The Biden Administration unveiled details regarding a forthcoming proposed Federal Acquisition Regulation (FAR) rule on Greenhouse Gas (GHG) emission disclosures for major federal suppliers on November 10, 2022. Titled the “Federal Supplier Climate Risks and Resilience Rule,” the proposed FAR rule would impose emission disclosure requirements on contractors that received $7.5 million or more in federal contract obligations[1] in the prior fiscal year as a mandatory element of a FAR Part 9 responsibility determination. The proposed FAR rule is expected to be published in the Federal Register for comments on November 14, 2022, and marks the next step in the administration’s steady drive toward net-zero procurement. Previously, we commented on related regulatory efforts, including the underlying FAR Case 2021-015 and two other open FAR cases. While the following discussion sheds light on the proposed rule, contractors should keep in mind that the rule’s mechanics will likely change somewhat in response to the ongoing notice and comment process.
Background
The current administration has made combating climate change a mainstay of its agenda, issuing a steady drumbeat of climate-related executive orders culminating in President Biden’s Executive Order 14057. In Executive Order 14057, the President articulated a vision of a carbon‑neutral economy by laying out a series of ambitious goals for achieving carbon neutrality by 2050. Those goals, as clarified by the Council on Environmental Quality’s Implementing Instructions issued in late August, include federal agencies reducing their own GHG emissions by 2030, with progress noted on Office of Management and Budget (OMB) scorecards. GHG emissions are defined to include carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, nitrogen trifluoride, and sulfur hexafluoride. The implemented framework categorizes emissions into three “scopes”:
The Implementing Instructions recognize the federal government’s supply chain as a “major source of GHG emissions,” with federal contractors and subcontractors emitting double the government’s own Scope 1 and 2 emissions. The Instructions urged agencies to begin exploring vehicles to reduce contractor emissions in preparation for anticipated changes to the FAR. In particular, the Instructions exhorted agencies to develop pilot projects targeting areas of “significant agency spending” or “greatest potential . . . impact,” and to seek supplier information on “life-cycle carbon emissions and related economic costs, including the social cost of greenhouse gases (SC-GHG), of procured products and services.”
Now, in what the White House hails as “historic action to address greenhouse gas emissions and protect the Federal Government’s supply chains from climate-related financial risks,” the administration has announced the highly anticipated proposed rule. As is discussed in greater detail below, the proposed rule requires “major contractors” to annually disclose Scope 1, 2, and 3 emissions and to set science-based target requirements, while requiring “significant contractors” to annually disclose Scope 1 and Scope 2 emissions. Major contractors are defined as receiving at least $50 million in Federal contract obligations in the prior fiscal year, while significant contractors are defined as those receiving at least $7.5 million, but less than $50 million. The proposed rule, if made final, will effect suppliers of both commercial and non-commercial goods and services.
President Biden highlighted the proposed rule at this year’s U.N. Framework Convention on Climate Change (COP27). The announced proposed FAR rule, which arises out of the earlier Executive Order 14030, is the first of three related Net-Zero Procurement FAR cases to be issued as a proposed rule. The announcement signals the administration’s continued commitment to use the federal government’s procurement power to pursue climate change-related action via sustainable procurement. Embodying the mantra “what gets measured gets managed,” the proposed rule suggests it is but the first step in managing contractor emissions. To reduce agencies’ Scope 3 emissions, the federal government first needs insight into contractor emissions. Thus, by requiring major federal suppliers to disclose their annual greenhouse gas emissions, the administration lays the groundwork for further measures, which may culminate in evaluating emissions during source selection decisions.
The Proposed Rule
The proposed FAR rule would create a new FAR subpart at 23.XX, entitled “Public Disclosure of Climate Information.” The proposed FAR rule leverages the same GHG Protocol Corporate Accounting and Reporting Standards as the SEC proposed rule published in April, 2022. However, the proposed FAR rule goes further, requiring that major contractors also use the CDP Climate Change Questionnaire to assess their climate-related financial risks and set science-based targets to reduce their GHG emissions. The proposed rule would also expand the solicitation provisions at FAR 52.223-22 (Public Disclosure of Climate Information – Representation), and 52.212-3 (Offeror Representations and Certifications – Commercial Products and Commercial Services) and establish a new standard of responsibility for certain contractors in FAR part 9. Currently, GHG disclosures are voluntary.
Impact on Federal Suppliers
Regarding potential climate impact, the government notes that major contractors alone account for approximately 69 percent of federal supply chain emissions. In an effort to address this, based on the government’s calculations using Federal Procurement Data System (FPDS) award data, the rule would regulate 86 percent of annual federal spend and about 86 percent of supply chain GHG impacts. According to the government’s analysis, 4,413 entities would qualify as significant contractors, of which 2,835 (or 64 percent) are small businesses, and another 1,353 entities would qualify as major contractors, of which 389 (or 29 percent) are small businesses. While some federal contractors already voluntarily disclose their emissions, the proposed rule would require many more to do so. Currently only 10 percent of contractors qualifying as significant, and 31 percent of major contractors disclose their GHG emissions in SAM, though these disclosures are not standardized in terms of scopes of reporting.
The proposed rule’s reporting requirements are no small imposition on contractors who, particularly if they do not already collect emissions data, will need to invest significant time and money in developing emissions accounting regimes. This burden is lessened only slightly by the one-year period that the proposed rule sets to allow contractors to develop their accounting methods before they’re required to make official disclosures.
A Presumption of Nonresponsibility
Under the second prong of the proposed rule, contractors would be presumed nonresponsible until the Contracting Officer makes a positive determination of compliance with the GHG tracking and disclosure rule. Both major and significant contractors would be deemed nonresponsible (and thus ineligible for contract award) if they fail to inventory and disclose annual GHG emissions within one year of the proposed rule taking effect. Moreover, major contractors are deemed nonresponsible if they fail to complete the CDP Climate Change Questionnaire and set science‑based targets to reduce their own emissions within two years of the rule’s effective date.
Exceptions, Exemptions, and Waivers
The proposed rule contains several measures to tailor compliance. First, exceptions will be proposed for Alaska Native Corporations, higher education institutions, nonprofit research entities, state or local governments, and federal management and operating (M&O) contractors, which need not comply with the proposed requirements. Additionally, major contractors that qualify as small businesses may report under the standards for significant contractors (disclosing Scope 1 and 2 emissions only, with no targets required). The Senior Procurement Executive of an agency may also exempt certain procurements from the proposed rule’s ambit, by waiving the requirements for emergencies, national security, or other mission essential purposes. Finally, the Senior Procurement Executive may waive the requirements for an additional period not to exceed one year to permit an entity to come into compliance.
Takeaways for Government Contractors
For contractors who have not yet given serious thought to greenhouse gas accounting, or how they would disclose emission data to the government if it became a requirement, now is the time to get smart. This article links to several key tools that contractors can familiarize themselves with now to prepare for implementation. The more robust an organization’s emissions accounting methods become, the less risk the organization will face downstream when the government ultimately requires greenhouse gas disclosures. Pursuing emission reduction strategies can also prove to be good for business, leading to cost-savings, brand enhancement, and increased innovation. As part of the puzzle, contractors should consider their own supply chains and plan to flow down requirements. Interested contractors should further consider submitting comments by January 13, 2023, on the Federal eRulemaking portal. Morrison Foerster will continue to monitor developments related to Net-Zero Procurement.
[1] This number should be calculated in accordance with OMB Circular A-11.
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