Up in Smoke?

The Supreme Court's CO2 ruling could leave businesses fuming.

In a decision that could have serious repercussions for U.S. corporations, on Monday the Supreme Court ruled that the Environmental Protection Agency does have the authority to regulate CO2 emissions from automobiles. The verdict settles a case filed by 12 states, 13 environmental groups, the District of Columbia, and American Samoa against the government agency.

As CFO reports in its current issue (“Cleaning Up Carbon“), the EPA has in the past resisted attempts to force it to regulate carbon dioxide emissions. Among other things, the agency has argued that CO2 is not a pollutant, and therefore, not governed by the Clean Air Act.

In a 5-4 vote, the court disagreed, ruling that CO2 and other greenhouse gases are indeed pollutants. The decision could pave the way for federal or state restrictions on automobile tailpipe emissions. At the very least, it increases the odds that California will receive a waiver from the EPA to roll out its new exhaust emission standards, which are set to take effect in 2009. In a statement issued Monday, California Gov. Arnold Schwarzenegger said, “We remain hopeful that the EPA will soon determine, as California has, that vehicle greenhouse gases must be reduced.”

None of this is good news for automakers, which are already fighting a lawsuit filed by the California attorney general. That suit alleges that exhaust fumes from cars have contributed to global warming, which, in turn, has damaged the state’s eco-system.

Automakers claim that attempts to regulate tailpipe emission regulations could force them to redesign existing cars, change product lines, and offer fewer engine options on vehicles. Indeed, a 2003 report by Sustainable Asset Management and the World Resources Institute found that impending climate regulations could materially impact the U.S. automobile sector. The study estimated, for example, that carbon constraints would reduce Ford Motor’s earnings (before interest and taxes) by 10 percent.

Still, car-company CEOs and CFOs aren’t the only corporate executives who should be concerned about yesterday’s ruling. In fact, the decision could spell trouble for scores of U.S. manufacturers. For one thing, legal experts believe the ruling will encourage environmental groups to sue the EPA to get it to regulate CO2 emissions from smokestacks.

More worrisome still: The decision could leave businesses on the hook for lawsuits arising from carbon emissions. Risk managers point out that insurers typically exclude pollution coverage from general liability, umbrella/excess, and D&O policies. Now that the Supreme Court has ruled that greenhouse gases are pollutants, the pollution exclusion means that policy holders — not policy writers — will have to pay for any damages awarded in a CO2-related lawsuit.

In the meantime, the EPA could try to skirt the court’s decision. How? By publicly stating that greenhouse gases do no threaten human health or welfare. That’s going to be a tough sell, however. Such an assertion has already been rejected by the United Nation’s Intergovernmental Panel on Climate Change — as well as by the EPA’s own researchers.

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