Climate change disclosure laws miss the point



Climate disclosure laws are spreading across the country, from federal agencies to state governments. Although these laws aim for transparency, mandatory climate change disclosure increases costs for businesses and consumers, impedes environmental progress, and provides little return for investors. Lawmakers should refrain from following California’s lead and instead introduce policies that reduce the cost of doing business.

Last October, California made history by passing the nation’s first climate disclosure law. The law would require public and private companies with annual revenues of more than $1 billion to disclose greenhouse gas emissions from their direct and indirect activities. The impact of this law in the world’s fifth-largest economy and the largest economy in the United States will be felt in other parts of the country.

California’s disclosure law, modeled after European Union law, has naturally drawn criticism and lawsuits from industry, farmers and businesses.

The cost of complying with climate change disclosure laws is significant and effectively amounts to a tax on companies that is passed on to consumers in the form of higher prices. Quarterly reporting under the EU’s disclosure laws has cost companies across the region an average of more than $150,000 in consulting fees and 150 staff days. Compliance would be even more costly in the United States, with the SEC estimating that reporting under the proposed disclosure rules would cost companies more than $10 billion annually.

However, a recent investigation found that the SEC underestimated these fees, with a more accurate estimate being about $25 billion annually.

Unjustified costs expected to exceed $960 million through climate change disclosures and other new regulations come at a time when consumers are finally starting to feel safe after years of record inflation It is misguided and evil to add this to companies, and by extension, consumers.

And while California’s law only applies to companies with annual revenues of more than $1 billion, it’s not just large companies that will be adversely affected. Under the regulation, Nebraska farmers who sell cattle to California processors would be required to report their operational emissions to regulators in Sacramento. Regulations that are costly for farmers, as seen in Germany and the Netherlands, are unpopular, counterproductive, and harmful to rural communities.

Beyond financial costs, these rules have political costs for companies of all sizes. Unfortunately, a growing number of states are beginning to introduce legislation that explores the potential challenges and benefits of disclosure requirements. How can we prevent other states from responding to these regulations by imposing fees and restrictions on companies that decide to comply with California’s laws?Current partisanship and federalism make companies into unnecessary political battles and potential litigation, potentially causing further harm to both consumers and investors.

Importantly, such climate disclosure laws are not beneficial to investors. “Reporting fatigue” is worsening in the EU, while companies say the rules are unclear and “of little use to investors.” Disclosures based on educated guesses can be misleading and ultimately have a worse impact on investment decisions than reporting nothing at all. Lawmakers supporting these bills believe they are environmentally beneficial, but at the expense of increasing capital formation costs and diverting resources away from innovation to compliance.

U.S. companies already issue reports on their environmental impact in response to requests from asset managers and investors. If consumers and investors want more disclosure and sustainability, the market will provide it. Importantly, there are laws on the books to prevent greenwashing and misleading shareholders. It is in the best interest of companies and investors to understand risks, including climate-related risks, but they are best assessed through market mechanisms rather than government mandates. For example, the private insurance market is an effective tool for investors and businesses to assess risk.

To make lasting progress on the environment, as advocates of open access laws hope, policy leaders need to make it easier for companies to grow and invest in cleaner technologies and practices. Empirical evidence shows that there is a strong correlation between ease of doing business and environmental progress. Business freedom allows companies to invest in next-generation technology and innovative breakthroughs rather than allocating valuable resources to completing tedious paperwork. Efficient regulation and open trade allow companies and countries to specialize and develop more environmentally friendly products.

Uniform climate disclosure is costly and ignores the complexity of America’s diverse economy. Lawmakers should work to reduce harmful barriers to capital formation, innovation, and economic growth, rather than placing undue burdens on businesses and consumers that provide little benefit to investors.

Jeff Luse is a policy analyst at C3 Solutions.

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