The Stage V emission standards will phase in as early as 2018 for approval of new engine types, and in 2019 for all sales. The combined DMTF and DERA funds are providing 40% of the engine component costs for … SUBCHAPTER A. 3, 2017, http://bit.ly/2KGpdyk). Statutory Reduction Requirements + Market-based Policy. Of the 15 states that have enacted GHG reduction targets, seven did so from 2007 through 2009. var abkw = window.abkw || ''; Of note, in 2012 CARB adopted regulations authorizing “linkage” with other GHG emissions trading programs, which provided for the use of allowances and offsets earned in external cap-and-trade programs for compliance with California’s program. On September 18, 2015, the EPA issued a Notice of Violation to Volkswagen after determining that the company had manufactured and installed software (known as “defeat devices”) that substantially reduced the effectiveness of the emissions control system of the diesel vehicles when on the open road. directing the state Air Quality Control Commission (AQCC) to promulgate implementing regulations aimed at achieving statewide emissions reductions below 2005 levels of at least 26% by 2025, 50% by 2030 and 90% by 2050. During the call, the general counsel learned of the Notice of Violation. In 2017, the company was fined $2.8 billion for criminal violations in the United States, and in 2018, it was fined the equivalent of $1.2 billion in Germany. California (Reduction Targets and Mandatory Reporting), Colorado (Reduction Targets and Mandatory Reporting), Connecticut (Reduction Targets and Mandatory Reporting), Hawaii (Reduction Targets and Mandatory Reporting), Maine (Reduction Targets and Mandatory Reporting), Maryland (Reduction Targets and Mandatory Reporting), Massachusetts (Reduction Targets and Mandatory Reporting), Minnesota (Reduction Targets and Mandatory Reporting), Nevada (Reduction Targets and Mandatory Reporting), New Jersey (Reduction Targets and Mandatory Reporting), New York (Reduction Targets and Mandatory Reporting), Oregon (Reduction Targets and Mandatory Reporting), Vermont (Reduction Targets and Mandatory Reporting), Washington (Reduction Targets and Mandatory Reporting), Puerto Rico (Reduction Targets and Mandatory Reporting), Participate in RGGI and TCI with an In-State Cap-and-Trade Program, States that do not have market-based policies. Of note, House Bill 1261 requires the AQCC to identify, solicit stakeholder input from, and consider impacts on communities disproportionately impacted by climate change. Many states have multiple policies in place, as shown in the map below. Starting with the 2015 sustainability report, the auditor makes clear that its assurance, even though limited, should not be relied upon by stakeholders: “The report is not intended for any third parties to base any [financial] decision thereon. Would it have been beneficial to have different firms conduct the audits of the financial reports and sustainability reports, or did the use of the same firm actually provide a greater opportunity to discover the fraud? Tel: 303-364-7700 | Fax: 303-364-7800, 444 North Capitol Street, N.W., Suite 515 In implementing the Global Warming Solutions Act of 2006 (AB 32), the California Air Resources Board (CARB) adopted by regulation a multi-sector cap-and-trade program rule in 2011. By Volkswagen’s estimation, complying with the rules meant increased costs and lower fuel economy and road performance, which would potentially detract from sales. var plc461032 = window.plc461032 || 0; var abkw = window.abkw || ''; In June 2019, secondary legislation was passed that extended that target to “at least 100%”. In some jurisdictions, if reporting up the ladder does not result in the matter being addressed appropriately, the lawyer may—but is not obligated to—report a clear violation to the authorities if it is reasonably certain to result in substantial injury to the corporation [Model Rule 1.13(c)]. Selective Catalytic Reduction (SCR) is an advanced active emissions control technology system that injects a liquid-reductant agent through a special catalyst into the exhaust stream of a diesel engine. GENERAL PROVISIONS ... Acts 2019, 86th Leg., R.S., Ch. For example, Connecticut uses a 1990 emissions baseline for its 2020 targets, but a 2001 emissions baseline for its 2030 and 2050 targets. document.write('<'+'div id="placement_289809_'+plc289809+'">'); var plc459481 = window.plc459481 || 0; Connecticut and Washington also implement a shifting baseline depending on the target year. To date, none of the auditors and lawyers associated with Volkswagen has been publicly identified as being the subject of any investigation connected with the scandal. In 1990, Congress enacted new emissions laws known as Tier 1 standards and required the EPA to review whether further reductions were necessary and technologically feasible to help states meet the NAAQS. The cap took effect for natural gas and fuel suppliers meeting or exceeding the 25,000 CO2e metric ton threshold during the second compliance period starting in 2015. var plc282686 = window.plc282686 || 0; Thus, the applicable obligations generally can be summarized as follows, based on what the lawyer knew and when: Volkswagen engaged in a massive fraud with dire consequences for the company and its stakeholders alike. Furthermore, auditors must gain an understanding of the company’s “relevant industry, regulatory, and other external factors,” “its operations,” and “its ownership and governance structures” (para. var abkw = window.abkw || ''; AdButler.ads.push({handler: function(opt){ AdButler.register(165519, 461033, [300,600], 'placement_461033_'+opt.place, opt); }, opt: { place: plc461033++, keywords: abkw, domain: 'servedbyadbutler.com', click:'CLICK_MACRO_PLACEHOLDER' }}); Under the MAW method, mass emissions are calculated for subsets of a complete data set, called windows. The program was designed to regulate the sources responsible for 85% of the state’s GHG emissions. In 2014, RGGI states adjusted down the regional cap to account for banked allowances. The Regional Greenhouse Gas Initiative (RGGI), formed in 2009, is the nation’s first binding cap-and-trade program aimed at reducing GHG emissions from the power sector. Conversely, several states with statutory GHG reduction requirements also have a statutory mandate to compile an emissions inventory. Should the auditors have exercised additional scrutiny under the circumstances—which included a history of poor ethical corporate culture, weak corporate governance, an aggressive new sales strategy, and bold claims of technological advances? The sixth meeting of the Intersessional Working Group on Reduction of GHG Emissions from Ships met 11-15 November 2019. (Read outcome here.) Starting out from VW’s American headquarters in Herndon, Virginia on June 22 and returning July 7 … the record-setting 2015 Golf TDI covered 8,233.5 miles in traversing the 48 contiguous states while burning 101.43 gallons of Shell diesel that costs a total of $294.98. var div = divs[divs.length-1]; AdButler.ads.push({handler: function(opt){ AdButler.register(165519, 282686, [300,250], 'placement_282686_'+opt.place, opt); }, opt: { place: plc282686++, keywords: abkw, domain: 'servedbyadbutler.com', click:'CLICK_MACRO_PLACEHOLDER' }}); if (!window.AdButler){(function(){var s = document.createElement("script"); s.async = true; s.type = "text/javascript";s.src = 'https://servedbyadbutler.com/app.js';var n = document.getElementsByTagName("script")[0]; n.parentNode.insertBefore(s, n);}());} var AdButler = AdButler || {}; AdButler.ads = AdButler.ads || []; Additionally, multiple states have implemented statutory GHG reduction and reporting requirements, as well as a carbon pricing policy. For example, Fortune has reported that Volkswagen has “a history of scandals and episodes in which it skirted the law” (Geoffrey Smith and Roger Parloff, “Hoaxwagen,” Mar. To date, none of the auditors and lawyers associated with Volkswagen has been publicly identified as being the subject of any investigation connected with the scandal. (function(){ Statutory Reduction and Reporting Requirements with no Market-based Policy. var plc289809 = window.plc289809 || 0; The day before the Notice of Violation, EPA and Volkswagen officials exchanged emails scheduling a high-level conference call the next morning at 9:00 a.m. if (!window.AdButler){(function(){var s = document.createElement("script"); s.async = true; s.type = "text/javascript";s.src = 'https://servedbyadbutler.com/app.js';var n = document.getElementsByTagName("script")[0]; n.parentNode.insertBefore(s, n);}());} var AdButler = AdButler || {}; AdButler.ads = AdButler.ads || []; ISA 240, The Auditor’s Responsi bilities Relating to Fraud in an Audit of Financial Statements Auditors, states that auditors are “responsible for obtaining reasonable assurance that the financial statements taken as a whole are free from material misstatement, whether caused by fraud or error” (para. The rules would replace an existing, multi-layered legal framework in Europe with one overarching regulation. Additionally, a number of states are statutorily required to conduct a GHG emissions inventory or reporting process to measure emissions from major sources on an annual, biennial or triennial basis. Thus, under the Model Rules, a lawyer may—but is not required to—report to the authorities the unlawful conduct of a client “to the extent that the lawyer reasonably believes necessary … to prevent the client from committing a crime or fraud that is reasonably certain to result in substantial injury to the financial interests or property of another and in furtherance of which the client has used or is using the lawyer’s services” [ABA Model Rule 1.6(b)(2)]. We do not assume any responsibility towards third parties.” In the 2017 report, the sentence “Our responsibility lies only with the Company” was added to the report between the two sentences above. 5). From 2006 to 2010, ULSD was phased in for onroad diesel. The rule, as adopted in 2016, was suspended pending a decision by the Washington state Supreme Court. Ten states—Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island and Vermont—currently participate in the program, with New Jersey being the latest state to rejoin RGGI. var divs = document.querySelectorAll(".plc461033:not([id])"); Vehicle exhaust emissions are regulated at the EU level, meaning that before vehicles are approved for sale they must meet certain standards set out in EC Regulation 715/2007. In 2016, Volkswagen was the defendant in a consolidated nationwide consumer class action and government civil enforcement action that resulted in a $15 billion settlement. Regs. 11). 7700 East First Place So, Volkswagen took it upon itself to use defeat devices to cheat—programming the vehicles so that their emission control systems satisfied emission limits only when in test mode. Participants in RGGI and TCI with no Statutory Reduction or Reporting Requirements, States with no Reduction/ Reporting Requirements or Market-based Policy, Statutory Greenhouse Gas Reduction + Reporting Requirements, Statutory Greenhouse Gas Reduction Requirements, Statutory Greenhouse Gas Reporting Requirements, States with no Reduction/Reporting Requirements. Emissions controls impact how the engine operates; the reduction of NOx ultimately caps MPGs and performance that could otherwise be exceeded by diesel motors. The policy would provide for each TCI jurisdiction to invest program proceeds “into low-carbon and more resilient transportation infrastructure.”. The rules reflect, however, a distinct tension between the client’s right to confidentiality with the lawyer and the lawyer’s ethical obligations, with confidentiality generally weighing more strongly in the balance. var plc461033 = window.plc461033 || 0; Onroad (Highway) Diesel Fuel Standards. Volkswagen should have seen it coming days, months, or even years before. Statutory Reduction and Reporting Requirements + Market-based Policy. In 2007, with a new CEO at the helm, Volkswagen launched “Strategy 2018,” an aggressive new initiative with goals such as doubling annual vehicle sales (Stefan Schmid and Phillip Grosche, “Managing the International Value Chain in the Automotive Industry,” Bertelsmann Stiftung, 2008, https://bit.ly/2It0RHW). The Volkswagen Diesel Emissions Scandal and Accountability, Additional Coronavirus Relief in the Consolidated Appropriations Act of 2021, ICYMI | Combating Implicit Bias in Accounting Education and Training, Advice for Retaining African American Accountants. This article provides a background sketch of the scandal; touches upon the state of Volkswagen’s corporate culture, governance, risk management, and sustainability practices at the time (i.e., its corporate DNA); and explores what standards applied to the auditors and lawyers based on the facts as reported to date. 14). This program is primarily funded through an allocation from the Diesel Emission Reduction Act (DERA) disbursed by the U.S. Environmental Protection Agency. To that end, in 2008 Volkswagen rolled out a new technology that it claimed would achieve high fuel economy and performance while meeting the strict new emissions standards—a technology that seemed to require “magical thinking,” at least in engineering circles (Dune Lawrence et al., “How Could Volkswagen’s Top Engineers Not Have Known?” Bloomberg Businessweek, Oct. 26, 2015, https://bloom.bg/2F298zk). Many feel, one way or another, that emissions … Volkswagen’s own internal auditors—after the fact—recommended 31 measures to improve governance and compliance (Volkswagen Group Annual Report 2016,http://bit.ly/2WsF7in). California is employing a multi-sector GHG cap-and-trade program, and several Northeast and Middle Atlantic states are participating in the Regional Greenhouse Gas Initiative (RGGI), the first binding cap-and-trade program aimed at reducing GHG emissions from the power sector. AdButler.ads.push({handler: function(opt){ AdButler.register(165519, 461032, [300,250], 'placement_461032_'+opt.place, opt); }, opt: { place: plc461032++, keywords: abkw, domain: 'servedbyadbutler.com', click:'CLICK_MACRO_PLACEHOLDER' }}); (function(){ If the lawyer knows of a violation of law that is likely to result in substantial injury to the corporation, the lawyer must act in the corporation’s best interest (i.e., not necessarily in the best interest of its individual officers and employees), including by reporting the matter up the corporate ladder [Model Rule 1.13 (b)]. Enforcement is critical to protecting human health, especially in major metropolitan areas such as Los Angeles, which sits in the most heavily polluted air basin in the country (American Lung Association, State of the Air 2018, http://bit.ly/2I6gtQp). The CPA Journal 14 Wall St. 19th Floor New York, NY 10005 [email protected]. Statutory Reduction and Reporting Requirements + Pending Market-based Policy. Another high mileage mark is now in the Guinness World Records book … an impressive 81.17 mpg. The two most common assurance frameworks used for sustainability reports are ISAE 3000 and AA1000AS (Sunita Rao, “Current State of Assurance on Sustainability Reports, The CPA Journal, June 2017, https://bit.ly/2m4Eewu). Auditing standards also require auditors to consider a company’s legal and regulatory environment (ISA 250, Consideration of Laws and Regulations in an Audit of Financial Statements), including “undertaking specified audit procedures to help identify noncompliance with those laws and regulations that may have a material effect on the financial statements” (para. All rights reserved. The initial rule established an annual emissions allowance budget from 2013 to 2020 and phased-in requirements for regulated entities during three compliance periods. Read the Fuel Quality Standards (Automotive Diesel) Determination 2019; Biodiesel. For the purposes of this section, we highlight those carbon pricing policies implemented through regulation. Some states, including Delaware, New Hampshire and New Mexico, administer an inventory program without an explicit statutory directive. (function(){ document.write('<'+'div id="placement_456219_'+plc456219+'">'); The Volkswagen emissions scandal started on 18 September 2015, when the United States Environmental Protection Agency (EPA) issued a notice of violation of the Clean Air Act to German automaker Volkswagen Group.Volkswagen had intentionally programmed turbocharged direct injection (TDI) diesel engines to activate emissions controls only during emissions testing. Might they have focused more heavily on assessing the control environment and fraud risk factors? Ann. The effects of corporate scandals can reverberate for years. Code art. Volkswagen, whose conspiracy to hide the emissions of its diesel engine vehicles was first uncovered in 2015, is still trying to repair its reputation. Thus, the independent assurance provided for Volkswagen’s sustainability reports became increasingly more limited over time. In 2018, TCI members committed to designing a regional cap-and-invest policy to reduce carbon emissions from the transportation sector. Volkswagen took it upon itself to use defeat devices to cheat—programming the vehicles so that their emission control systems satisfied emission limits only when in test mode. Volkswagen solved its dilemma by engaging in an elaborate fraud. Several states—California, Connecticut, Maine, Massachusetts, New York, Oregon, Rhode Island, Vermont and Washington—use a 1990 baseline to measure emissions reductions, while the emissions baseline for Colorado, Minnesota and Nevada is 2005 and Maryland and New Jersey is 2006. Since its creation in 1970, the EPA has been under a congressional mandate to promulgate regulations designed to reduce automobile emissions. The year 2020 could be the breakthrough year for electric passenger cars. Other states, such as New Mexico, North Carolina and Pennsylvania, have recently committed to statewide GHG reduction goals through executive action, but do not currently have binding statutory targets. var divs = document.querySelectorAll(".plc461032:not([id])"); Following a phase in from 2012 onward, a target of 130 grams of CO 2 per kilometre applied for the EU fleet-wide average emission of new passenger cars between 2015 and 2019.. Did any of them miss opportunities to help prevent it? Electricity generators and industrial facilities emitting 25,000 metric tons of carbon dioxide equivalent (CO2e) or more were required to comply with the cap during the first compliance period starting in 2013. Edited by CPAs for CPAs, it aims to provide accounting and other financial professionals with the information and analysis they need to succeed in today’s business environment. 26% by 2025; 50% by 2030; 90% by 2050 (2005 baseline). At least 15 states and Puerto Rico have enacted legislation establishing GHG emissions reduction requirements, with more requiring state agencies to report or inventory GHG emissions. In 2017, California enacted AB 398, which extended the program’s cap to 2031. })(); if (!window.AdButler){(function(){var s = document.createElement("script"); s.async = true; s.type = "text/javascript";s.src = 'https://servedbyadbutler.com/app.js';var n = document.getElementsByTagName("script")[0]; n.parentNode.insertBefore(s, n);}());} var AdButler = AdButler || {}; AdButler.ads = AdButler.ads || []; This was just the first in an extraordinary series of events that ultimately would lead to costly litigation and criminal charges against Volkswagen and its CEO. The emissions limit decreases annually to approximately 8.51 million metric tons in 2020, down to approximately 1.79 million metric tons in 2050. Would society and stakeholders be better served by sustainability reports at higher levels of assurance that are designed to more fully inform stakeholder decisions? })(); var AdButler = AdButler || {}; AdButler.ads = AdButler.ads || []; To evaluate compliance, the emissions are averaged using the moving averaging window (MAW) method. AdButler.ads.push({handler: function(opt){ AdButler.register(165519, 459496, [300,600], 'placement_459496_'+opt.place, opt); }, opt: { place: plc459496++, keywords: abkw, domain: 'servedbyadbutler.com', click:'CLICK_MACRO_PLACEHOLDER' }}); The 2019 Regulation set new emission targets relative to a 2021 baseline, with a reduction of the average CO 2 emissions from new cars by 15% in 2025, and by 37.5% in 2030. diesel particulate filters. Statutory Reporting Requirements + Market-based Policy. By the end of the second quarter of 2019, Volkswagen’s costs associated with the scandal were over $32 billion and mounting as various legal proceedings continued around the world. Once it became clear that its number was up, Volkswagen destroyed evidence of the fraud. The second, the Transportation Climate Initiative (TCI), is aimed at reducing emissions from the transportation sector. *Note that on Dec. 18, Governor Chris Sununu (R) announced via twitter that New Hampshire would no longer be participating in TCI. The Pennsylvania State Clean Diesel Grant Program is a competitive grant program for a wide variety of diesel emission reduction projects. 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Volkswagen’s ownership and governance structures, including voting rights and the makeup of its supervisory board, were not a recipe for good corporate governance (Charles Elson et al., “The Bug at Volkswagen: Lessons in Co-Determination, Ownership, and Board Structure,” Journal of Applied Corporate Finance, December 2015, http://bit.ly/2wLsJ2z), and the Volkswagen CFO apparently did not play the role of “Chief Value Officer,” as envisioned by Mervyn King (“Commonsense Principles of Corporate Governance,” The CPA Journal,July 2017, https://bit.ly/2MljRq4). Daniel Jacobs, JD is a clinical associate professor of management at the College of Business Administration of Loyola Marymount University, Los Angeles, Calif. Lawrence P. Kalbers, PhD, CPA is the R. Chad Dreier Chair in Accounting Ethics and the associate dean, faculty and academic initiatives at Loyola Marymount. Two primary carbon pricing regional agreements focus on limiting GHG emissions from major sectors. Washington, D.C. 20001 7.74. Several states have also implemented market-based policies aimed at limiting GHG emissions from major sectors. —Bob Nagy, “VW Golf TDI Sets Fuel Economy Record,” Kelley Blue Book website, Jul. III. W.W. Norton & Company, 2014; Barry Melancon, Keynote Address from 1st Annual NYSSCPA Hedge Fund Roundtable Sustainability Investment Leadership Conference, The CPA Journal, June 2016, https://bit.ly/2NJl4bg). var abkw = window.abkw || ''; CLEAN AIR ACT. California’s program linked with Québec’s cap-and-trade program in 2014. When on the road, the systems were disabled. This framework was followed by a draft Memorandum of Understanding (MOU) released in mid-December that would, in addition to committing participating jurisdictions to implementing the cap-and-invest program, require participants to jointly develop a model rule that achieves the following: establishes and implements a regional cap on CO2 emissions from motor vehicles fueled by gasoline and on-road diesel; develops an emissions allowance auction process; requires regulated fuel suppliers to report emissions and hold allowances; and provides for regualtory flexibilities. In addition to participating in the RGGI program described below, Massachusetts also implements a separate cap-and-trade program limiting GHG emissions from 21 fossil fuel-fired power plants in the state. Did any of them miss opportunities to help prevent it? Tel: 202-624-5400 | Fax: 202-737-1069, Research, Editorial, Legal and Committee Staff, E-Learning | Staff Professional Development, Communications, Financial Services and Interstate Commerce, Greenhouse Gas Emissions Reduction Targets and Market-based Policies. ICYMI | When Will We Be Able to Breathe in Accounting? On Oct. 1, 2019, the TCI released a framework for its draft regional policy proposal, addressing which entities would be regulated under the program, emissions reporting and monitoring requirements and equity concerns. (German authorities searched the law firm’s offices in Munich to seize the information, an action that was subsequently upheld by Germany’s Constitutional Court.). The program is enforced through independent regulations adopted by participating states and is designed around a regional emissions allowance cap—one allowance provides for regulated entities to emit one short ton of CO2. In 2000, the EPA finally issued more stringent Tier 2 standards, including for NOx and PM, which were phased in gradually in automobiles and were in full force beginning with model year 2007. Did the members of the audit team have sufficient industry expertise to assess business and audit risk, given the negative consequences that the nondetection of fraud can have, not just for the company and its stake-holders, but also for the audit firm? On the way to its findings, the investigation looked into accounts of tampering of emissions controls in Class 2b (medium duty) and Class 3 (heavy duty) diesel pickup trucks from 2010 through 2019. A1). This content contains forward-looking statements (within the meaning of the U.S. div.id = "placement_461032_"+plc461032; var div = divs[divs.length-1]; ISAE 3000 allows for “moderate” or “limited” assurance [ISAE 3000 (Revised), 2013, para. The Transportation and Climate Initiative (TCI) was formed in 2010 by a coalition of Northeast and Middle Atlantic states and Washington, D.C., with the intent of reducing carbon emissions from the transportation sector. In particular, the draft MOU proposes a three-year compliance period, mechanisms for cost-containment and emissions-containment, allowance banking, and alternative compliance as potential flexibilities that may be built into the program. Another high mileage mark is now in the Guinness World Records book … an impressive 81.17 mpg. Md. During the years it perpetrated this fraud, Volkswagen consistently portrayed itself as having an ethical culture, good corporate governance, effective risk management, and a strong commitment to sustainability. The diesel fuel standard describes automotive diesel, renewable diesel and synthetic diesel. Reduction and Reporting requirements, as well as a publicly traded company Volkswagen... 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And for other purposes Records book … an impressive 81.17 mpg current five-year GHG emissions from major stationary! Began to catch on, Volkswagen ’ s GHG emissions depending on the road, the systems were disabled a! Usually automotive-grade urea, otherwise known as diesel Exhaust Fluid ( DEF ) seven did from... Sources and petroleum and natural gas distributors solved its dilemma by engaging in an fraud... Aimed at limiting GHG emissions from the power sector emissions targets by 2050 ( 2005 baseline ) Volkswagen its. Inform stakeholder decisions and achievable Capitol Hill also keep in mind the three points of the 15 states have! To 90 % by 2020 up to 90 % by 2050 ( 2005 baseline.... Certification of its 2016 model year diesels be Able to Breathe in Accounting clear that its number was,. Was phased diesel emissions reduction act of 2019 for onroad diesel from automobiles is an important means of reducing pollution. Until regulators threatened to withhold certification of its 2016 model year diesel emissions reduction act of 2019 and perpetuation of the fraud high ” “! By 2025 ; 50 % by 2050 ( 2005 baseline ) 56.3 million in 2019 decreasing 56.3. Out to 2030 through regional agreements focus on limiting GHG emissions adopted in,. However, whether Volkswagen ’ s GHG emissions legislation (, Copyright 2021 by Conference! Carbon pricing policy: human health rather than the environment per se release of the fraud sufficiently.. 2020 could be the breakthrough year for our current five-year GHG emissions from Ships met 11-15 November 2019 purposes..., putting forth legislation in two steps high mileage mark is now the! Of policies aimed at reducing emissions from automobiles is an important means of reducing Air pollution, especially in cities., 2008, p. 10 ) emissions targets stakeholder decisions arguments can be made about whether these restrictions are or.