ESG Weekly #8 - EPA v W Virginia, Premature Payloads, and Protests
Back to the grind. As I alluded to last week, I’m pivoting back to a weekly roundup format and then filling in other content as I see fit. I’ll aim to do one topic from each ESG component (Environment, Society, Governance) and summarize other exciting happenings in the space.
ENVIRONMENT - EPA v West Virginia: Bye-bye administrative state?
Climate activists and pundits on the internet are in disarray following the Recent Supreme Court ruling on West Virginia v EPA, which stripped most of the EPA’s ability to directly regulate GHG emissions under the Clean Air Act. Personally, I think the ruling is simultaneously (1) Really Bad, (2) A Little Overblown and (3)Has a Silver Lining.
Sign up, I’m begging ya!
As someone who spent years doing almost nothing but Clean Air Act compliance and permitting, I have lots of thoughts. First, let’s go through some history. The Clean Air Act Amendments of 1977 really added some much needed muscle to the regulation. The so-called PSD regulations in particular, added special emphasis on “Major Sources” of air pollution.
Major sources of pollution are facilities that contribute large quantities of pollutants to the atmosphere. Determining if a facility is a Major Source relies on thresholds of 100 or 250 tons per year (depending on facility type) of “criteria pollutants” to the atmosphere. These include Lead, Carbon Monoxide, Particulates (dust), Oxides of Nitrogen (NOx), Volatile Organic Carbons (VOC), and Oxides of Sulfur (SOx). These emissions are ubiquitous and contribute to regional air pollution and have aggregate negative health outcomes and/or create smog.
In addition to the “Criteria” pollutants, facilities who emit 10 tons per year of any one so-called “Hazardous Air Pollutants” (HAP) are also “Major Sources.” HAPs are particularly toxic chemicals (think Benzene, Formaldeyhde, Methanol) that cause serious health impacts at much lower concentrations. The “Criteria” pollutants are fixed but the List of HAPs can be updated by EPA based on scientific data.
Enter the “Administrative State.” The regulations that dictate HAPs were smartly set up so that when a new chemical is determined to be dangerous, the EPA can act without an act of congress to modify the Clean Air Act. This makes sense. We learn about all sorts of new biochemical and epidemiological dangers all the time. Industry invents new chemicals and starts using chemicals in different ways from time to time as well.
As climate change became a hotter and hotter topic with each passing year and US Greenhouse Gas emissions continued to rise, it became clear that the US needed to get a handle on our contribution to the global problem. One sliggggght hiccup is that there was absolutely no way Congress was going to actually implement anything.
So in 2010 EPA issued a rule to regulate GHG emissions. There was one little problem: while 100 tons of Carbon Monoxide or NOxis what one can expect from a 250 Megawatt power plant, a small 50 Kilowatt diesel generator will emit well over 100 tons of CO2. Using the existing 100/250 ton threshold for CO2 was non-tenable, as nearly every single facility in the country that combusted anything, no matter how small, would become a major source. Adding hundreds of thousands of facilities to the Clean Air Act PSD program was never gonna fly.
EPA’s solution was to slap three more zeros onto the threshold making the limits 100,000 and 250,000 tons per year of GHG emissions. This would ensure that all the ethanol plants, refineries and steel mills were “Major” for GHG without sucking every single industry.
The Supreme Court in 2014 struck down a portion of this rule in Utility Air Regulatory Group v. EPA. The Court reaffirmed that GHG was a pollutant but said that EPA couldn’t apply this rule to facilities that were major for only GHG. In short, facilities like small ethanol plants (who have lots of CO2 but not a ton of the “normal” pollutants) got out of the rule, but major sources like refineries and smelters were still subject to the GHG restrictions.
CO2 and Greenhouse Gas emissions are indeed dangerous to human health. But this harm is a second-order effect. Elevated levels of atmospheric CO2 don’t create cancer clusters or increase asthma incidence. GHGs don’t contribute to regional smog. They don’t act like any other pollutant in the Clean Air Act. CO2 contributes to global warming, and as such, the negative effects will be drought, famine and habitat loss. But the effect is delayed, and regional climate impacts are uncorrelated to regional emissions.
The Clean Air Act simply wasn’t designed to regulate CO2.
A few years ago I performed a study for a private client. Without revealing anything I cannot, a random sample I pulled of 25 GHG Permitted facilitiesin the US showed that 24 had CO2/GHG emission limits that were impossible to exceed based on NOx/CO limits. Simply put, most of the GHG permits EPA and states have issued since 2014 to sources were… kinda pointless. As long as the facilities complied with the (still valid) CAA requirements for combustion emissions (NOx/CO), a mass balance showed that the CO2 permits under this law did absolutely nothing to reign in GHG emissions; you’d exceed NOx limits well before approaching CO2 limits.
The fact of the matter is that EPA’s rule that they forced in using weird mental gymnastics didn't, like, accomplish anything tangible.
Likewise, West Virginia v EPA involves the never-enacted Clean Power Plan. This rule allowed the agency to force system-wide caps on utilities that required them to offset, curtail and shift CO2 emissions. It was almost a convoluted Cap-and-Trade program with extra steps. The rule relied on, once again, cobbled together legal justifications. The Landmark 2006 Massachusetts v EPA case affirmed that CO2 must be regulated by the EPA.
As a result of Massachusetts vs EPA, the agency developed the 2010 PSD Rule; it was promptly neutered by courts. Then the Clean Power Plan came along, which had a much better methodology by forcing shifts in system-wide aggregate emissions in the power grid. The court killed this one last month. And the reasoning is, uh, not great.
The Court, in essence, argues that the EPA (under the Clean Air Act) can institute point source control requirements and that’s it. For example, EPA can require a refinery process to have emission limits (in ppm and lb/mmbtu). EPA can also tell sources exactly what kind of control equipment to use. They can tell refineries they can ONLY use one type of flare and can prohibit other types of control devices. But the court now prohibits any other alternative to reduce aggregate emissions.
The court is admitting EPA’s mandate (since it’s explicitly broad under the Clean Air Act). But they’re then sticking their nose in and shooting down the only realistic way to actually reduce emissions. Ironically, the Clean Power Plan was a free market Neoliberal solution in that it allowed companies flexibility to shift production based on national totals and their own economic judgment.
The court has explicitly stripped long-established independence from an agency to develop rules according to their subject expertise. And they appear to have done so for political purposes.
I promised a silver lining and here it is: if nothing else, this ruling has tied the hands of EPA. They spent far too much time and effort trying to regulate GHG under a rule that was always inadequate for this purpose. This (might) force Congress to actually develop a national policy to address GHG. Even if it’s 20 years too late. They don’t have an excuse now and can’t pass the buck to EPA.
SOCIETY - How do companies navigate this Supreme Court?
I don’t have a ton to say on the topic, but the recent overturn of Roe v Wade has companies with lots of employees in red states like Texas scrambling.
“It’s a shitshow,” one Texas Based HR director told me. He described how difficult it’s been to discuss continuation of benefits to employees who are concerned that Texas has decided upsetting the entire societal status quo was a good thing to take on. Republicans always presented themselves as the “business friendly” party, but this seems to be anything but that.
The reason I’m posting this is for some leads: If you have any HR or corp gossip leads about how the GOP’s ongoing culture war is shaking up your workplace, shoot me an email. I’d love to get a few more data points.
GOVERNANCE- Astra is a Rocket to Nowhere
A few months back, I covered Astra, the failing Rocket company that
Can’t stop destroying customer payloads; and
Has a few quarters of cash and no way to raise more
They also have a sketchy CEO. Astra lost another NASA payload last month, noting:
"We had a nominal first stage flight; however, the upper-stage engine did shut down early and we did not deliver our payloads to orbit," Astra's Amanda Durk Frye, senior manager for first stage and engine production, said during live launch commentary.
Seems to me like “Nominal first stage; however…” is just “Other than that, how was the Play, Mrs. Lincoln?” for 21st century tech entrepreneurs.
In February, I noted:
No spectacular crash in a public company’s shares is complete without the looming threat of shareholder lawsuits. These don’t always have merit, of course, but if you browse the various ambulance chaser press releases, you’ll note a few themes. They all cite Atra’s CEO, Chris Kemp, and his wild claim that by 2025 they intend to reach a launch cadence of 300 per year.
Chris Kemp, the Dollar Store Brand Elon Musk, still refuses to acknowledge the elephant in the room (in particular: they are bad at building rockets). Check out this amazing clip from Bloomberg:
At sub 50% reliability, I think launch cadence is the least of your worries, Chris!
The real issue is that the company is swirling the drain and management refuses to acknowledge it. Again, as I wrote in February:
In the first 9 months of 2021 Astra racked up $206 million in losses while burning $120 million in cash. This burn accelerated as the year proceeded with operating expenses in Q3 equaling combined expenses in Q1 and Q2.
At a run rate of 45-50 million per quarter, and $378 million in cash, Astra’s got a few more quarters before they’re not going to be able to keep the lights on.
Astra has noted to investors that they intend to increase R&D and capital expenditures, and in fact, they need to do so if they want to succeed with their high volume aspirations. Burning $300+ million per year is hardly an unusual level of spend in hyped tech companies. The problem here is that at an $850 million market capitalization, shareholders will have to be diluted by 35% just to keep spending at par for a single year.
The company’s market cap is down a further 60% from that time. This is a dead company walking, and the CEO still acts like things are going swimmingly. While they aren’t loaded with debt, this stock is a Donut. I’ve noticed that retail shareholders on the internet don’t seem to understand that they aren’t buying the dip. They’re being bamboozled.
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