Last year, the United States federal government closed the commentary period for proposed regulation Federal Acquisition Regulation (“FAR”) Case 2021-015.[i] Under this proposed regulation, large government contractors would be required to publicly disclose their direct and indirect greenhouse gas (“GHG”) emissions. And in some cases, these contractors must even achieve periodic reductions in their GHG emissions.
The proposed rule would be a fundamental change to the federal procurement process, particularly in an industry where less than 5% of contractors report their GHG emissions.[ii] If passed, FAR Case 2021-015 will cost an estimated $508,000 annually for federal contractors to comply.[iii] The proposed rule inflicts serious consequences for those that fail to accurately report their GHG emissions, the most severe of which includes False Claims Act violations.
Though this proposed regulation is not yet been implemented, federal contractors, subcontractors and suppliers should familiarize themselves with reporting requirements under FAR Case 2021-015. And the issues that these requirements can raise. This article will review some of the main issues, although it does not serve as a comprehensive summary of every imaginable issue.
Background
In May 2021, the Biden Administration issued an Executive Order (“EO 14030”) which required GHG emission disclosure requirements to be incorporated into the FAR. EO 14030 required that “where feasible, [federal agencies should] give preference to bids and proposals from suppliers with a lower social cost of GHG emissions.”
In response to EO 14030, on November 14, 2022, the Department of Defense (“DoD”), the General Services Administration (“GSA”), and the National Aeronautics and Space Administration (“NASA”) published FAR Case 2021-015. The review and comment period for the proposed rule closed on January 13, 2023. Now, FAR Case 2021-015 rests with the DoD, GSA, and NASA. These federal agencies will consider the comments and either issue a revised proposed rule or publish final rule as is.
Overview FAR Case 2021-2015
As proposed, FAR Case 2021-015 would require many, but not all, federal contractors to annually and publicly report their organization’s GHG emissions. There are two tiers of contractors who would be required to report under the proposed rule: “Significant” and “Major” contractors. Significant contractors are those that receive between $7.5 and $50 million in federal awards annually. Major contractors are those that receive in excess of $50 million in federal awards annually. Those federal contractors that receive less than $7.5 million in federal awards annually would not be required to report under FAR Case 2021-015.
Significant and Major contractors would be required to report three different “scopes” of GHG emissions inventory. FAR Case 2021-015 defines “Scope 1” as the direct GHG emissions from sources that are owned or controlled by the reporting company. Scope 1 GHG inventory would include, but is not limited to, a contractor’s owned buildings, facilities, and vehicles. “Scope 2” is defined as indirect GHG emissions, from sources like purchased electricity, steam, heating and cooling for contractor’s use.
“Scope 3” is the most extensive GHG emissions inventory. Scope 3 includes all other indirect, downstream GHG emissions, which includes but is not limited to emissions from contractor’s leased assets, employee commuting, business travel, waste generated in operation, capital goods, purchased goods and services, investment, use of sold products, and end-of-life treatment of sold products. Scope 3 poses the biggest reporting challenge and burden for federal contractors.
Under FAR Case 2021-015, Significant contractors would only be required to report Scope 1 and 2 inventories. Major contractors would be required to report their Scope 1, 2, and 3 inventories. In an effort to reduce carbon emissions, Major contractors will also be required to develop and commit to science-based reduction targets, or certified plans to reduce the company’s carbon footprint requirements. To incentivize accurate and reliable science-based reduction targets, if the proposed rule is passed, the federal government agencies would give bid preference to those contractors whose GHG emissions are lower.[iv]
Implications of FAR Case 2021-015
If passed, initial compliance under FAR Case 2021-015 will be extremely challenging for most Significant and Major contractors. The overwhelming majority of contractors in the industry do not currently report their GHG emissions.[v] Even fewer contractors report to the extent that FAR Case 2021-015 would require. Most federal contractors would be starting from square one.
The proposed rule offers some grace by permitting federal contractors to “calculate emissions using the calculation tool of their choice[.]”[vi] The FAR council suggests using the Environmental Protection Agency’s “simplified” GHG emissions calculator.[vii] However, this simplified calculator requires a laundry list of accurate data to be collected over the course of a year. This data includes but is not limited to: employee commuter and fleet vehicles types, gallons of fuel used, miles driven, square footage of owed facilities, the natural gas purchased to heat said facilities, square footage of facilities, electricity purchased, and so on.[viii] For contractors that have never reported GHG emissions before, collecting and accurately reporting a years’ worth of this data will be burdensome.
Reporting under proposed FAR Case 2021-015 is even more burdensome for Major contracts required to report Scope 3 inventory. Among other requirements, Scope 3 would require contractors to obtain and report each and every supplier’s GHG emissions data. Many Major contractors have various cross-country and international suppliers making this Scope 3 reporting category extremely burdensome. Major contractors should consider contractually requiring suppliers to provide certified GHG disclosures, assuming suppliers would be willing and could afford to comply. The contract management and compliance monitoring of suppliers GHG emissions alone will be costly for Major contractors.
In addition to the burdensome requirements under the proposed rule, federal contractors should also be aware of the consequences for failure to comply. Contractors that fail to report would risk incurring fines, contract cancellation, termination, suspension or debarment. In the most serious cases, where a contractor knowingly submits false records, the contractor would be liable under the False Claims Act. A False Claims violation exposes the contractor to three times the government’s actual damages plus a penalty that is linked to inflation.
Conclusion
While FAR Case 2021-015 has not yet been implemented, some federal government requests for proposals already require similar GHG reporting criteria. Regardless of prior disclosures, federal contractors would have one year after the final rule has been published before effected contractors would be obligated to report their GHG emissions under FAR Case 2021-015. In any event, federal contractors should begin familiarizing themselves with the nuanced requirements under FAR Case 2021-015 and consider preparing for compliance with the proposed rule. For most federal contractors, who are new to GHG emissions reporting, compliance with the proposed rule will require significant preparation and investment.
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[i] Disclosure of Greenhouse Gas Emissions and Climate-Related Financial Risk, Proposed Rule FAR Case 2021-015 (Nov. 11, 2021) (to be codified at 48 C.F.R. 1, 4, 9, 23, and 52).
[ii] Id.
[iii] How Federal Contractors Can Meet Proposed GHG Reporting Rules, FORVIS (published on Oct. 17, 2023), https://www.forvis.com/forsights/2023/10/how-federal-contractors-can-meet-proposed-ghg-reporting-rules#:~:text=By%20taking%20the%20necessary%20steps,related%20financial%20risks%2C%20and%20prepare.
[iv] Exec. Order No. 14,030 (2021).
[v] Disclosure of Greenhouse Gas Emissions and Climate-Related Financial Risk, Proposed Rule FAR Case 2021-015 (Nov. 11, 2021) (to be codified at 48 C.F.R. 1, 4, 9, 23, and 52).
[vi] Id.
[vii] Simplified GHG Emissions Calculator, United States Environmental Protection Agency (last updated June 6, 2023), https://www.epa.gov/climateleadership/simplified-ghg-emissions-calculator.
[viii] Id.