proposed action.

Data Standards and Requirements

The FRA includes several provisions related to data. First, it clarifies that in making a determination on the appropriate level of review (Environmental Impact Statement (“EIS”), Environmental Assessment (“EA”), or categorical exclusion), the lead agency can make use of any reliable data source—and that “new scientific or technical research [is not required] unless the new scientific or technical research is essential to a reasoned choice among alternatives, and the overall costs and time frame of obtaining it are not unreasonable.” It is unclear whether this will be applied beyond the determination of what level of review is required. This change has the potential to limit delays due to agencies undertaking or requesting additional studies from project proponents. What is deemed “essential” and what costs and timeframe are “not unreasonable,” however, remain undefined.

Second, the legislation requires that the action agency “ensure the professional integrity, including scientific integrity, of the discussion and analysis in an environmental document.” The practical implications and scope of this scientific integrity mandate are unclear—and is likely to be a subject of agency guidance and, potentially, future litigation.

Efficiency Measures

The FRA further codifies several less controversial changes from the Trump Administration 2020 NEPA rule, which the recent Biden rulemaking had left in place. These changes include expressly recognizing and establishing regulations for EAs. Additionally, these changes include setting page limits for EISs—150 pages generally and 300 pages for agency actions “of extraordinary complexity”—and EAs—75 pages—excluding citations and appendices. Additionally, the changes codify the regulatory presumptive deadlines for completion of NEPA reviews—two years for EISs and one year for EAs. The legislation goes beyond existing regulations by creating the right to judicial review when an agency fails to meet a deadline. Under the new legislation, if an agency misses the deadline, the delayed project’s sponsor may seek a court order requiring the agency to act as soon as practicable, which is not to exceed 90 days from the date on which the order was issued unless the court determines that additional time is needed to comply with applicable law.

Further, the legislation clarifies the role of the NEPA lead agency, specifying that the lead agency must develop a schedule, in cooperation with each cooperating agency, the applicant, and other appropriate entities, for the completion of the environmental review and any permit or authorization required to carry out the proposed agency action. This mirrors provisions previously adopted as part of Title 41 of the Fixing America’s Surface Transportation Act (“FAST-41”) in 2015, which has demonstrated success in requiring coordination and improving the permitting and authorization processes for certain large infrastructure projects. Although the FRA expressly contemplates extensions to the schedule, just having a schedule in place can be a helpful tool in the timely completion of NEPA reviews.

In addition, the legislation authorizes project applicants to hire independent consultants to prepare EISs and EAs, subject to the independent review of the lead agency. This provision can provide project applicants with a path to minimize delays caused by a lack of staff and resources at federal agencies.

Programmatic Reviews and Categorical Exclusions

The FRA also codifies the current agency practice of preparing and relying on programmatic environmental documents to streamline the review process for subsequent actions that implement the evaluated program. The legislation provides that programmatic review can be relied on for five years without additional review, and after five years if the agency reevaluates the analysis. Although this change promotes further use of programmatic reviews, the five-year period presumption and reevaluation process could present challenges in certain cases given the extensive resources and time required to undertake a programmatic review and tiered reviews.

The FRA also seeks to facilitate the use of categorical exclusions in the NEPA process by authorizing agencies to adopt a categorical exclusion established by another agency. The legislation lays out a process for consulting with the agency that established the exclusion to determine whether adoption is appropriate, notifying the public of the plan to use the categorical exclusion, and documenting adoption of the categorical exclusion. Though dependent upon agencies taking advantage of this new flexibility, this could have the effect of enabling some types of projects to forgo detailed environmental review.

Other Provisions

In addition to the NEPA reforms, the FRA includes several other important permitting provisions. The legislation seeks to streamline and accelerate permitting for “energy storage” projects by adding energy storage to the list of “covered projects” under FAST-41.

Additionally, the legislation provides a clear path for the completion of the much-delayed Mountain Valley Pipeline project. The legislation finds the timely completion of the project is in the national interest, and congressionally approves and ratifies the various federal authorizations required for the project. Further, the legislation bars judicial review of federal agency actions with respect to the project.

Finally, the legislation requires the North American Electric Reliability Corporation (“NERC,” the entity responsible for setting reliability standards for the nation’s electric grid) to undertake a study within a year and a half on whether more transfer capacity is needed between existing transmission planning regions—including recommendations on measures to increase the amount of energy that can be reliably moved between the studied regions. The Federal Energy Regulatory Commission will thereafter have a year to seek and consider public comments on the study and file a report with Congress detailing any recommendations for statutory changes. This study provision was in lieu of a larger set of transmission-related actions that are of key interest to Democratic lawmakers that will be the subject of future legislative efforts.

Implications

Although the provisions in FRA are not a silver bullet to solve every NEPA woe experienced by project applicants, it is a significant step in the right direction. The codification of key concepts within the NEPA statute itself (rather than regulation, guidance, or case law) will have a durable, long-lasting impact on implementation of environmental reviews because it limits the regulation issuance/withdrawal cycle that we have witnessed with the recent administration changes.

Looking forward, we can expect a rulemaking by CEQ to align the existing regulations with the revised statutory language, as well as additional rulemakings by other agencies to harmonize their NEPA implementing regulations with the revised law. For the last year, we have awaited the Phase 2 NEPA rulemaking from CEQ, as explained in our previous alert. With this new legislation, it seems likely that CEQ will pause and further revise its proposed regulations to capture these new reforms before issuing additional regulations. We can also expect future guidance—and eventual litigation—on several ambiguous provisions in the new legislation as agencies begin to implement them.

While the intention behind the legislation is to speed and ease what has become a very lengthy, expensive, and perilous environmental review process—far exceeding the original intent of NEPA—whether these goals are achieved will depend on whether federal agencies embrace them or look for ways to interpret the reforms to continue “business as usual.”

For example, to meet the new timelines, it is possible that federal agencies will require applicants to provide all documentation needed for the environmental review before starting the clock. This approach would have the effect of undermining the statutory timeframes as well as the efficacy of the public engagement process. Similarly, while the legislation seeks to curtail the extent of the analysis through page limits, it is foreseeable that relatively short EISs and EAs could be weighed down with thousands of pages of analysis contained in the appendices.

It also remains to be seen how courts will interpret these reforms. The “hard look” standard developed by courts to evaluate the adequacy of environmental review documents may have the effect of ballooning the analyses again despite Congress’ intent to streamline the process.

Finally, while these reforms are substantial, Congress continues to discuss and debate additional reforms to address unresolved federal siting and permitting concerns—particularly with respect to energy infrastructure projects. Notably absent from the legislation was transmission permitting reform language of interest to Democratic lawmakers as well as provisions to support oil and gas leasing on federal lands and to facilitate the siting and permitting of mining projects to boost domestic supplies of critical minerals essential for existing and developing clean energy technologies.

© 2023 Van Ness Feldman LLP

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Renewable Energy Tax Credits under the Inflation Reduction Act: Opportunities for Exempt Organizations

The Inflation Reduction Act of 2022 (the “IRA” or “Act”) added and modified several renewable energy tax provisions under the Internal Revenue Code of 1986, as amended (the “IRC”).[1] These changes provide many opportunities for exempt organizations, investors, and developers in clean energy projects to lower their costs by monetizing previously unavailable tax credits and thereby increase their business. Among them:

  • Solar facilities are now eligible for the Section 45 Production Tax Credit
  • An Investment Tax Credit for stand-alone energy storage technology with a minimum capacity of 5 kWh
  • A new two-tier credit system consisting of a base credit and an additional bonus credit for eligible projects that satisfy new prevailing wage and apprenticeship requirements
  • New “domestic content,” “energy community,” and “low-income community” bonus credits
  • New “technology neutral” tax credits
  • New ways to monetize tax credits

There has been significant interest in the energy credits by tax exempt organizations, in particular by universities and hospitals. Indeed, these organizations have been looking to minimize their greenhouse gas impact or carbon footprint with the goal of achieving clean energy even prior to the enactment of the IRA. The direct pay option which is now available under the IRA has accelerated the interest in clean energy. Commentators also note that private foundations have been interested in addressing climate change and taking advantage of these newly enacted credits to help spread the use of clean technologies.

Section 6417, discussed below, could be a “game changer” in this regard. Even though certain of the credits have been in existence, unless tax exempts have had a significant amount of unrelated business income tax (“UBIT”), they previously could not avail themselves of the credits prior to the enactment of Section 6417 which provides the direct payment alternative.

The below will outline the new and modified renewable energy tax credits under the IRA, and summarize recent guidance issued by the Treasury Department.

CHANGES TO EXISTING TAX CREDITS

Section 45 Production Tax Credit

Before the enactment of the IRA, the Section 45 Production Tax Credit (“PTC”) was available to electricity produced from certain renewable resources, including wind, biomass, geothermal, hydropower, municipal solid waste, and marine and hydrokinetic energy. Under the Act, solar facilities and are now also eligible for the PTC. In order to qualify for the PTC, eligible facilities must be placed in service and start construction before the end of 2024. Facilities which begin construction after December 31, 2024, will fall under the new technology-neutral tax credit regimes (discussed below).

Section 48 Investment Tax Credit[2]

Prior to the Act, the Section 48 Investment Tax Credit (“ITC”) was not available to stand-alone energy storage projects. The IRA created an ITC for stand-alone energy storage technology with a minimum capacity of 5 kWh. The term “energy storage technology” includes any technology that receives, stores, and delivers energy for conversion to electricity, or to most technology that thermally stores energy.

Like the PTC, under the Act, eligible facilities can qualify for the ITC as long as they are placed in service and begin construction before the end of 2024. Facilities which begin construction after December 31, 2024, will fall under the new technology-neutral tax credit regimes (discussed below).

STRUCTURAL CHANGES TO THE TAX CREDIT SYSTEM

The IRA created a new two-tier credit system consisting of a base credit and an additional bonus credit that is only available for eligible projects that satisfy the new prevailing wage and apprenticeship requirements (discussed below). The new ITC base rate will be 6 percent, and the bonus rate will increase it to 30 percent. The new PTC base rate will be 0.3 cents/kwh and the bonus rate will increase it to 1.5 cents/kwh.

Prevailing Wage Requirement

Taxpayers must pay laborers, mechanics, contractors, and subcontractors a prevailing wage during the construction of the project and with respect to subsequent alterations or repairs of the project following its placement in service. The prevailing wage is based on the pay rates published by the Department of Labor (“DOL”) for the geographic areas and type of job or labor classification. If relevant pay rates are not published, the taxpayer must request a wage determination or wage rate from the DOL.[3]

Apprenticeship Requirement

Taxpayers must also ensure that, with respect to the construction of a qualified facility, no fewer than the “applicable percentage” of total labor hours are performed by qualified apprentices. The “applicable percentage” is: (i) 10 percent for projects beginning construction before 2023, (ii) 12.5 percent for projects beginning construction during 2023, and (iii) 15 percent for projects beginning construction thereafter. Each contractor and subcontractor who employs four or more individuals to perform construction on an applicable project must employ at least one qualified apprentice. A “qualified apprentice” is an individual who is employed by the taxpayer or any contractor or subcontractor and who is participating in a registered apprenticeship program.

If a taxpayer fails to satisfy the apprenticeship requirement during a particular year, the taxpayer may correct the failure by paying a penalty to the IRS equal to $50 ($500 if the apprenticeship requirement was intentionally disregarded) multiplied by the total number of labor hours that did not satisfy the apprenticeship requirement. However, the IRA also includes a “good faith effort” exception if the taxpayer requests qualified apprenticeships from a registered apprenticeship program and either the request is denied, or the program fails to respond within five business days after receiving the request.

ADDITIONAL BONUS CREDITS

The IRA established the “domestic content,” “energy community,” and “low-income community” bonus credits.

Domestic Content

Projects qualifying for certain PTC and ITC credits could qualify for a 10 percent increase to the base and bonus credits if they satisfy the IRA’s new “domestic content” requirements. To qualify for this bonus credit, all steel, iron, and manufactured products that are components of the completed facility are to be produced in the United States.

Energy Community

Facilities located in an “energy community” will also qualify for a 10 percent increase to the base and bonus credits. An “energy community” includes brownfield sites, certain areas with significant employment related to, or local tax revenues generated by, coal, oil, or natural gas, and where there is high unemployment, or a census tract where a coal mine has recently closed or a coal-fired electric plant was retired or removed.

NEW “TECHNOLOGY NEUTRAL” TAX CREDITS

The IRA added new tax credits that apply to qualified facilities placed into service after December 31, 2024, and which yield zero greenhouse gas emissions. The Section 45Y Clean Electricity Production Credit (“CEPTC”) and the Section 48E Clean Electricity Investment Credit (“CEITC”) will replace the PTC and ITC, respectively, and are intended to be technology neutral. The credit amounts for the CEPTC and CEITC are calculated similarly to the PTC and ITC and are subject to similar prevailing wage and apprenticeship bonus requirements.

NEW WAYS TO MONETIZE TAX CREDITS UNDER THE IRA

The Act established the following two novel methods to monetize energy tax credits.

Direct Pay Available to Tax Exempt Organizations

For tax years beginning after December 31, 2022, and before January 1, 2033, certain “applicable entities” can make an election to receive a cash payment equal to the value of otherwise allowable tax credits. This option allows for the applicable entities to utilize and monetize the tax credits via a refund, even though the entities generally do not incur tax liabilities. The term “applicable entities” includes tax-exempt organizations, state and local governments, tribal governments, and the Tennessee Valley Authority.

The direct pay option is also available to taxpayers claiming the Sections 45V, 45Q, and 45X credits even if they do not meet the definition of an “applicable entity.”

Third-Party Sales

For tax years beginning after December 31, 2022, taxpayers (“transferee”) that do not meet the definition of an “applicable entity” may transfer all or a part of their eligible credits to an unrelated taxpayer (“transferor”) in exchange for cash. The cash consideration is not includible in the income of the transferor and is not deductible by the transferee. Credits may not be transferred more than once. In the case of any transfer election, the transferee taxpayer will be treated as the taxpayer for all purposes under the IRC with respect to such credit. With respect to a project held by a partnership, only the partnership itself (and not its partners) can elect to transfer the eligible credits. (Emphasis added.) Then it is likely to be treated as unrelated trade or business.

All of the tax credits eligible for the direct pay option, except for the Section 45W Clean Commercial Vehicles Credit, are also eligible for sale to a third-party.

NOTICES 2023-17 AND 2023-18

On February 13, 2023, the IRS issued Notices 2023-17 and 2023-18 which provide guidance on the administration of two allocation-based renewables tax credit programs under Sections 48(e) and 48C, respectively.

Notice 2023-17

The Act amended Section 48(e) to provide an increase in the ITC for qualified solar and wind facilities which are deployed in specified low-income communities or residential developments. To receive these increased credit amounts, a taxpayer must receive an allocation of “environmental justice solar and wind capacity limitation” (“Capacity Limitation”). A “qualified solar and wind facility” is any facility that (1) generates electricity solely from a wind facility, solar energy property, or small wind energy property; (2) has a maximum net output of less than five megawatts (as measured in alternating current); and (3) is described in at least one of the four categories described in the chart below.

Notice 2023-17 established the Low-Income Communities Bonus Credit Program under Section 48(e) and provided guidance on the procedures and information required to apply for an allocation of Capacity Limitation. For each of 2023 and 2024, the annual capacity limitation is 1.8 gigawatts of direct current capacity, which will be allocated among four categories of projects as follows:

Category

Required Facility Location

Category

Required Facility Location

Capacity Limitation Allocation (MW)

Bonus Percentage

1

Low-Income Community

700 MW

10%

2

Indian Land

200 MW

10%

3

Qualified Low-Income Residential Building Project

200 MW

10%

4

Qualified Low-Income Economic Benefit Project

700 MW

10%

A taxpayer must submit an application to the IRS in order to receive a Capacity Limitation allocation. Details regarding the application process are forthcoming, however, Notice 2023-17 states that applications will be accepted in a phased approach during a 60-day application window for calendar year 2023. Applications will be accepted for Category 3 and 4 projects beginning in the third quarter of 2023, and Category 1 and 2 project applications will be accepted thereafter.

The Department of Energy (“DOE”) will review applications for statutory eligibility and any other criteria provided by the IRS. On this basis, the DOE will provide recommendations to the IRS regarding the selection of applicants for an allocation of Capacity Limitation. If the selected applications exceed the capacity limitations for a given category, the DOE will use a lottery system or some other process to allocate Capacity Limitations. If accepted, the IRS will notify the applicant of its decision and specify the amount of Capacity Limitation allocated. Within four years of receiving such notification applicants must place the eligible property in service to claim the increased credit rate.

Notice 2023-18

The Act extended the Section 48C Advanced Energy Project Credit (“48C Credit” or “AEPC”), which was originally enacted as part of the American Recovery and Reinvestment Act of 2009. Section 48C provides a credit for investments in projects that fall into one of the following three general categories: (i) clean energy manufacturing and recycling projects, (ii) greenhouse gas emission reduction projects, and (iii) critical materials projects. The AEPC is subject to an aggregate cap of $10 billion, at least $4 billion of which will be allocated to census tracts (or tracts adjacent to census tracts) in which coal mines have been closed after 1999 or coal-fired generation facilities have been retired after 2009.

Notice 2023-18 provides guidance on the process and timeline for applying for an allocation of 48C Credits. The first allocation round of $4 billion began on May 31, 2023. Outlined below is an overview of the application, review, and approval process for the first allocation round of 48C credits:

The applicant submits a “concept paper” to the DOE between May 31, 2023, and July 31, 2023.

After reviewing the concept paper, the DOE will issue a letter to the applicant either encouraging or discouraging the submission of an application. All applicants that submit a concept paper during the above period may submit an application irrespective of the DOE’s response.

The applicant submits an application to the DOE for review. If the applicant intends to apply for a bonus credit because it will satisfy the prevailing wage and apprenticeship requirements, it must confirm this in the application.

The DOE then makes a recommendation as to whether to accept or reject the application and provides a ranking of the applications.

Based on the DOE’s recommendations and rankings, the IRS will make a decision regarding the acceptance or rejection of the application and notify the applicant of its decision.

Within two years after receiving an allocation from the IRS, the applicant must provide evidence to the DOE that the certification requirements have been met.

The DOE notifies the applicant and the IRS that it has received the applicant’s notification that the certification requirements have been met.

The IRS will provide a letter to the applicant certifying the project (“Allocation Letter”).

Within two years after receiving the Allocation Letter, the applicant must notify the DOE that the project has been placed in service. The applicant may claim the 48C Credit in the year in which the property is placed in service.

Additional guidance from the Treasury Department and IRS is expected to be released throughout the year.

FOOTNOTES

[1] Unless otherwise stated, all “Section” references are to the IRC.

[2] For any investment tax credit under Section 50(b)(3), an exempt organization could only avail itself of such credit to the extent the property in question was used in unrelated business income. So in effect, prior to the enactment of IRA, any property that was used consistent with the tax exempt organization’s mission presented an obstacle which Section 6417 expressly overrides. Section 50(b)(3).

[3] If a taxpayer fails to meet the prevailing wage requirement during a particular year, the taxpayer may cure the failure by paying each worker the difference between actual wages paid and the prevailing wage, plus interest and a penalty of $5,000. If a taxpayer’s failure to pay prevailing wages was due to “intentional disregard,” then the taxpayer must pay each worker three times the difference and pay the IRS a $10,000 penalty per worker.

© 2023 Blank Rome LLP

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Is Biodiversity Emerging As A Unifying Concept That Can Help Ease The Political Polarization Surrounding ESG?

Highlights

    • In addition to global initiatives by the United Nations, G7, and the U.S., the need for protection against biodiversity loss has become a central focus of the business and investment communities
    • Biodiversity protection is emerging worldwide as a unifying concept that can mitigate the political polarization surrounding ESG and promote constructive dialogue about sustainability
    • A number of steps can be taken to capitalize on the unique attributes and appeal of biodiversity and leverage its potential to serve as a unifying concept

International Biodiversity Day, May 22, 2023, with its theme “From Agreement to Action: Build Back Biodiversity” was a powerful reminder that momentum for biodiversity conservation is accelerating globally. Biodiversity is increasingly being recognized as a potential unifying concept that can help alleviate some of the extreme political divergence over the term ESG.

ESG, which encompasses a broad range of environmental, social, and governance factors, has become politically charged and the subject of intense debate and varying interpretations. Biodiversity, on the other hand, is widely recognized as a critical aspect of environmental sustainability and it is increasingly acknowledged as a pressing issue by virtually all stakeholders, including scientists, policymakers, businesses, and communities.

Biodiversity represents the variety of life on Earth, including ecosystems, species, and genetic diversity. It is a tangible and universally valued concept that resonates with people from various backgrounds and ideologies. The preservation, protection and conservation of biodiversity are essential for the health and resilience of ecosystems, as well as for addressing climate change and ensuring the well-being of future generations.

By emphasizing biodiversity within sustainability discussions, stakeholders can find common ground and rally around a shared objective: protecting and restoring the Earth’s natural diversity. Biodiversity provides a unifying language and focus that transcends political divisions, as it highlights the interconnectedness of all life forms. It allows for a more tangible and universally valued point of reference, which can facilitate collaboration and drive collective action towards conservation efforts.

In addition to global initiatives by the United Nations, the Group of Seven (G7), and the U.S., the need for protection against biodiversity loss has also become a central focus of business and investment communities, and appears to be receiving a more favorable reception in the U.S. than the broader concepts associated with and motives attributed to ESG investing. This increased attention has, in turn, opened up a number of practical opportunities for action to leverage the potential of biodiversity as a unifying concept.

International Support for Biodiversity Protection

The United Nations formed the Convention on Biological Diversity (CBD) to promote nature and human well-being. The first draft was proposed on May 22, 1992, which was then designated as International Biodiversity Day. Since the Rio Earth Summit in 1992, nearly 200 countries have signed onto this treaty, which is a legally binding commitment to conserve biological diversity, to sustainably use its components and to share equitably the benefits arising from the use of genetic resources.

In December 2022, at the 15th UN Biodiversity Conference (COP15), the CBD adopted the Kunming-Montreal Global Biodiversity Framework that calls for protecting 30 percent of the planet’s land, ocean, and inland waters and includes 23 other targets to help restore and protect ecosystems and endangered species worldwide, and ensure that big businesses disclose biodiversity risks and impacts from their operations. The Kunming-Montreal framework also focused on increasing funding for biodiversity by at least $200 billion per year (with at least $30 billion per year to developing countries by 2030).

The U.S. is one of just a few countries worldwide that has not yet formally approved the CBD. While President Clinton signed the CBD in 1993, the Senate did not ratify it. Although the U.S. was on the sidelines at COP15 in late 2022, in parallel with the CBD approval of the Kunming-Montreal framework, the U.S. reiterated its support for an ambitious and transformative Global Diversity Framework, outlined in this State Department press release.

In addition to committing to conserve at least 30 percent of U.S. lands and waters by 2030, other U.S. leadership initiatives to mainstream and conserve nature that were announced or reaffirmed at that time include:

    • Conserving forests and combatting global deforestation
    • Prioritizing nature-based solutions to address climate change, nature loss, and inequity
    • Incorporating nature into national economic statistics and accounts to support decision-making
    • Recognizing and including indigenous knowledge in federal research, policy, and decision-making, including protections for the knowledge holder
    • Knowing nature with a national nature assessment that will build on the wealth of existing data, scientific evidence, and Indigenous Knowledge to create a holistic picture of America’s lands, waters, wildlife, ecosystems and the benefits they provide
    • Strengthening action for nature deprived communities by expanding access to local parks, tree canopy cover, conservation areas, open space and water-based recreation, public gardens, beaches, and waterways
    • Conserving arctic ecosystems through increased research on marine ecosystems, fisheries, and wildlife, including through co-production and co-management with Indigenous Peoples

The U.S. also spearheaded efforts to reverse the decline in biodiversity globally by advancing land and water conservation, combating drivers of nature loss, protecting species, and supporting sustainable use, while also enabling healthy and prosperous communities through sustainable development. The U.S. also affirmed its financial commitment to and support for international development assistance to protect biodiversity. Additionally, the U.S. made major policy and financial commitments to protect oceans and advance marine conservation and a sustainable ocean economy.

Of particular importance, the U.S. reaffirmed its commitment to advancing science-based decision making and its support for the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services.

Most recently, the G7 Hiroshima Leaders’ Communique issued at the close of their meeting on May 20 on the cusp of International Biodiversity Day, affirmed that G7 leadership (including the U.S.) welcomed “the adoption of the historic Kunming-Montreal Global Biodiversity Framework (GBF) to halt and reverse biodiversity loss by 2030, which is fundamental to human well-being, a healthy planet and economic prosperity, and commit to its swift and full implementation and to achievement of each of its goals and targets.”
G7 leadership also reaffirmed their commitment “to substantially increase our national and international funding for nature by 2025,” and “to supporting and advancing a transition to nature positive economies.” Notably, they also pressed companies to do so as well while at the same time voicing support for TNFD’s market framework for corporate nature related disclosures:

“We call on businesses to progressively reduce negative and increase positive impacts on biodiversity. We look forward to the publication of the Taskforce on Nature-related Financial Disclosures’ (TNFD’s) market framework and urge market participants, governments and regulators to support its development.”

Similarly, multilateral development banks (MDBs) were urged by the leaders of G7 to increase their support for biodiversity by leveraging financial resources from all sources and “deploying a full suite of instruments.”

Increasing Focus On Biodiversity By The Financial Sector

The financial sector has taken note of the growing international support for biodiversity conservation and protection. A 2023 study by PwC found that “55% of global GDP—equivalent to about US $58 trillion—is moderately or highly dependent on nature.” In its report The Economic Case for Nature, the World Bank found that a partial collapse of ecosystem services would cost 2.3 percent of global GDP ($2.7 trillion) in 2030. Conversely, the report found that implementing policies beneficial to nature and biodiversity conservation (including achieving the “30×30” goal subsequently approved by the CBD in the Kunming-Montreal framework and by Executive Order in the U.S.) could result in a substantial increase in global real GDP by 2030.

According to a 2020 report by the World Economic Forum, protecting nature and increasing biodiversity could generate business opportunities of $10 trillion a year and create nearly 400 million new jobs by 2030. Given this economic potential, it comes as no surprise that a growing number of investors are focusing on deploying capital for nature-based opportunities, and trying to assess whether and to what extent companies are susceptible to biodiversity related risks.

Toward those ends, the financial sector has been monitoring and supporting the development of TNFD’s market framework for nature related disclosures that was most recently endorsed by G7. That private global effort was launched in 2021 in response to the growing need to factor nature into financial and business decisions. The fourth and final beta version was issued in March 2023:

“The TNFD is a market-led, science-based and government supported initiative to help respond to this imperative. The Taskforce is nearing the end of its two-year framework design and development phase to provide market participants with a risk management and disclosure framework to identify, assess, respond and, where appropriate, disclose their nature-related issues. The TNFD framework, including TCFD-aligned recommended disclosures, will be published in September 2023 ready for market adoption.”

While the TNFD framework is not legally binding, the final version will be coming on line just in time for use as a guide for compliance with the EU’s Corporate Sustainability Reporting Directive (CSRD), which was effective in April 2023. It will require a substantial number of European companies and others operating in the EU, to start making disclosures regarding biodiversity and nature in coming years.

One of the more significant catalysts for investment in the protection of biodiversity and nature was the establishment of the Natural Capital Investment Alliance as part of the United Kingdom’s Sustainable Markets Initiative announced in 2020 and the Terra Carta sustainability charter launched by King Charles a year later. The Alliance is a public/private venture that aims to invest $10 billion in natural capital assets. Speaking at the One Planet Summit on biodiversity where the Alliance was announced in January 2021, King Charles stated “… I have created a Natural Capital Investment Alliance to help us arrive at a common language on Natural Capital Investment so that we can start putting money to work and improve the flow of capital.”

According to research by Environmental Finance, total assets held in thematic biodiversity funds more than tripled in 2022, and it is anticipated that momentum and growth will accelerate in response to COP 15 in December 2023, and approval of the Kunming-Montreal framework.

Positioning Biodiversity As A Unifying Concept

While biodiversity is not replacing ESG, it is gaining more attention within the broader ESG framework. Biodiversity conservation is supported by a vast body of scientific research and has a broad consensus among stakeholders. Many companies are incorporating biodiversity considerations into their sustainability strategies, and setting goals for conservation, habitat restoration, and responsible land use. Investors are also factoring biodiversity into their decision-making processes, looking for companies that demonstrate strong biodiversity conservation efforts.

Given the universal importance of biodiversity, it can serve as a focal point for mutual understanding for stakeholders with varying perspectives. Biodiversity conservation provides a unifying language that encourages collaborative efforts towards shared goals of environmental stewardship and the preservation of natural resources. Protection against biodiversity loss is not an ideological issue. To the contrary, it is fundamental, practical, and existential: the need to preserve the natural systems that support life on Earth. Emphasizing the importance of biodiversity shifts the focus to concrete and tangible actions required globally and locally, such as species preservation, and ecosystem protection, which can garner broader support and participation and help bridge political divides.

While biodiversity protection is by no means a panacea, there are further steps that can be taken to capitalize on its unique attributes and appeal that can improve the potential for biodiversity to serve as a unifying concept that can help reduce the current political polarization in the U.S. over ESG and promote more constructive dialogue around sustainability:

    • Universal concern – Biodiversity loss affects every individual and society, regardless of political affiliation. It is a shared concern that is oblivious to political boundaries, as the preservation of nature’s diversity is vital for the well-being of all life on Earth. By emphasizing biodiversity as a unifying concept, stakeholders can find mutuality and work together towards its conservation.
    • Inclusivity – Biodiversity requires inclusive engagement by diverse stakeholders and technical and scientific support from local communities, indigenous groups, governments, businesses, civil society organizations and the public. Such engagement fosters dialogue, understanding, and collaboration, breaking down political barriers.
    • Tangible and relatable – Biodiversity is a concrete and tangible concept that people can relate to, unlike some of the more complex ESG concepts, like Scope 3 greenhouse gas (GHG) emissions and Net Zero. It encompasses the variety of species, ecosystems, and genetic diversity, which are easily understandable and relatable to everyday experiences. This relatability can bridge political divides and foster broader support for conservation efforts.
    • Interconnectedness – Biodiversity underscores the interconnectedness of ecosystems and species emphasizing that actions in one area can have cascading far-reaching consequences on others, including ecological, social, and economic effects. Recognizing this interconnectedness can encourage stakeholders to collaborate across sectors and ideologies to address biodiversity loss collectively.
    • Co-benefits and shared values – Biodiversity conservation often aligns with other societal values and goals, such as climate change mitigation, sustainable development, and human well-being. By emphasizing the co-benefits that arise from biodiversity conservation, such as ecosystem services and resilience, stakeholders can rally around shared values and work towards a common vision.
    • Economic implications – Biodiversity loss can have significant economic implications for industries like agriculture, tourism, and pharmaceuticals. It can also have impacts on supply chains and market access. Recognizing the economic value of biodiversity and the potential risks associated with its decline can bring together diverse stakeholders, including businesses and investors, who recognize the importance of integrating biodiversity considerations into their strategies and decision-making processes.
    • Science-based approach – Biodiversity conservation relies on scientific knowledge and research. Emphasizing the scientific evidence on the importance of biodiversity helps build consensus and transcends political biases, providing a foundation for constructive discussions.
    • Local and global perspectives – Biodiversity conservation is relevant at both local and global scales. It allows for discussions that incorporate local knowledge, values, and practices, while recognizing the need for global cooperation to address biodiversity loss and protect shared resources.

To leverage biodiversity as a unifying concept, it is crucial to promote open dialogue, knowledge sharing, and collaboration. Stakeholders should engage in inclusive decision-making processes that respect diverse perspectives and prioritize equitable and sustainable outcomes.

Takeaways

Biodiversity is emerging as a potential unifying concept that can help mitigate the political polarization surrounding the term ESG. While ESG has become a politically charged and debated topic, biodiversity is widely recognized as a critical aspect of environmental sustainability and has broad support across different stakeholders.

By focusing on biodiversity, stakeholders can find common ground in recognizing the importance of preserving nature’s diversity and ensuring the long-term sustainability of ecosystems. Biodiversity loss is a global challenge that affects everyone, irrespective of political affiliation, and it is increasingly acknowledged as a pressing issue by scientists, policymakers, businesses, and communities.

It is important to note that while biodiversity can be a unifying concept, there will still be debates and differing opinions on specific approaches and trade-offs involved in biodiversity conservation. Different stakeholders may have differing priorities, perspectives, and proposed means and methods to address biodiversity loss. The complexity of biodiversity issues, such as balancing conservation with economic development or navigating conflicts between different stakeholder interests, requires careful consideration and dialogue.

© 2023 BARNES & THORNBURG LLP

For more Financial Legal News, visit the National Law Review.

Biden Administration Initiates Ocean Justice Strategy

On June 8, 2023, the White House Council on Environmental Quality (CEQ) and Office of Science and Technology Policy (OSTP), on behalf of the Ocean Policy Committee (OPC), announced the development of a new “Ocean Justice Strategy.” This federal government-wide initiative marks the latest in a long series of Biden administration efforts to promote environmental justice (EJ). The first step is a request for public input through July 24, 2023.

Overview

    • Per CEQ, the Ocean Justice Strategy aims to identify barriers and opportunities to incorporate environmental justice principles into the federal government’s ocean-related activities. It will encompass all recent Biden administration Executive Orders and policies relating to environmental justice, including the Ocean Climate Action Plan. The Strategy will serve as a guide to the federal government’s objectives for guiding “ocean justice” activities. It will propose “equitable and just practices to advance safety, health, and prosperity for communities residing near the ocean, the coasts, and the Great Lakes.”
    • The OPC, a Congressionally-created office dedicated to developing federal ocean policy, will draft the Ocean Justice Strategy with input from stakeholders, including Tribes, state and local governments, the private sector, and the public.
    • The Biden Administration previewed its support for ocean justice last year when it announced a commitment to extending environmental justice efforts to coastal and marine contexts. NOAA Fisheries followed suit by releasing its first-ever Equity and Environmental Justice Strategy, which puts equity and environmental justice at the forefront of their effort to steward the nation’s ocean resources and habitats.
    • The Strategy and its underlying EJ-based principles could lead to future policy changes, including for industries such as offshore energy, real estate, shipping, ports, and fisheries. This new effort is somewhat unique among EJ initiatives in that it targets activities that inherently occur along the nation’s coasts or far away from communities. The Strategy could emerge in a variety of directions, from identifying favored or disfavored ocean-based activities to layering additional processes for certain types of proposed projects.

Request for Public Input

OPC seeks public input on the following topics to develop the Ocean Justice Policy:

    • Definitions (namely, what is “ocean justice”)
    • Barriers to ocean justice
    • Opportunities for ocean justice
    • Research and knowledge gaps
    • Tools and practices (e.g., how to use existing tools such as CEJST, EJScreen, and EnviroAtla, in addition to developing new tools)
    • Partnerships and collaboration with external stakeholders
    • Any additional considerations

In addition to these comments, OPC will consider comments submitted in response to its previous request for information on the Ocean Climate Action Plan to inform the development of the Ocean Justice Strategy.

© 2023 Beveridge & Diamond PC

For more Environmental Legal News, visit the National Law Review.

Montana Passes 9th Comprehensive Consumer Privacy Law in the U.S.

On May 19, 2023, Montana’s Governor signed Senate Bill 384, the Consumer Data Privacy Act. Montana joins California, Colorado, Connecticut, Indiana, Iowa, Tennessee, Utah, and Virginia in enacting a comprehensive consumer privacy law. The law is scheduled to take effect on October 1, 2024.

When does the law apply?

The law applies to a person who conducts business in the state of Montana and:

  • Controls or processes the personal data of not less than 50,000 consumers (defined as Montana residents), excluding data controlled or processed solely to complete a payment transaction.
  • Controls and processes the personal data of not less than 25,000 consumers and derive more than 25% of gross revenue from the sale of personal data.

Hereafter these covered persons are referred to as controllers.

The following entities are exempt from coverage under the law:

  • Body, authority, board, bureau, commission, district, or agency of this state or any political subdivision of this state;
  • Nonprofit organization;
  • Institution of higher education;
  • National securities association that is registered under 15 U.S.C. 78o-3 of the federal Securities Exchange Act of 1934;
  • A financial institution or an affiliate of a financial institution governed by Title V of the Gramm- Leach-Bliley Act;
  • Covered entity or business associate as defined in the privacy regulations of the federal Health Insurance Portability and Accountability Act (HIPAA);

Who is protected by the law?

Under the law, a protected consumer is defined as an individual who resides in the state of Montana.

However, the term consumer does not include an individual acting in a commercial or employment context or as an employee, owner, director, officer, or contractor of a company partnership, sole proprietorship, nonprofit, or government agency whose communications or transactions with the controller occur solely within the context of that individual’s role with the company, partnership, sole proprietorship, nonprofit, or government agency.

What data is protected by the law?

The statute protects personal data defined as information that is linked or reasonably linkable to an identified or identifiable individual.

There are several exemptions to protected personal data, including for data protected under HIPAA and other federal statutes.

What are the rights of consumers?

Under the new law, consumers have the right to:

  • Confirm whether a controller is processing the consumer’s personal data
  • Access Personal Data processed by a controller
  • Delete personal data
  • Obtain a copy of personal data previously provided to a controller.
  • Opt-out of the processing of the consumer’s personal data for the purpose of targeted advertising, sales of personal data, and profiling in furtherance of solely automated decisions that produce legal or similarly significant effects.

What obligations do businesses have?

The controller shall comply with requests by a consumer set forth in the statute without undue delay but no later than 45 days after receipt of the request.

If a controller declines to act regarding a consumer’s request, the business shall inform the consumer without undue delay, but no later than 45 days after receipt of the request, of the reason for declining.

The controller shall also conduct and document a data protection assessment for each of their processing activities that present a heightened risk of harm to a consumer.

How is the law enforced?

Under the statute, the state attorney general has exclusive authority to enforce violations of the statute. There is no private right of action under Montana’s statute.

Jackson Lewis P.C. © 2023

For more Privacy Legal News, click here to visit the National Law Review.

NLRB Issues Memo on Non-competes Violating NLRA

On May 30, 2023, Jennifer Abruzzo, the general counsel for the National Labor Relations Board (NLRB), issued a memorandum declaring that non-compete agreements for non-supervisory employees violates the National Labor Relations Act. The memo explains that having a non-compete chills employees’ Section 7 rights when it comes to demanding better wages. The ­theory goes that employees cannot threaten to resign for better conditions because they have nowhere to go. Non-compete agreements also prohibit employees from seeking better working conditions with competitors and/or soliciting coworkers to leave with them for a local competitor.

Experts have yet to weigh in, but ultimately this issue will be decided by the federal courts. As an employer, if you employ any non-supervisory employees that are subject to a non-compete agreement, an unfair labor practice charge could be filed, and it appears the NLRB would lean towards invalidating the agreement, though all evidence would have to be taken into consideration.

© 2023 Jones Walker LLP

For more Employment Legal News, click here to visit the National  Law Review.

Investigation Spurs Launch of Puerto Rico and U.S. Virgin Islands (USVI) Environmental Crimes Task Force

The U.S. Department of Justice (DOJ) recently announced the launch of a new Puerto Rico and U.S. Virgin Islands (USVI) Environmental Crimes Task Force. The DOJ’s announcement, on May 11, 2023, coincided with its announcement of the grand jury indictments of two individuals in Puerto Rico who are accused of committing environmental crimes between 2020 and 2022.

As noted by the DOJ, its formation of the Puerto Rico and U.S. Virgin Islands (USVI) Environmental Crimes Task Force also comes one year after the Department’s formation of an Office of Environmental Justice within its Environment and Natural Resources Division. This suggests that the DOJ is engaging in a long-term strategy to combat environmental crime, with particular emphasis on combating environmental crime in Puerto Rico and the USVI.

For companies and individuals doing business in Puerto Rico and the USVI, this is cause for concern. Even compliance won’t necessarily prevent an investigation; and, in the event of an investigation, insufficient documentation of compliance can present risks regardless of the underlying facts at hand. As a result, companies and individuals doing business on the islands need to prioritize environmental compliance (and adequately documenting their compliance), and they need to have strategies in place to deal effectively with the DOJ’s Puerto Rico and U.S. Virgin Islands (USVI) Environmental Crimes Task Force if necessary.

Puerto Rico and the U.S. Virgin Islands. By announcing the formation of its new task force on the same date that it announced two grand jury indictments, it is also sending a clear message that it will not hesitate to pursue criminal charges when warranted.

The DOJ’s Puerto Rico and U.S. Virgin Islands (USVI) Environmental Crimes Task Force: An Overview

To be prepared to deal with the DOJ’s Puerto Rico and U.S. Virgin Islands (USVI) Environmental Crimes Task Force, companies and individuals doing business on the islands need to have a clear understanding of the task force’s composition and law enforcement priorities. Here is an overview of what we know so far:

Federal Agencies with Personnel on the DOJ’s Task Force

While the Puerto Rico and U.S. Virgin Islands (USVI) Environmental Crimes Task Force falls under the DOJ’s law enforcement umbrella, it includes personnel from several federal agencies. Each of these agencies is likely to have its own set of enforcement priorities—setting the stage for wide-ranging investigations in Puerto Rico and the USVI.

As identified by the DOJ, the federal agencies with personnel on the Puerto Rico and U.S. Virgin Islands (USVI) Environmental Crimes Task Force include:

  • Army Criminal Investigation Division (Army CID)
  • Army Corps of Engineers
  • Department of Agriculture Office of Inspector General (DOA OIG)
  • Department of Commerce Office of Inspector General (DOC OIG)
  • Department of Homeland Security Homeland Security Investigations (DHS HSI)
  • Department of Transportation Office of Inspector General (DOT OIG)
  • Environmental Protection Agency Criminal Investigation Division (EPA CID)
  • Environmental Protection Agency Office of Inspector General (EPA OIG)
  • Federal Bureau of Investigation (FBI)
  • Food and Drug Administration Office of Criminal Investigations (FDA OCI)
  • Housing and Urban Development Office of Inspector General (HUD OIG)
  • IRS Criminal Investigation (IRS CI)
  • National Oceanic and Atmospheric Administration Office of Law Enforcement (NOAA OLE)
  • U.S. Coast Guard – Sector San Juan (USCG San Juan)
  • U.S. Coast Guard Investigative Service (USCG IS)
  • U.S. Fish and Wildlife Service (FWS)

The DOJ’s press release announcing the formation of the task force also notes that its personnel will work closely with local authorities on both islands. This includes the Puerto Rico Department of Natural Resources, Puerto Rico Department of Justice, U.S. Virgin Islands Department of Planning and Natural Resources, and U.S. Virgin Islands Attorney General’s Office.

The Task Force’s Enforcement Priorities in Puerto Rico and the USVI

The DOJ’s press release also identifies several areas of enforcement that are priorities for the Puerto Rico and U.S. Virgin Islands (USVI) Environmental Crimes Task Force. As of the date of its launch, the task force’s priorities will include:

  • Air and water quality violations involving agriculture, construction, transportation, and other industries
  • Fraud, waste, and abuse affecting government programs (including, but not limited to, EPA programs)
  • Harm to wetlands, navigable waters, and wildlife (including harm caused by pesticide misuse)
  • Hazardous material spills and transportation violations
  • Marine environmental violations and harm to federal marine resources
  • Public corruption involving environmental compliance and risks
  • Violations involving medications, foods, cosmetics, and other biological products
  • Violations involving workplace and housing conditions affecting residents working in the islands’ protected environments

As you can see, not all of these violations are strictly related to environmental compliance. This reflects the task force’s composition as well as the DOJ’s general disposition to investigate and prosecute all crimes, regardless of the impetus for a particular inquiry. Environmental crime investigations in Puerto Rico and the USVI will present risks for conspiracy, money laundering, tax evasion, wire fraud, and other federal criminal charges as well—and targeted companies and individuals could potentially face these charges even if they are ultimately cleared of any alleged environmental law violations.

Oberheiden P.C. © 2023
For more Environmental Law news, click here to visit the National Law Review.

Rise in VCM Business May Trigger CFTC Oversight on Sales of Carbon Offset Credits

Many major companies have announced a blueprint to minimize their carbon footprint. Some companies have gone so far as to proclaim that they will achieve “net zero” emissions in the near future. To accomplish their climate goals, many have turned to purchasing products called “carbon offset credits.”

Offset credits are defined as tradable “rights” or certificates linked to activities that lower the amount of carbon dioxide (CO2) in the atmosphere. These offsets are purchased and sold on what is commonly referred to as “voluntary carbon markets” (VCMs), where owners of carbon-reducing projects can sell or trade their carbon offsets to emitters who wish to offset the negative effects of their emissions.[1] The VCMs, however, have been subject to criticism and concern due to lack of effective regulation to combat potential fraud. In response, the US Commodity Futures Trading Commission (CFTC) has announced its intent to increase enforcement resources and expertise to police the carbon markets.

How It Works

The owner of the carbon-reducing project applies to an independent (and largely unregulated) registry for carbon offsets. The registry then evaluates the project, often relying on complex information submitted by the project owner, to determine whether and how much atmospheric carbon the project will reduce. If the registry determines the project will reduce atmospheric carbon, it will issue a carbon offset credit to the project owner.

Typically, one offset credit represents one metric ton of carbon dioxide removed or kept out of the atmosphere. The price of offset credits will vary depending on different project types, different levels of benefits, and the markets in which they are traded. Once the registry issues the offset credit, the project owner can sell it to whomever it wants on a VCM. It is not uncommon for profit-seeking entities such as brokers or investors to purchase the offset credit and then sell it to the “end user,” which is the entity that wants to take credit for the carbon reduction. Once the “end user” purchases the offset credit, the credit is “retired” to ensure that it cannot be sold again.

Although voluntary carbon markets have been around for decades, they have taken off in recent years amid a deluge of corporate climate commitments. From 2018 to 2021, the VCM’s value grew from $300 million to $2 billion. Global management consultancy company McKinsey estimates that the value of VCMs may reach as high as $180 billion by 2030, while Research and Markets has projected a global value of $2.68 trillion by 2028.

Yet, the voluntary carbon market is fragmented and largely unregulated, suffers from varying accounting standards, and has been described as “the Wild West” for fraud. An investigation by The Guardian found that 90% of offsets issued by one of the largest registries for rainforest preservation projects were worthless because they did not represent legitimate carbon reductions. The voluntary carbon market is largely unregulated in the United States, and carbon offsets are almost exclusively issued by nongovernmental entities. Perhaps not surprisingly, regulators have started to look at the voluntary carbon markets more closely. In particular, the CFTC has shown an increasing interest in carbon in recent years.

Road Ahead

In September 2020, the CFTC’s Climate-Related Market Risk Subcommittee issued a report, “Managing Climate Risk in the U.S. Financial System,” that concluded climate change poses a major risk to the stability and integrity of the US economy and presented several dozen recommendations to mitigate climate risks. Less than a year later, CFTC Chairperson Rostin Behnam created the Climate Risk Unit to focus on the role of derivatives “in climate-related risk and transitioning to a low carbon economy.”

In June 2022, the CFTC held the first ever Voluntary Carbon Markets Convening to discuss issues related to a potential carbon offset market and to solicit input from industry participants in the CFTC’s potential role. After the Convening, the CFTC issued an RFI asking whether and how the CFTC should be involved in creating and regulating a voluntary carbon market. The responses to the RFI reflected that, while most industry participants agreed on the need for additional transparency and standardization in the voluntary carbon markets, they disagreed on the role the CFTC should play in such a market. A group of seven United States senators, including Sens. Cory Booker (D-NJ) and Elizabeth Warren (D-MA), argued that the CFTC should establish a robust regime governing the carbon market. Others argued that it is too soon for the CFTC to create rules and a registration mechanism, expressing concern that those actions might stifle industry innovation and progress.

At a keynote speech in January 2023, Chair Behnam stated that the CFTC “can play a role in voluntary [carbon] markets.” CFTC Commissioner Goldsmith Romero echoed the sentiment a month later in another speech and gave proposals for the CFTC to “promote resilience to climate risk.” Among those was a proposal that the “Commission should promote market integrity by increasing enforcement resources and expertise to combat greenwashing and other forms of fraud.”

The voluntary carbon market, Goldsmith Romero noted, “carr[ies] particular concerns of greenwashing, fraud, and manipulation” which “can lead to serious harm, distort market pricing, seriously damage a company’s reputation, and undermine the integrity of the markets.” This is particularly true with an esoteric commodity such as carbon offsets. For tangible commodities such as soybeans or oil, verifying delivery of the goods is relatively easy. But for carbon offsets, the offset purchaser often cannot verify that the promised greenhouse gas reduction is actually occurring; instead, the purchaser must rely on the promises made by the project owner or independent registry.

At present, the CFTC has limited enforcement jurisdiction over carbon offsets because only a limited number of carbon derivatives are traded on regulated futures markets. Carbon, as well as carbon and other environmental offsets or credits, are generally considered “commodities” as defined by § 1a(9) of the Commodity Exchange Act of 1936 (CEA). As a regulated commodity, transactions involving carbon credits or offsets are subject to the CFTC’s anti-fraud and anti-manipulation enforcement jurisdiction.

As VCMs continue to grow, it is likely that offerings of carbon derivatives such as futures, options, and swaps will grow with them, which may provide the jurisdictional catalyst for the CFTC to get more involved. The CFTC has exclusive jurisdiction over the regulation of futures markets, including oversight of the listing of new contracts on futures exchanges. Currently, a limited number of carbon futures are available to trade, and most trade on already regulated exchanges such as the Global Emissions Offset (GEO) futures contracts traded at the Chicago Mercantile Exchange (CME). The price of CME’s GEO futures contract is based on CORSIA-eligible (Carbon Offsetting and Reduction Scheme for International Aviation) offset credits issued through specific independent registries.

But given the varying standards and methodologies for these registries, combined with an increasing number of investigations that have found significant issues with offset credits, it is reasonable to expect that the CFTC may eventually seek to engage in more oversight of the registries to ensure that futures contracts are not being manipulated and the offset credits are actually delivering the carbon reductions promised. Given that offsets are widely traded as commodities, that demand for offset-based derivatives products is growing, and that fraud may be a widespread problem throughout the marketplace, it seems like a matter of when, not if, the CFTC begins to regulate VCMs more heavily.

FOOTNOTES

[1] Although often used interchangeably, voluntary carbon markets are different from compliance carbon markets. Compliance carbon markets are regulated markets set by “cap-and-trade” regulations at the state, national, or international governmental organizations. Governmental organizations set a cap on carbon emissions and then provide members with credits that act as a “permission slip” for a company to emit up to the cap. Voluntary carbon markets, on the other hand, involve trading of carbon credits between companies to reduce their own carbon footprint.

© 2023 ArentFox Schiff LLP
For more Environmental Law news, click here to visit the National Law Review.

Intellectual Property for the Metaverse

How do you use the patent system to protect inventions related to the metaverse?

What is the Metaverse?

Merriam-Webster defines the metaverse as “a persistent virtual environment that allows access to and interoperability of multiple individual virtual realities.” The term “metaverse” originates from dystopian science fiction novels in which it referred to an immersive, computer-generated virtual world. Today’s “metaverse” is now firmly integrated into the technology sector and can be thought of as a common virtual world shared by all users across a plurality of platforms. Examples of metaverse-related technology includes the software that generates these virtual environments, as well as virtual reality (VR) and augmented reality (AR) headsets and other devices that enable human interaction with the environment and representations of other humans within it.

The adoption of metaverse-related technology is expanding. In 2021 the company then known as Facebook rebranded to “Meta” in an effort to emphasize the company’s commitment to developing a metaverse. In Fall of 2022, Apple announced the development of its own VR/AR headset. 2022 also saw the launch of the first Metaverse Fashion Week.

These events are indicative of the growing emphasis on the metaverse and the expectation amongst technology companies that the metaverse will be the eventual successor to the internet, smartphones, and/or social media. Applications of the metaverse are not limited to socialization and gaming—as the metaverse expands there is increased acknowledgment of the benefits it may provide in other settings, including in education, finance, and medicine.

As patent attorneys and innovators, we ask: How do you use the existing framework of the patent system to best protect inventions related to the metaverse?

Using Patents to Protect Inventive Concepts in the Metaverse

In this blog post, we explore considerations for protecting inventions in and related to the metaverse. Because many of these technologies are new and the industry surrounding the metaverse is in its infancy, inventions made today may prove to be quite valuable in the coming years. Protecting these inventions today is likely to be well worth the investment in the future. Inventive concepts in the metaverse can be protected using both utility patents which focus on the functional benefits of an invention and design patents which focus on the ornamental aspects of an invention.

Utility Applications for Metaverse

Utility patents may be used to protect the functional aspects of hardware or software-based innovative technologies in the metaverse.

Innovators in the metaverse environment might pursue patent protection on technologies associated with headsets, displays, cameras, user control interfaces, networked storage and servers, processors, power components, interoperability, communication latency, and the like. These hardware-based inventions for the metaverse may be a natural expansion of those previously developed for augmented and virtual reality, video-game technology, or the internet. Accordingly, patent applicants may look to those fields for best practices in protecting their hardware-based inventions. As with any patent application, identifying a point of novelty early on in the process is essential to deciding whether and how to pursue patent protection.

Software-based inventions may include technologies associated with performing tasks in the metaverse, such as representation of virtual environments and avatars, speech/voice processing, and blockchain transactions (e.g., for purchasing virtual goods). These software-based inventions may face additional challenges at the U.S. Patent and Trademark Office (USPTO), where the patent eligibility bar under 35 U.S.C. §101 prohibits the patenting of “abstract ideas” which may include methods of organizing human activity, mental processes, and mathematical concepts. It is typical for software-related patent applications to receive a patent eligibility rejection during the examination process.

One challenge in patenting software-based applications for the metaverse includes the fact that software that merely implements a process that is equivalent to a known process outside of the metaverse environment is unlikely to be allowed by the USPTO. However, a software-based invention that accounts for the changes introduced by being in a metaverse environment and addresses what specific problems were unique to the metaverse may be found patentable by the USPTO. Thus, best practices for drafting patent applications related to the metaverse may be to include details surrounding the considerations taken to account for the change in operating in the metaverse environment as opposed to a non-metaverse environment in any patent applications.

Additionally, while patent applicants may draft patent applications with the USPTO in mind, applicants should also consider the intricacies of claiming patent protection for software related technologies on a global basis. For example, patent applicants should consider that patents for software processes are more difficult to acquire in Europe unless clear indications of how a software-based invention provides a technical solution to a technical problem are included in the application.

Design Applications for Metaverse

Innovators in the metaverse may also use design patents to protect ornamental aspects of their invention. For example, fashion companies may seek protection of their branded objects within the metaverse. Technology companies may try to protect the ornamental features of their headsets or user interfaces.

The protection of objects within the metaverse presents an interesting avenue for patent protection. Objects displayed within the metaverse may be protected similarly to how innovations in video-game technology, web applications and graphical user interfaces are currently protected using design patents. For example, representations of physical items within a virtual environment can be considered computer-generated icons that can be protected so long as they are shown in an embodiment tying them to an article of manufacture such as a computer screen, monitor, other display panel, or any portion thereof in compliance with 35 U.S.C. 171. Similarly, movement of items within a multiverse environment can be protected similar to how changeable computer generated icons are protected today.

Again, while patent applicants may focus on the requirements of the USPTO, it is important to note that the metaverse is inherently global in its nature and that industrial design applications across the globe may have different requirements. For example, Europe does not require a display screen for industrial designs. Accordingly, comprehensive strategies for design protection of metaverse related technologies may consider the nuances of seeking industrial design protection in various jurisdictions.

Other Methods for Protecting Inventive Concepts in the Metaverse

As with any product or company, a comprehensive strategy for intellectual property protection includes not only patents but also trademarks and copyrights. As intellectual property attorneys consider the best ways to protect a client’s product, they may often turn to trademarks and copyrights in connection with design and utility patent applications to provide more holistic protection of intellectual property assets. For example, fashion-based companies may utilize a combination of trademark protection and design patent protection for their brands and the innovative designs for which they are known in the metaverse. Software-based companies may turn to a combination of copyright and utility patents to protect innovative functionality for the metaverse.

Concluding Thoughts

The growth in use of utility and design patent applications to protect concepts related to the metaverse is immense. One study conducted by IALE Tecnología found that “over the past five years, metaverse-related patent applications have doubled to more than 2,000.” This rapid expansion in patents for innovative concepts surrounding the metaverse is only expected to advance in the coming years.

Cohesive and comprehensive strategies involving utility patents, design patents, trademarks, copyrights and trade secrets are likely to provide the best protection to innovators operating in the metaverse.

©1994-2023 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.

For more Intellectual Property Legal news, click here to visit the National Law Review.

Tempur Sealy Acquisition of Mattress Firm: A Vertical Bridge Too Far for the FTC?

In a deal announced on May 9, Tempur Sealy International, Inc., the world’s largest mattress manufacturer, has agreed to acquire Houston-based Mattress Firm Group, Inc., the largest U.S. brick-and-mortar bedding retailer, with more than 2,300 locations and a robust e-commerce platform. The companies hope to finalize the $40 billion deal in the second half of 2024.

Following pre-merger notification of the deal last October, the FTC is reportedly taking a deep dive into the mattress industry to assess whether the transaction is likely to harm competition. The depth of the investigation itself signals a departure from the antitrust agencies’ traditional approach to “vertical” mergers in which firms in the same industry but in non-overlapping market segments (such as manufacturing and retailing the same product category) benefit from a soft presumption of legality. Customarily, vertical integration was perceived to be benign, if not somehow “efficiency enhancing.”

Whatever the merits of applying such leniency to traditional supply chains of widgets, it does not serve competition policy well in an economy dominated by technology-driven platforms that serve several enormous groups of customers at once. In today’s markets, non-overlapping vertical arrangements can severely affect whether rival firms can gain access to inputs, markets, or prospective customers.

Evidence of the FTC’s awareness of the potential for vertical mergers to cause competitive harm abounds. On September 15, 2021, the FTC withdrew the FTC/Department of Justice 2020 Vertical Merger Guidelines and Commentary. The Commission’s majority said that the 2020 Guidelines included a “flawed discussion of the purported procompetitive benefits (i.e., efficiencies) of vertical mergers, especially its treatment of the elimination of double marginalization” and by failing to address “increasing levels of consolidation across the economy.”

Mattresses and Widgets

A course correction is borne out by the Commission’s recent challenges to several proposed vertical mergers, including Nvidia Corp.’s attempted acquisition of Arm Ltd., Lockheed Martin Corporation’s attempted acquisition of Aerojet Rocketdyne Holdings, Inc., Microsoft Corp.’s acquisition of Activision Blizzard Inc., and Illumina, Inc.’s acquisition of GRAIL, Inc. After the parties abandoned the Nvidia/Arm acquisition, the FTC’s press release was effusive: “This result is particularly significant because it represents the first abandonment of a litigated vertical merger in many years,” the Commission said.

Enter the Tempur Sealy/Mattress Firm transaction, a vertical acquisition in a product category whose markets resemble widgets more than online merchandising or payment networks. Tempur Sealy became the world’s largest mattress manufacturer in 2012, when Tempur-Pedic acquired Sealey Corp. for $1.3 billion. The company currently earns revenues of $5 billion a year, almost a third of the $17 billion U.S. mattress market. Mattress Firm, the largest mattress retailer in the U.S. with annual revenues of $2.5 billion a year, has been owned since 2016 by German retail holding company Steinhoff International Holdings NV. The firm filed for Chapter 11 bankruptcy protection in October 2018, but quickly emerged the following month after closing 700 stores.

The merging parties are no strangers to one another, having engaged in a commercial relationship for the past 35 years. In 2017, Tempur Sealy sued Mattress Firm for selling mattresses that infringed on the Tempur-Pedic line-up, but in 2019, after its emergence from bankruptcy, Mattress Firm and Tempur Sealy struck a long-term partnership agreement. A merger of the two firms has been under discussion in one form or another for most of the past decade.

Public statements by the parties stress the complementarity of the deal, which they describe as combining “Tempur Sealy’s extensive product development and manufacturing capabilities with vertically integrated retail.” The merged entity will end up with about 3,000 retail stores, 30 e-commerce platforms, 71 manufacturing facilities, and 4 R&D facilities around the world. It is the kind of combination of complementary businesses that not long ago might not have even earned a Second Request from the antitrust agencies.

The FTC, which at least since last December has been investigating the potential effects on the mattress industry of a merger between the two market leaders, issued a Second Request earlier this month. By February, the Commission had already interviewed executives from the top 20 mattress manufacturers, according to a report in Furniture Today (February 2, 2023).

Disruptors and Goliaths

The FTC is likely to discover a large and growing global industry undergoing significant changes in how mattresses are designed, marketed, and sold in reaction to changing consumer preferences.

Several online mattress-in-a-box companies have disrupted the industry. Today, nearly half of all consumers purchases are online. They will also find fairly low barriers to entry into both brick-and-mortar and online retailing and mattress manufacturing. Their review of the Tempur Sealy/Mattress Firm transaction will also encounter two players in the market with a long history of cooperation.

With 20 manufacturers significant enough to interview, the Commission would appear to be faced with a fairly competitive market – one in which little or no foreclosure of rivals to the ability to obtain inputs or the availability of channels of distribution to reach consumers will result from the proposed transaction. Additional competitive pressure comes from Amazon, which began selling its own mattresses in 2018 as part of the Amazon Essentials line, and Walmart, which introduced its own mattress-in-box brand, Allswell, available online and in stores.

On balance, the acquisition of Mattress Firm by Tempur Sealy would not appear to raise significant antitrust issues. A challenge to this transaction by the FTC may be a vertical bridge too far. That is no doubt the assessment reached by Scott Thompson, chairman and CEO of Tempur Sealy, who expressed confidence in clearing the FTC’s antitrust review, “either in the traditional sense or through litigation.”

© MoginRubin LLP

For more Antitrust and FTC news, click here to visit the National Law Review.

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