Climate change is the greatest threat to our economic well-being and the habitability of our planet. In January, the Biden administration will arrive in Washington with a clear mandate from the voters and a detailed $2 trillion plan for immediate and aggressive action to address it. At the very moment when a tidal wave of Covid infections and resulting business closures is creating an urgent need for economic rejuvenation, the plan wisely includes measures for creating 10 million clean energy jobs.
In the best-case scenario, the incoming administration’s climate program will give a needed shot in the arm to a Covid-ravaged economy, reduce partisan divisions, and remedy racial and economic injustices, all the while earning the U.S. – the largest historic emitter of greenhouse gases – a renewed leadership role among the community of nations working to preserve a habitable climate. But moving quickly to implement ambitious spending and regulatory measures poses enormous risks of waste, fraud and abuse. The incoming administration must therefore give priority to enlisting whistleblowers to help ensure that its climate program is implemented even-handedly and in accordance with the law.
Strengthening whistleblower laws for the benefit of the climate
For the past several decades, at no cost to the government, whistleblowers have been using the confidential reporting channels provided under laws such as the Dodd-Frank Act and False Claims Act to help regulators and prosecutors build enforcement actions, winning important precedents that have changed industry behavior and deterred crime and corruption. Millions in financial rewards have been paid to whistleblowers from the monetary sanctions they helped the government to recover, thus incentivizing further whistleblowing. For example, UBS executive Brad Birkenfeld helped expose billions of dollars illegally stashed in secret Swiss bank accounts and received a $104 million for his disclosures. Thanks to his work with the IRS, Swiss banks can no longer be used to evade U.S. taxes.
The whistleblower laws that make these law enforcement actions possible enjoy bipartisan support in Congress. The Biden administration must help push pending measures to strengthen them across the finish line when they are reintroduced in the 117th Congress.
Strengthening climate change whistleblowing through executive action
The most ambitious Biden proposals to protect the climate will require Congressional action, which is by no means certain given widely divergent views and aggressive industry lobbying. Regardless of how Congress proceeds, however, the Biden administration will integrate climate change action into the work of virtually every federal agency. Effective implementation, legal compliance and enforcement will be critical to success. This is where whistleblowers will prove their tremendous value.
I would like to highlight just a few areas where federal agency officials in the incoming administration can improve their prospects on climate change by ensuring a meaningful role for whistleblowers.
The Biden administration is expected to move quickly to address the risks that climate change poses to global financial stability. A few days after the November election, the Federal Reserve assessed climate change risks for the first time in its financial stability report and concluded that addressing such concerns “is vitally important.” A widely-praised September 2020 report commissioned by the Commodity Futures Trading Commission will likely guide the Biden team. One of the report’s key findings is that improved company disclosure of information on material, climate-related financial risks is an “essential building block” to any program addressing the threat to the financial system.
Unfortunately, many companies have failed to prepare for climate change and will be motivated to conceal their climate risks to avoid losing access to investment capital. This is particularly true in the fossil fuel sector, which includes many companies engaged in a multi-decade deception campaign to downplay the seriousness of climate change rather than prepare. As the National Whistleblower Center found in its July 2020 report “Exposing a Ticking Time Bomb,” because there is high risk of climate risk-related fraud in the fossil fuel industry, the only way to avoid global financial instability is to prioritize whistleblower-assisted enforcement of disclosure rules.
Another key focus of financial regulators in the new administration will be the activities of financial institutions, asset managers and insurers. Many of these entities provide large-scale financial support for fossil fuel development and other activities with high carbon emissions. Whistleblower-assisted enforcement of disclosure regulations will be essential to ensure that these financiers, virtually all of which profess to be working toward climate change solutions, are not engaging in fraudulent greenwashing and destabilizing the financial system with carbon-heavy investments.
Stronger rules will be needed to ensure that climate risk disclosures by all key market participants are robust and comparable. NWC is working closely with partners at Duke University in a project called the “Climate Risk Disclosure Lab” to facilitate the development of these rules and to ensure that they are harmonized with rules being developed by securities regulators outside the U.S.
Disclosure alone will not solve the climate crisis; new policies are needed to drive down carbon emissions. A price on carbon emissions, either through a carbon tax or a regulatory cap combined with a trading system, has long been favored by economists and other experts as the most efficient means of tackling climate change.
Although it is unclear whether Biden administration will find sufficient support in Congress for establishing a national carbon price, emissions trading systems are already accelerating around the world, including in California and the northeastern U.S. How to recognize emissions offsets traded in these programs in the UN Framework Convention on Climate Change will inevitably be a key topic in the COP26 negotiations in Glasgow in November 2021.
Will the Biden administration support UN recognition of emissions offset credits as part of Nationally Determined Contributions to greenhouse gas reductions? The political pressure to do so will be enormous. Emissions offset projects, such as those involving forest restoration and carbon capture and sequestration, are at the heart of many companies’ strategies to combat climate change. But given the great complexity and opacity of transnational carbon markets, the risk of fraud and money laundering in the trading of such offsets is significant.
This corruption, if allowed to proliferate, would seriously undercut progress toward the Paris Climate Agreement emissions reduction targets. Before embracing any international emissions trading regime, the Biden administration must insist upon an aggressive anti-corruption strategy using the tenets of the Dodd-Frank Act, with whistleblowers provided a central role along with regulators and prosecutors. It also will need to revisit recent rulemakings under Dodd-Frank, such as the CFTC’s July 2020 cross-border trading rule, which, as shown by the Institute for Agriculture and Trade Policy, allows the trading activities of foreign subsidiaries of U.S. banks to escape regulatory scrutiny. To avoid repeating the mistakes that led to the global financial crisis of 2008-09, which required $29 trillion in emergency loans from the Federal Reserve System to rescue the banking system, the CFTC and other financial regulators must look holistically at the web of U.S. and foreign financial institutions involved in emissions trading and ensure effective oversight and regulation.
Permitting and Leasing
The Biden-Harris team has stated its intention to put in place a wide array of environmental rules and to end leasing of fossil fuel exploration on public lands and waters as part of its plan to curb carbon emissions. Although it is difficult to forecast exactly how this pollution crackdown will fare in the face of political pushback and legal challenges, one can safely predict that federal permitting and leasing requirements will become more rigorous. Likewise, recent moves by the Trump Administration to accelerate oil drilling in the Gulf of Mexico and to open the Arctic National Wildlife Refuge for oil development will be heavily scrutinized for legal defects. Whistleblowers, especially those with access to information about deceptive applications that give rise to liability for “reverse false claims,” will be critical for ensuring compliance with permitting and leasing requirements.
In its climate plan, the Biden-Harris team pledged to expand federal procurement by $400 billion over its four-year term to make the U.S. the world’s leader on batteries, electric vehicles and other clean energy technologies. As in the case of any large-scale spending, whistleblowers will be essential to help guard against fraud and to ensure that the funding reaches its intended purposes. Since the False Claims Act was enacted in 1987, the government has recovered $438 billion from perpetrators of procurement fraud thanks to “qui tam” actions filed by whistleblowers. (“Qui tam” means filing a case on the government’s behalf.) Whistleblowers received a combined $6.4 billion from these sanctions as a reward for their efforts, thus creating a virtuous cycle of more whistleblowing and more successful anti-fraud actions. The Biden administration should embrace whistleblowers and the False Claims Act as a central part of its strategy for using federal procurement to help the climate.
Fossil Fuel Subsidies
Researchers at Oil Change International found in a 2017 study that the U.S. government subsidizes fossil fuel exploration and development with roughly $20.5 billion annually. More recently, researchers at Bailout Watch found the fossil fuel industry has availed itself of over $5 billion in federal loan guarantees just this year through Covid-19 economic relief programs. The rapid expansion of these subsidies and lack of transparency surrounding how they were obtained suggests a high likelihood of fraud and other corruption. The Biden administration can make early progress on reducing these counterproductive subsidies – progress that does not require action by Congress – by announcing that identifying such corruption is a priority and encouraging whistleblowers to step forward confidentially with evidence.