These requirements are not only financially burdensome but have been challenged on legal and Constitutional grounds. In January, the California Chamber of Commerce sued the California Air and Resource Board (CARB), seeking an injunction against the implementation of SB 253 and SB 261. In their complaint, they argued that California violated principles of federalism by requiring companies to disclose emissions data both in and out of the state and therefore burdening out-of-state emissions and commerce. The Eighth Circuit Court of Appeals, meanwhile, has just received its last briefs for National Center for Public Policy Research v. SEC, in which petitioners are challenging the SEC’s statutory authority under the Securities Exchange Act of 1934 and the Administrative Procedure Act of 1946 to issue such extensive disclosure requirements.
Many argue that the California and SEC proposals infringe upon free speech rights under the First Amendment. In West Virginia v. Barnette, the Supreme Court held that public schools could not force students to salute the flag and recite the pledge of allegiance. Justice Jackson, writing for the Court, famously argued that “if there is any fixed star in our constitutional constellation, it is that no official…can prescribe what shall be orthodox in politics…or force citizens to confess by word or faith therein.” That, however, is precisely what SB 253 and SB 261 sought to do: as one legislative report explained, “the knowledge that companies’ compelled statements will be publicly available might encourage them to take meaningful steps to reduce emissions.”
Because these proposals neither further a compelling government interest, nor are narrowly tailored towards achieving that goal, the courts should look seriously at invalidating these laws.
The California laws make no exception for businesses who are low-level emitters, and thus unduly burden the speech of those who shouldn’t be targeted by the law. The SEC requirements are similarly burdensome in that they require tedious line-by-line accounting which is not only expensive, but according to investors, “far too granular to inform investment decisions,” and might instead overload them with “inconsequential information that would complicate their analysis.”
The government’s “compelling” interest in assuring transparency is similarly misguided: not only do companies already disclose significant amounts of climate-related information to investors, but there is no evidence that climate-related disclosures achieve that goal.
A leading expert in corporate disclosure found that “investors do not update their beliefs about value (upward or downward) in light of [greenhouse-gas] emissions data.” Furthermore, because transparency is not “sufficiently measurable to permit judicial review,” the government can cite “transparency” until eternity, safe in the knowledge that there will be no way of determining when transparency has been sufficiently achieved.
As PRI senior fellow Wayne Winegarden has explained, legislation like SB 253 and SB 261 will “worsen the state’s business climate” and stifle the innovation required to develop emission-reducing technologies by instead diverting financial resources towards costly carbon accounting reports.
His concerns were shared by Governor Newsom himself, who in his signing statement of SB 253, acknowledged the “overall financial impact of this bill” and the infeasibility of the implementation deadlines.
The SEC’s requirements suffer from the same problems: for very little gain, they would require companies to spend $100 million a year on Scopes-1-and-2 emission disclosures. The SEC itself estimates incremental direct costs of up to $6.37 billion in total, a figure which stands at 165% of the current cost, but still may understate the true cost. Worse still, the SEC’s requirements would likely come into conflict with SB 253 and SB 261, creating uncertainty for those domestic companies and foreign private issuers which are SEC registrants and also subject to California’s requirements by virtue of doing business here.
Economic liberty, as conceived by John Locke and the Founders, rests on the idea that individuals have a right to the fruits of their labor, and may choose to alienate it as they see fit. In the context of our dynamic and complex 21st century economy, liberty allows businesses and consumers to freely transact, guided by the invisible hand of the free market. Disclosure requirements passed either by state legislatures or federal regulatory agencies, which browbeat companies into pouring financial resources towards burdensome line-by-line accounting and complex climate impact modeling distort free-market principles in the name of the ‘greater good,’ and are antithetical to liberty our founding fathers fought to preserve.
Nikhil Agarwal is a research associate at the Pacific Research Institute.
