Eligibility for Government Contracts Tied to Greenhouse Gas Emissions

Federal contractors’ fitness for the job may soon be tied to more detailed disclosures of their greenhouse gas emissions and plans to reduce them.

A newly proposed amendment to the Federal Acquisition Regulation (FAR) would create additional emissions disclosure requirements for all offerors that earned at least $7.5 million in federal contract funds during the prior fiscal year. The amendment would also require contracting officers to presume that prospective contractors are not responsible—and therefore ineligible for receipt of federal funds—unless they meet those disclosure requirements.

Key Changes to the FAR

The proposed amendment would amplify and add teeth to the FAR’s current greenhouse gas emissions clause, FAR 52.223-22, Public Disclosure of Greenhouse Gas Emissions and Reduction Goals - Representation. That clause requires all offerors that received at least $7.5 million in federal contract funds during the prior fiscal year to represent whether they publicly disclose their greenhouse gas emissions, and whether they publicly disclose a quantitative greenhouse gas emissions reduction goal. But this proposed rule would create more stringent requirements, especially for the highest-earning federal contractors.

The amendment proposes two tiers of obligations based on a newly proposed distinction that would label contractors as “significant” or “major” depending on how much federal funding they receive.

Significant Contractors

Offerors that received between $7.5 million and $50 million in federal funds the prior fiscal year would be considered “significant” contractors. Significant contractors would need to assess two types of greenhouse gas emissions each year: Scope 1 and Scope 2 emissions.

Scope 1 emissions include direct greenhouse gas emissions from sources owned or controlled by the reporting entity. Scope 2 emissions include indirect greenhouse gas emissions associated with the generation of electricity, heating and cooling, or steam that are purchased or acquired for the reporting entity’s consumptions but occur at sources owned or controlled by another entity.

Significant contractors would be required to report their total annual Scope 1 and 2 emissions in the System for Award Management (SAM).

Major Contractors

Offerors that received more than $50 million in federal funds would be considered “major” contractors. Major contractors would be subject to the same Scope 1 and Scope 2 assessment and reporting requirements, and would also be required to complete an annual inventory of their Scope 3 greenhouse gas emissions.

Scope 3 emissions include greenhouse gas emissions other than Scope 2 emissions that are a consequence of the reporting entity’s operations, but that occur at sources other than those owned or controlled by the reporting entity.

Major contractors would also be required to publish an annual climate disclosure, completed within its current or prior fiscal year, using the CDP Climate Change Questionnaire, and develop a science-based target for greenhouse gas reduction validated by the Science Based Targets Initiative (SBTi) within the last five fiscal years.

Exemptions

Not all types of entities will be subject to these requirements. The amendment proposes that higher education institutions, nonprofit research entities, state and local governments, and entities that derive at least 80% of their annual revenue from federal management and operating contracts will be exempt. So will Alaska Native corporations, community development corporations, Indian tribes, Native Hawaiian organizations, and tribally owned concerns.

Finally, while major contractors considered small businesses or nonprofits must still complete and report a greenhouse gas inventory for their Scope 1 and Scope 2 emissions, they will not be required to complete an annual climate disclosure or to set science-based targets.

The FAR amendments would also permit contracting officers to exercise some discretion. Contracting officers may find that an offeror that could not certify compliance with the requirements is still responsible if the noncompliance resulted from circumstances properly beyond the offeror’s control; if the offeror provided documentation that demonstrates substantial efforts to comply; or if the offeror made a public commitment to comply as soon as possible.

Takeaways

Federal contractors that receive at least $7.5 million a year from the federal government may soon face a higher reporting hurdle to establish their responsibility. But if the proposed emissions disclosure amendments take effect, contractors will have time to prepare. Scope 1 and Scope 2 emissions reporting requirements will take effect one year after publication of the final rule. Scope 3 emissions reporting requirements, and requirements to submit an annual climate disclosure and develop a science-based target, will take effect two years after publication of the final rule.

Of interest, the proposed rule advances similar goals to the March 2022 regulations proposed by the US Securities and Exchange Commission (SEC). Those proposed rules would require investors to include certain climate-related disclosures in their registration statements and periodic reports. The SEC’s proposed rules were the subject of substantial comments and criticism. In the wake of that criticism, the SEC missed a self-imposed October deadline to publish final rules and has not announced a new timeline for their completion.

The proposed FAR amendment was published in the Federal Register on November 14, 2022, as 87 Fed. Reg. 68,312. Interested parties are invited to submit written comments to the rule until January 13, 2023. We will continue monitor the promulgation of this rule and developments in the area.