Environmental due diligence inquiries come in various types and costs. How much and what kind of environmental data is necessary to make an informed decision for a particular transaction depends on (1) who the user is, and (2) the user's objectives. Historically, liability concerns prompted environmental due diligence inquiries. However, as the Obama administration pushes to usher in a new era of environmental regulation, opportunities and challenges posed by climate change and energy efficiency demand new approaches for due diligence inquiries beyond establishing a potential defense to CERCLA liability.
Under CERCLA, an entity that owns property from which there is a release of hazardous substances can be held liable for the clean-up costs just by virtue of ownership. CERCLA does, however, provide certain parties with liability protection. In order to be classified as a nonliable party (i.e., bona fide prospective purchaser, contiguous property owner, or innocent landowner), the user must have undertaken "all appropriate inquiry into the previous ownership and uses of the property consistent with good commercial or customary practice in an effort to minimize liability" - within one year prior to acquiring ownership of the property. 42 USC 9601(35)(B). Stated differently, the user must conduct a Phase I site assessment in order to possibly qualify as a nonliable party under CERCLA.
The purpose of a Phase I site assessment is to identify potential or existing environmental contamination liabilities associated with the real estate. The techniques applied in a Phase I have been promulgated by the Environmental Protection Agency and based in part on ASTM in Standard E1527-05. The investigation must consist of a review of public and private records about the site (and adjacent sites), interviews with persons knowledgeable about the site's current and past operations, and a visual inspection of the property for any signs of contamination. Did local department of health and sanitation records reveal any contamination of water wells within one mile of the site? Were underground storage tanks removed from the site, and if so, was the contractor responsible for the removal interviewed? Did the site inspector report any stained floors or areas with a foul smell within the building? Business decisions to buy, sell, or invest in property can depend on this data alone.
However, in a world focused on climate change, due diligence inquiries likely will need to become broader in scope. Green building initiatives, rapidly escalating energy costs, and the Obama administration's focus on reducing carbon dioxide and other greenhouse gas (GHG) emissions are spurring the drafting, consideration, and passage of climate change regulations on both federal and state levels. Buildings, especially energy-intensive industrial operations, will become even greater targets of energy efficiency and regulatory efforts in years to come. Moreover, they will be enticed by economic incentives to incorporate green building practices. Environmental due diligence inquiries will have to evolve in such a way as to identify factors that may impact, directly or indirectly, energy consumption and pollution emissions associated with a real estate asset - which would in turn impact its value.
For example, knowledge of a building's carbon footprint would be important to buyers seeking the benefits of a green building. Certain industrial processes produce carbon emissions as a consequence of their operations. On June 26, 2009, the U.S. House of Representatives passed a major energy and climate change bill that could significantly change the way Americans use and produce energy, specifically carbon. Formerly known as the Waxman-Markey bill, the American Clean Energy and Security Act (ACESA) includes provisions for a cap-and-trade program for GHG emissions. Under cap-and-trade, the EPA would establish a nationwide cap on GHGs. Companies covered under the bill would need to have a permit - or "allowance" - for each ton of pollution they release into the atmosphere that exceeds the cap. (Cap and trade will not apply to entities that emit less than 25,000 tons of carbon dioxide per year). The EPA would initially allocate the allowances through a combination of sales to the highest bidder and free distribution. Once distributed, the recipients would be permitted to sell, trade with other companies, or otherwise use the allowances. By the terms of the bill, the government would reduce the number of available allowances issued each year to ensure aggregate GHG emissions reduction by 3% below 2005 levels in 2012, 17% below 2005 levels by 2020, and 83% below 2005 levels in 2050.
The cost of carbon impacts real estate value. Buildings that consume less carbon, and incorporate renewable energy as part of their daily consumption, could become more attractive to potential buyers. Buildings that depend heavily on carbon or are ill-equipped to utilize alternative energy resources may become less attractive and harder to sell. As per the proposed cap and trade program contained in the ACESA, those operations successful in cheaply reducing their carbon output could profit by selling their excess permits. Whether (and for how long) a less successful operation would need to purchase and use pollution permits in order to remain in compliance and stay in business is an environmental risk factor that deserves a high level of scrutiny.
The ACESA will also mandate the EPA to develop procedures for rating building energy efficiency, in addition to recommending efficiency standards for lighting and other appliances. The new bill will require electric utilities to meet 20% of their electricity demand through renewable energy sources and energy efficiency by 2020. Last summer, on the state level, Governor Ted Strickland signed Senate Bill 221 into law, establishing an alternative energy portfolio standard (AEPS) for Ohio. S.B. 221 mandates that by 2025, at least 25% of electricity sold in Ohio be generated from alternative energy resources. At least half of the 25% must come from renewable energy resources, such as wind, solar (which must account for at least 0.5% of electricity use by 2025), or geothermal power. Electric utilities and service companies in Ohio will be required to meet annual benchmarks, or incremental percentage requirements, in order to fulfill the renewable portion of the state's portfolio standard.
The passage of the ACESA in the U.S. House, combined with the adoption by Ohio (and 28 other states to date) of a renewable portfolio standard, creates an opportunity for the property owner to identify and ask questions of the third-party utility supplying its building with power. Does that utility rely on carbon? How does that utility's carbon use affect the carbon footprint of the building? How well is that utility equipped to utilize alternative energy resources? If that utility begins using alternative energy resources, how much will that increase the building's overall operational costs? Often such questions asked during an environmental due diligence inquiry could benefit both the property owner and utility.
In sum, federal and state carbon emissions restrictions and renewable energy standards for buildings and operations could soon become threshold review items in a standard environmental due diligence inquiry. The U.S. House of Representatives' approval of the ACESA clears the way for further debate in the U.S. Senate. Senate Majority Leader Harry Reid says he wants to take up the new legislation by this coming fall. The provisions in the ACESA and other similar legislation (both on federal and state levels) will not only challenge property owners to integrate energy efficient practices into their operations, but encourage potential buyers to consult with environmental professionals and expand the scope of due diligence inquiries. Simply put, environmental due diligence may soon be about more than just CERCLA.
Mr. Feichtner was assisted by Gabriel Davis (Harvard Law School, J.D. 2011), a summer associate this year at Dinsmore & Shohl LLP.