Thursday, July 07, 2022

Justices curb EPA climate authorities; will SEC disclosure proposal survive major questions doctrine?

By Sheila Lynch-Afryl, J.D., M.A. and Mark S. Nelson, J.D.

The U.S. Supreme Court invoked the major questions doctrine to invalidate EPA regulations that regulated greenhouse gas emissions from power plants. The Court ruled that by arguing that Section 111(d) of the Clean Air Act “empowers it to substantially restructure the American energy market,” the EPA found “newfound power” in the “vague language” of a provision that was designed to function as a gap filler and had rarely been used in preceding decades. Dissenting Justices Kagan, Breyer, and Sotomayor argued that the Court issued an advisory opinion that flies “in the face of the statute Congress wrote,” while President Joe Biden called it a “devastating decision that aims to take our country backwards” (West Virginia v. Environmental Protection Agency, No. 20-1530, June 30, 2022, Roberts, J.).

Clean Air Act. Clean Air Act Section 111(b)(1) (42 U.S.C. §7411) required the EPA to publish a list of categories of stationary sources if the category of sources “causes, or contributes significantly to, air pollution which may reasonably be anticipated to endanger public health or welfare.” Subsection (a)(3) defines “stationary source” as any building, structure, facility, or installation that emits or may emit any air pollutant. Under Section 111(b)(1)(B), the EPA sets standards of performance for new stationary sources. “Standard of performance” is defined as a standard for emissions of air pollutants that reflects the degree of emission limitation achievable through the application of the best system of emission reduction, which (taking into account the cost of achieving such reduction and any nonair quality health and environmental impact and energy requirements) the EPA determines has been adequately demonstrated. Under Section 111(d), each state must submit a plan that establishes standards of performance for any existing source and provides for their implementation and enforcement.

EPA regulations. In 2015, during the Obama Administration, the EPA, under the authority of Clean Air Act Section 111(d), issued the Clean Power Plan (CPP) rule, which established carbon dioxide (CO2) emission guidelines for existing fossil fuel-fired electric generating units. The rule involved “generation shifting”—a shift in electricity production from higher-emitting to lower-emitting producers—at the grid level. The Supreme Court stayed enforcement of the CPP, and before a decision could be reached the Trump Administration issued the 2019 Affordable Clean Energy (ACE) rule, which repealed the CPP.

The ACE rule established emission guidelines for states to use when developing plans to limit CO2 at their coal-fired electric generating units. The EPA asserted in the rule that it had exceeded its authority under Clean Air Act Section 111 by issuing the CPP rule. In 2021 the D.C. Circuit vacated the ACE rule but stayed its mandate with respect to the vacatur of the CPP repeal rule pending a new EPA rulemaking. Several groups, including coal companies and a coalition of states led by West Virginia, appealed to the Supreme Court (see Court hears arguments on EPA’s authority to regulate greenhouse gas emissions, February 28, 2022).

Article III standing. The Supreme Court first found that the state petitioners have Article III standing. The D.C. Circuit vacated the ACE rule and its repeal of the CPP, “and accordingly purports to bring the Clean Power Plan back into legal effect.” The rule injures the states since it requires them to more stringently regulate power plant emissions within their borders.

The Court rejected the government’s argument that the EPA’s intention not to enforce the CPP and the appellate court’s stay of the vacatur of the CPP repeal rule pending new rulemaking eliminated any possibility of injury. The doctrine of mootness, not standing, addresses whether an intervening circumstance deprives a plaintiff of a personal stake in the outcome of the lawsuit. The government failed to sustain its “heavy” burden to establish mootness because it never claimed that if the litigation is resolved in its favor it will not reimpose emissions limits predicated on generation shifting; instead, it “vigorously defends” the legality of this approach.

Major questions doctrine. In addressing the merits, the Court framed the issue as “whether restructuring the Nation’s overall mix of electricity generation, to transition from 38% coal to 27% coal by 2030, can be the ‘best system of emission reduction’ within the meaning of Section 111.” It ruled that “this is a major questions case” because the EPA discovered newfound power in the vague language of an ancillary provision, allowing it to adopt regulations that “Congress had conspicuously and repeatedly declined to enact itself.”

Before 2015, the EPA set emissions limits under section 111 based on the application of measures that would reduce pollution by causing the regulated source to operate more cleanly; it never devised a cap by creating a system that would reduce pollution by shifting activity from dirtier to cleaner sources. The EPA’s understanding of “system of emission reduction” reflected the “seemingly universal view” that Congress intended a technology-based approach, i.e., one that focuses on improving the emissions performance of individual sources.

In the CPP, however, the EPA aimed to “improve the overall power system” by forcing a shift from one type of energy source to another. This new view of the EPA’s authority, said the Court, was unprecedented, and it was highly unlikely that Congress would leave to agency discretion the decision of how much coal-based generation there should be over the coming decades. “The basic and consequential tradeoffs involved in such a choice are ones that Congress would likely have intended for itself.”

The Court also noted that the CPP “essentially adopted a cap-and-trade scheme, or set of state cap-and-trade schemes, for carbon.” However, Congress has consistently rejected proposals to amend the Clean Air Act to create such a program and similar programs like a carbon tax.

Dissenting opinion. Justices Kagan, Breyer, and Sotomayor, dissented, arguing that because no one is subject to the CPP, there was no reason for the Court to decide the case, and the Court’s decision was an advisory opinion on the scope of the new rule the EPA is considering. Even though the new rule would be subject anyway to pre-enforcement judicial review, “this Court could not wait—even to see what the new rule says—to constrain EPA’s efforts to address climate change.”

Furthermore, argued the dissent, Section 111(b)(1)(A) directs the EPA to regulate stationary sources of any substance that “causes, or contributes significantly to, air pollution” and that “may reasonably be anticipated to endanger public health or welfare.” Broadness is not the same as vagueness, and a key reason Congress makes “broad delegations like Section 111 is so an agency can respond, appropriately and commensurately, to new and big problems.” However, the majority overrode that legislative choice and “deprives EPA of the power needed—and the power granted—to curb the emission of greenhouse gases.”

The SEC’s climate proposal. The SEC’s climate-related disclosure proposal would require disclosures about GHG emissions. Here, the SEC acknowledged that the EPA, through its U.S. EPA 2009 Mandatory Reporting of Greenhouse Gases Rule, already collects national data on GHG emissions. The SEC, however, said the EPA’s data is difficult to disaggregate regarding the different “Scopes” of emissions (i.e., Scopes 1, 2, and 3) and serves more as a national inventory of GHG emissions than a source of GHG emission data on particular companies. As a result, the SEC said a separate set of disclosure rules under federal securities laws is needed to ensure that investors have sufficient information about public companies’ climate-related risks, including GHG emissions.

This is one aspect of the SEC’s proposal that is likely to be challenged in court should the SEC issue a final version of the regulation, now that the Supreme Court has applied the major questions doctrine to limit the reach of EPA’s climate regulations. If the SEC adopts final climate-related disclosure regulations, the SEC would likely argue, among other things, that its regulations are within the scope of the traditional authorities conferred by its several organic statutes (e.g., the Securities Act and the Exchange Act), that the EPA does not have exclusive jurisdiction over GHG emissions and that the SEC’s climate-related regulations seek to achieve a different purpose than similar EPA regulations, and that the SEC’s climate-related disclosure regime targets public companies’ financial disclosures because of the potential impact climate-related disclosures can have on companies’ liquidity and cost of capital.

The majority opinion in West Virginia v. EPA is, on its surface, quite broad in its potential scope, suggesting only that a court would be guided in applying the major questions doctrine by the history and breadth of the agency authority asserted along with the economic and political significance of the agency's assertion of authority. The opinion can be read more narrowly in the context of the Clean Air Act, but it seems likely that other agencies’ rulemakings could become subject to legal challenges based on the major questions doctrine, including the SEC’s proposed climate-related disclosure regime.