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Who’s Afraid of Federal Action on Climate Change?

11:02 AM PDT on April 7, 2010

In financial reports that publicly traded companies file to their
investors and the Securities and Exchange Commission (SEC), the words
"material adverse effect" are often found.

US_regulate_national_auto_emissions.jpgAutomakers are bracing for new fuel-efficiency standards more than any coming climate bill. (Photo: TreeHugger)

Put simply, the phrase is a red flag
for any factor that could significantly hurt a firm's profits or
condition. But "material adverse change" clauses can also be written
into deals to give businesses an escape hatch if disaster strikes, as the public learned during the congressional probe of the Bank of America-Merrill Lynch merger.

So with Congress weighing national emissions limits -- and potential fuel taxes
-- as part of a climate change bill, and the Obama administration
vowing to step in via new regulations if lawmakers do not act, it's
worth asking which of the country's top carbon-generating companies are
truly concerned that pollution caps would hurt their business.

Automakers, for the most part, foresee problems if the administration's recent move
to raise U.S. fuel-efficiency standards is not extended beyond its
current 2016 expiration date. Ford's year-end financial report openly
fretted about the consequences of individual states, such as California, acting on their own to hike fuel standards in 2017 in the absence of another national agreement:

Compliance with [multiple fuel-efficiency] regimes would at best add enormous complexity to our planning processes, and at worst be virtually impossible.  If any of one these regulatory regimes, or a combination of them, impose and enforce extreme fuel economy or GHG standards, we likely would be forced to take various actions that could have substantial adverse effects on our sales volume and profits.

General Motors released its financial report today, declaring itself
"committed to meeting or exceeding" the new fuel-efficiency minimums
but warning that adverse consequences could result if consumers fail to
embrace electric cars:

We expect thatto comply with these standards we will be required to sell asignificant volume of hybrid or electrically powered vehiclesthroughout the U.S., as well as implement newtechnologies for conventional internal combustion engines, all atincreased cost levels. There is no assurance that we will be able toproduce and sell vehicles that use such technologies at a competitiveprice, or that our customers will purchasesuch vehicles in the quantities necessary for us to comply with theseregulatory programs.

The auto industry, however, expressed far less concern about the
prospects of a congressional climate bill or federal emissions
regulations, which are expected to focus largely on stationary sources
such as power plants. When carmakers reference climate change in their
communiques to investors, it is often to provide context for the
growing interest in governmental limits on pollution.

Coal
companies, by contrast -- generators of nearly half of the nation's
electricity -- are warily watching on the "material adverse"
consequences of climate action. Peabody, ranked No. 1 among U.S. coal producers, wrote in its 2009 annual report that:

The potential financial impact on us of future [emissions] laws or regulations will depend upon the degree to which any such laws or regulations forces electricity generators to diminish their reliance on coal as a fuel source.

More openly apprehensive of climate legislation was Massey, the coal company now facing blowback even on Wall Street after a fatal explosion Monday at one of its West Virginia mines. From Massey's annual report:

Furtherdevelopments in connection with legislation, regulations or other limits ongreenhouse gas emissions and other environmental impacts from coal combustion,both in the United States and in other countries where we sell coal, could havea material adverse effect on our cash flows, results of operations or financialcondition.

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