When a business faces new regulations, is shareholder capital best spent on complying with the rules, or on lobbying to overturn them? How companies answer this question will be of growing concern for investors in coming years.

On Wednesday, the Los Angeles Times reported on a shareholder campaign targeting three large oil and gas companies for their spending on an effort to overturn California’s greenhouse gas (GHG) regulations. The ballot initiative, called “Proposition 23,” would delay or prevent implementation of the 2006 Global Warming Solutions Act, known as “AB32.”

The fight over Prop 23 highlights two related issues. First, corporations’ political spending – now explicitly protected speech after the Supreme Court's 2010 Citizens United ruling – could give them more influence over laws and regulations that involve their businesses. And second, the oil and gas sector is only the first whose competitive landscape could be redrawn by GHG restrictions, such as the low-carbon fuel standards of AB32. 

Forty-eight years ago this week, President Kennedy summoned Americans to put a man on the moon. Today we need a new Apollo project to re-launch our economy and protect our planet.

This 21st century race features the United States against a new rival, China, which recently surpassed Japan as the world’s second-largest economy and the U.S. as the world’s largest carbon emitter. Both countries face a common adversary in global warming, which shows no respect for politics or international borders.

As BP gets closer, hopefully, to permanently containing the spill at the Macondo well in the Gulf of Mexico, the disaster has raised questions about BP’s future, that of its sector peers, and the prospects for further unconventional oil and gas production.

The Integrated Oil & Gas team of RiskMetrics ESG Analytics, part of MSCI, has considered these issues as part of our recently published annual company and industry reports. (We will present this research in a webcast on September 15th- click here in September to register). This article sums up our perspective on four key questions:

As carbon-curbing “cap and trade” legislation works its way through Congress, investors are asking how fossil fuel firms will cope with a shifting energy landscape. In April 2010, F. Emil Jacobs, ExxonMobil (XOM) Vice President of Research and Development, told a Sustainable Investment Research Analyst Network (SIRAN) analyst call about his firm’s research into alternative energy sources.

One big initiative is the production of fuel from algae. In 2009, ExxonMobil announced its partnership with Synthetic Genomics Inc (SGI), one of the world’s leading researchers and developers of algae biofuel. This is promising, but in the context of XOM’s other post-petroleum projects, there is reason to doubt that the biggest of Big Oil has truly embraced a new, sustainable ethos.

Responsible Investor’s Hugh Wheelan has written a comprehensive survey of “the explosive talking point of this year’s corporate proxy season”: a shareholder resolution calling for BP to disclose the assumption behind its proposed $2.8 billion Sunrise development of Canadian oil sands. While 150 investors support the resolution, many big shareholders plan to vote against it at BP’s April 15 annual meeting.

Mr. Wheelan describes this fight as one that pits “environmental risks” against “potential company profit.” This is certainly true, but there is also evidence that BP’s expected profits are based on overly optimistic projections. By demanding more disclosure from BP and its Canadian partner, Husky Energy, shareholders are seeking to protect their investments, as well as the environment.

Most discussion of the impact of proposed clean energy legislation has focused on consumer-facing energy firms, such as major oil companies and electric utilities. The American Clean Energy and Security Act, which has already passed the House, will affect wholesale energy companies, as well. As oil and gas remain integral to the US economy, how this sector’s firms respond to these provisions will have broad implications for consumers and investors.

On January 14, investors responsible for $13 trillion in assets jointly called for a strong policy response to global climate change. Coming on the heels of the UN Framework Convention on Climate Change (UNFCC) summit in Copenhagen, the Investors' Summit on Climate Risk showed broad private-sector support for public policy initiatives to combat climate change.

What will be the practical impact of carbon pricing for investors? A survey of RiskMetrics research shows that gaps in the existing regulatory patchwork could create perverse advantages for companies, investors and governments who avoid strong carbon regulations.

An interesting coalition of groups joined together for a side event at the Copenhagen climate change summit on Dec. 12. Gathered were the Worldwatch Institute, a respected think tank represented by its leader, Christopher Flavin; the United Nations Foundation, established by Ted Turner, and represented by its head, Tim Wirth, a former Senator and the main US negotiator for the Kyoto Climate Conference during the Clinton administration; and the American Clean Skies Foundation, which promotes natural gas as a clean alternative to coal, represented by its CEO, Gregory Staple.

Their three-hour conference was about a low-carbon energy source that could reduce US dependency on both imported oil and domestic coal: shale gas.

One of the lead speakers was Aubrey McClendon, CEO of Chesapeake Energy, a large natural gas producer. He stated that he was in Copenhagen to drive home the point that shale gas production was a game changer in "de-carbonizing" the US economy.

Mr. McClendon explained the potential of shale gas:

• New technologies, such as hydraulic fracturing ("fracking") and horizontal drilling, have made it feasible to extract vast "new" reserves of gas from underground formations of shale;
• Natural gas emits about 25 percent less CO2 than oil and 50 percent less than coal;
• Installed natural gas electricity capacity is already in place, and could meet current U.S. energy demands (unlike nuclear, wind, solar, or "clean" coal plants equipped with carbon capture and storage, or CCS);
• The steady output of gas plants can help balance the irregularity of solar and wind power; and
• Unconventional US gas would reduce the nation's dependency on foreign (OPEC) hydrocarbons.

While this message has been delivered consistently to investors by many of the US's independent gas players, the industry could do more to make its case to Congress and the public. The coal, electric utility, and railroad industries have employed top lobbyists to represent their interests, but the natural gas industry has been much less involved in the drafting of US climate change regulations.

Natural Gas Share of US Energy Use to Grow

Still, in its assessment of the American Clean Energy and Security Act of 2009 (also known as ACES, and the Waxman-Markey bill), the Energy Information Administration (EIA) projected that the share of natural gas in US electricity production could increase to 31 percent by 2020 from a 2007 level of 21 percent. EIA further projects a 39-percent contribution to the electricity supply from natural gas by 2030. This would lift the share of natural gas in the overall US energy supply to 26 percent in 2020, up 3 percentage points from 23 percent in 2007, and to 28 percent by 2030.

These projections, however, assume that the US will be unable to take advantage of overseas offsets for its domestic carbon output. EIA also assumes limited deployment of other low-carbon technologies, such as CCS and new nuclear plants.

Gas Industry Seeks Higher Profile

The US natural gas industry believes that ACES should have included greater explicit support for gas in the draft carbon regulation, and also taken a less lenient approach to coal, particularly in the allocation of emissions allowances. The gas industry's presence in Copenhagen is an attempt to raise its public-policy profile, as is the decision by 28 of the largest natural gas independents to form the "American Natural Gas Alliance," which is charged with promoting the benefits of natural gas to the public.

Big Oil Moving into Gas in a Big Way

In a sign of great expectations for the gas market, ExxonMobil recently announced a $41 billion, all-stock acquisition of XTO Energy, an offer price that represents a 25 percent premium above XTO's Dec. 11 closing share price. XTO has the largest proved natural gas reserves among the US independents, and Exxon's commitment to natural gas production in the U.S. not only will offset some of the carbon risks inherent in Exxon's portfolio, but it will also bolster the industry's ability to lobby Congress as it takes up climate change legislation in 2010.

The Impact of "Fracking"

While natural gas is set to play a more significant role in the US energy mix, increased domestic production will carry environmental costs. The industry will need to spend as much political capital on addressing these concerns as it will on improving the position of natural gas in carbon legislation. High on the list of these concerns are the environmental impacts of "fracking."

The Sustainable Investment Research Analyst Network (SIRAN) recently conducted a seminar on the implications of expanded fracking operations. In a follow-up to this article, Alan Petrillo will explore SIRAN's perspective on how the fracturing of shale formations could affect the environment, including the nation's water supply. The process of extracting the fossil fuel with the least impact on the atmosphere could have a big impact on the American landscape.

[Ed. Note: RiskMetrics analyst Mario Lopez-Alcala is attending the Copenhagen summit as an official observer.]

As the Copenhagen climate summit draws to a close, many are disappointed by the lack of progress being made here. The biggest announcement is likely to be a plan to compensate countries that preserve forests and other natural landscapes that store carbon dioxide, the main greenhouse gas tied to global warming.

While other agreements could be reached to place carbon regulations on aviation and shipping, other goals to curb industrial emissions of greenhouse gases and set new financing mechanisms to help developing countries mitigate and adapt to climate change remain elusive. Now the hope is to reach a legally binding agreement sometime next year.

Different World From a Year Ago

Still, as US Deputy Special Envoy for Climate Change Jonathan Pershing observed at Copenhagen's Bella Center last week, today's world is very different from the one we lived in a year ago when it comes to climate politics.

The Copenhagen summit has brought developing countries to the fore, with progressive proposals on mitigation, adaptation, and finance. The United States has also undergone a sharp policy reversal, with President Barack Obama here to underscore the US administration's commitment to tackling climate change. This sets the stage for a changing global regulatory environment that will benefit low-carbon investments.

The road ahead will be bumpy, however. In Copenhagen there have been heated debates on the legal outcome of two parallel negotiating paths: one under the Framework Convention on Climate Change, in which the US is a party; and one under the Kyoto Protocol, in which the US is an observer.

A bloc of Small Islands States led by Tuvalu has proposed developing a new negotiating group to work toward a binding treaty to succeed the Kyoto Protocol with even more ambitious targets. The U.S. regards this extension of Kyoto as a non-starter. Another proposal forged by the Mexican and Norwegian delegations would substantially increase the amount of predictable funding available for climate change actions in developing countries. However, beyond a commitment by the European Union to provide $10 billion annually in such funding as a down payment toward larger giving, the pledges have been few.

Significant Forest Protection Program

In any event, the forest protection program expected at Copenhagen (formally known as Reducing Emissions from Deforestation and Forest Degradation, or REDD) should not be overlooked for its significance.

Rainforest destruction and land conversion are responsible for about 20 percent of annual emissions that contribute to global warming. The REDD program puts financial incentives in place for developing countries to preserve these natural habitats effectively as a carbon-storing bank. Industrial countries would be able to purchase credits from this bank to offset emissions that exceed their own reduction targets.

The current U.S. legislative proposal as passed by the House of Representatives would allow up to one-quarter of the nation's emissions to be offset by such credits from international providers. REDD would help assure that a large bank of credits would be available at affordable prices, easing the pressure on domestic industries to achieve emissions cuts from their own operations.

REDD also could be a shot in the arm for the Clean Development Mechanism (CDM), a project-based source of carbon credits that can be used in emissions trading schemes established under the Kyoto Protocol. So far, the CDM has suffered from heavy bureaucratic oversight and limited geographic scope. However, new measures potentially could arise from talks seeking ways to lessen these drawbacks for CDM projects.

By virtue of the location of the world's rainforests, REDD could help disperse funding assistance across Asia, Latin America and Africa. Some representatives at Copenhagen are even lobbying to extend REDD's provisions to northern boreal forests, which also provide a substantial sink for carbon.

However the REDD program works out, it will be a while before the aid starts flowing. Details that remain to be worked out include setting exact targets and timetables for emissions reductions, and what systems should be used to measure and verify carbon storage of various habitats.

Climate Clock Keeps Ticking

Meanwhile, the climate clock keeps ticking. Scientists presenting at Copenhagen stressed the importance of bringing global emissions to a peak within the next decade and then starting a fast decline, led by a 25- to 40-percent reduction by industrial countries from 1990 levels by 2020. Each year of delay heightens the pace at which emissions reductions must be achieved thereafter.

United Nations Secretary General Ban Ki-moon admonished Copenhagen delegates in an address on Dec. 15 as they moved into their final days of negotiations. "We do not have another year to deliberate," he reminded them. "Nature does not negotiate."

Mario Lopez-Alcala is a member of RiskMetrics Group's Climate Risk Management team.

The climate change scientists whose emails were recently hacked are living their worst nightmare. Like many of their colleagues, these scientists had long been frustrated by a handful of vocal global warming skeptics. The hacked emails gave skeptics a new opening to sow doubts about global warming, just as media attention turned to the Copenhagen climate summit.

These scientists spoke in some private emails of resisting Freedom of Information Act requests and boycotting journals that provide an ongoing platform for the skeptics' views. Neither the hacking nor the censorship should be condoned. But when this dust-up settles, these things will be certain:

• The evidence of human contributions to global warming is so overwhelming that this media sideshow will have no impact on the outcome of the Copenhagen meeting.
• The real issue to be addressed at Copenhagen is how to pay for the ballooning costs of climate change. These costs now include not only trillions of dollars of investments in carbon mitigation, but also spending on adaptation measures, to address warming that will continue throughout our lifetimes. By some estimates, these adaptation costs will rise above $100 billion a year.

The Impact of Dumping "Coal Mines into the Air"

Global warming is a scientific fact. The debate now is at the margins of just how fast and dangerous the warming will be.

Svante Arrhenius won a Nobel Prize in 1896 for his theory that "evaporating our coal mines into the air" would eventually double the atmospheric concentration of carbon dioxide and raise the Earth's temperature by 5 to 10 degrees Fahrenheit. That's still the basic forecast today, except what Arrhenius thought would take a thousand years could well happen in this century.

The World Meteorological Organization has reported that the first decade of the 21st century will be the warmest since modern temperature records began in 1861. The Earth's temperature has risen nearly 1.5 degrees F since then, with another 1 degree F of warming expected within the next 30 years as the warming trend accelerates. By 2100, the Earth could be as much as 8 degrees warmer - a level not seen since the Age of the Dinosaurs 65 million years ago.

While skeptics point out that the global temperature has not exceeded the peak set in 1998, this does not change the fact that the Earth has caught a fever and so far has done nothing to stop it. In fact, all of the years since 1998 rank among the warmest on record; 2009 is expected to go down as the fifth warmest year.

If one wants other physical evidence of this warming, look no further than the North Pole, where the Arctic Ice Cap–a permanent fixture of the Earth over the last 3 million years–is melting so fast that it could disappear entirely during summer months within the next five to 10 years.

Official Scientific and Governmental Consensus

Since 2000, many of the world's most reputable scientific organizations have issued reports or statements supporting the human link to global warming, and the dangers it poses:

• In 2001, the U.S. National Academy of Sciences issued a report at the request of the Bush administration that concluded rising global temperatures in recent decades were "likely mostly due to human activities" (and issued a much more strongly worded report in 2009).
• In 2003, the American Geophysical Union concurred, saying, "Scientific evidence strongly indicates that natural influences cannot explain the rapid increase in near-surface temperatures observed in the second half of the 20th century."
• In 2004, the American Meteorological Society issued its own warning, describing human-influenced climate change as "a global climate experiment, neither planned nor controlled."
• In 2007, the Intergovernmental Panel on Climate Change (IPCC) issued its fourth assessment since 1990 on the state of climate change science. It concluded that there is greater than 90 percent certainty that most of the warming over the past 50 years has been caused by human activities, and that 3.4 degrees F to 8.3 degrees F of warming is likely with a doubling of atmospheric CO2.
• In March 2009, the IPCC provided a disturbing update to its forecast, warning that "[r]ecent observations show that greenhouse gas emissions and many aspects of the climate are near the upper boundary of the IPCC range of projections." Simply put, "the worst-case IPCC scenario trajectories (or even worse) are being realized."
• And on Monday, the U.S. Environmental Protection Agency issued a final ruling that greenhouse gases are endangering the environment and human health, triggering the need for regulatory controls. This finding, too, was driven by the weight of scientific evidence that human activity is largely responsible for the warming taking place.

"We know that skeptics have and will continue to try to sow doubts about the science," remarked EPA administrator Lisa Jackson at the announcement. "It's no wonder that many people are confused. But raising doubts – even in the face of overwhelming evidence – is a tactic that has been used by defenders of the status quo for years."

Academic Consensus

That is why responsible climate scientists find it so frustrating that public doubts persist, even though the basic premise that human activity is contributing to climate change has not been seriously contested for years or even decades:

• One literature review of 928 peer-reviewed articles published in the 1990s and through 2002 found that 75 percent either explicitly or implicitly accepted the consensus view that human activity is contributing to global warming. The remaining 25 percent of these studies dealt with other facets of the climatological issue, stating no position on this key question, according to the review by the Program in Science Studies at the University of California.
• In another recent survey of more than 3,000 Earth scientists, 82 percent agreed that human activity is a "significant contributing factor" in changing global temperatures. Specialists in the field who actively publish on the issue were in almost total agreement: 75 of these 77 climate scientists–about 97 percent–agreed with the statement.

Fundamentally, responding to climate change is sound risk management. While the chance of our house burning down is highly remote, we still take the precaution of buying fire insurance. Why then would we not take out insurance when there is a greater than 90 percent chance that our world is catching fire?

That is what the Copenhagen summit is really about. The longer we postpone real action to bring down greenhouse gas emissions to address global warming, the higher our premium costs will go.

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For another review of skeptics' claims and scientists' rebuttals, see this December 7th Wall Street Journal article: "What global warming? A look at the arguments the skeptics make–and how believers respond"

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Doug Cogan is Director of Climate Risk Management for RiskMetrics Group. His 1992 book, The Greenhouse Gambit, was one of the first to address the business and investment implications of climate change. He has since written many other reports and articles on climate and energy topics and helped develop a Climate Change Governance Framework to analyze corporate and fund manager responses to this issue.