What Does the Supreme Court’s Recent Decision on Climate Regulation Mean for the Energy Industry?

Vinson & Elkins LLP

The Supreme Court ended its 2021 term with a much-anticipated decision in West Virginia v. EPA.1 The 6-to-3 decision held that the Environmental Protection Agency (“EPA”) does not have the authority under Section 111(d) of the Clean Air Act (“CAA”)2 to restructure national energy policy by requiring the states to reduce greenhouse gas (“GHG”) emissions by shifting electric generation from existing coal- and gas-fueled power plants to lower- or zero-emitting sources of electricity. In so doing, it spoke not only to important questions about EPA’s authority under the CAA, but also broader issues in administrative law, particularly the Court’s evolving “major questions doctrine,” which has become increasingly prominent in recent years in challenges to regulatory actions issuing from federal agencies beyond the EPA.

Background

Section 111(d) authorizes EPA to regulate emissions of non-criteria, non-hazardous air pollutants from stationary sources through identification of the “best system of emission reduction” that is “adequately demonstrated.”3 Litigation over EPA’s authority to regulate GHG emissions under Section 111(d) began with the Obama EPA’s Clean Power Plan, which proposed “generation shifting” from higher-emitting to lower-emitting producers of electricity — from coal to natural gas, and from fossil fuels to low- or zero-emissions renewable sources — as part of the “best system of emission reduction” for power-plant GHG emissions. This sparked immediate litigation, not only because of the potential economic consequences, but because Section 111(d) had been rarely used in the past and, in the view of the Clean Power Plan’s opponents, was limited to measures for existing facilities to lower their emissions (e.g., scrubbers), not sector-wide measures like generation shifting.

In 2016, the Supreme Court stayed the Clean Power Plan. The Trump EPA subsequently repealed the Clean Power Plan and replaced it with the Affordable Clean Energy Rule, under which the “best system of emission reduction” would be limited to a combination of on-site power plant equipment upgrades and operating practices. Opponents challenged the Affordable Clean Energy Rule in court, and the U.S. Court of Appeals for the D.C. Circuit vacated that rule and the EPA’s repeal of the Clean Power Plan. However, by that point, compliance deadlines for the Clean Power Plan had long since passed, and the emissions reductions that the Clean Power Plan was projected to achieve had already been reached (at least at an aggregate level). Accordingly, the EPA sought and received a stay of the D.C. Circuit’s decision vacating the Clean Power Plan’s repeal, the need for which we have previously explained in detail, although the EPA also indicated it would propose new rules that would supersede both the Clean Power Plan and the Affordable Clean Energy Rule.

Major Questions Doctrine and the Scope of Section 111(d)4

In approaching the issue of Section 111(d)’s scope, the Court first addressed the applicability of the “major questions doctrine,” under which an agency must “point to clear congressional authorization” where the agency asserts powers of sweeping economic and political significance.5 Under this doctrine, “vague” or open-ended statutory language is insufficient, because the Court presumes that Congress does not “use oblique or elliptical language” to grant agencies “extravagant” power to regulate major aspects of “the national economy.”6 Where this doctrine applies, the Court need not evaluate under Chevron U.S.A. v. Natural Resources Defense Council7 whether the agency has reasonably interpreted an ambiguous statute, such that the agency’s interpretation is entitled to deference. Instead, it will reject the agency’s claim of statutory authority — even if there is a “colorable textual basis” in the statute for that claim of authority — absent a clear statement from Congress conferring that authority.8 This doctrine has been applied in a number of recent high-profile cases (e.g., challenges to the CDC’s eviction moratorium and OSHA’s COVID-19 vaccine mandate), but whether it should apply to this case was a major point of contention.

The Court concluded that the major questions doctrine applied. It noted that EPA had claimed to locate sweeping regulatory powers — essentially, to force major changes in the U.S. electric generation fuel mix — in “vague” language contained in a “rarely . . . used” “ancillary” provision of the CAA.9 The Court observed that EPA in the Clean Power Plan adopted emission limits based on generation shifting and the assumption that transitioning U.S. electric generation from 38% coal in 2014 to 27% coal by 2030 would be reasonable. The Court deemed this a “substantial[] restructur[ing of] the American energy market” and thus a transformative expansion of EPA’s regulatory authority.10 The Court also placed some weight on the fact that Congress had considered and rejected proposals to create cap-and-trade programs for carbon or a carbon tax, which made “all the more suspect” EPA’s argument that Congress had already delegated to EPA the authority to enact similar measures by regulation, and without further congressional authorization.11 The Court accordingly concluded that, under the major questions doctrine, EPA must “point to clear congressional authorization,” rather than mere vague or open-ended statutory language, to authorize it to “regulate in th[e] manner” it proposed.12 The Court, upon review of the relevant statutory text, concluded that EPA could not meet this burden.

Implications for Energy Markets and Future Climate Regulation

West Virginia raises two important questions for the energy industry: (1) what is its effect on control of GHG emissions from electric power generation, and (2) what are its implications for the Biden administration’s whole-of-government approach to climate change?

With respect to GHG emissions from electric power generation, the immediate practical effect of the West Virginia opinion is likely to be limited. As Justice Kagan’s dissent notes, “[m]arket forces alone caused the power industry to meet the [Clean Power] Plan’s nationwide emissions target,” even though the Clean Power Plan Rule never entered into force.13 And these market forces continue to lower the GHG intensity of power generation. For example, according to the International Energy Agency (“IEA”), the expansion of renewable capacity in the United States is forecast to be 65% greater over the 2021 to 2026 period than the five years prior.14 The IEA attributes this to “the economic attractiveness of wind and solar PV, increased ambition at the federal level, the extension of federal tax credits in December 2020, a growing market for corporate power purchase agreements, and growing support for offshore wind.”15

Additionally, growth in ESG and sustainable investing, where investors increasingly demand that companies set targets to reduce their GHG emissions, is driving down the GHG intensity of power generation. At least fifty of the U.S.’s investor-owned utilities have forward-looking carbon reduction goals, nearly three-quarters of which include a net-zero by 2050 or earlier equivalent goal.16

Notwithstanding these trends, the Biden administration has indicated that it intends to use the regulatory tools available to push to a stated goal of net-zero emissions from U.S. electric power generation by 2035.17 This raises the question of what a new approach to Section 111(d) might look like and what role it may play in meeting the Biden administration’s climate goals.

Although the Court held that EPA could not devise carbon emissions caps based on a generation shifting approach under Section 111(d), it left open a number of important questions about the scope of that statutory provision. Indeed, the Court’s holding was in some respects quite narrow: It simply held that EPA could not base a determination about the “best system of emission reduction” on a generation-shifting approach. The Court specifically declined to decide “whether the statutory phrase ‘system of emission reduction’ refers exclusively to measures that improve the pollution performance of individual sources,”18 or whether certain measures that reach beyond the proverbial “fenceline” of individual facilities might be allowable. Thus, in addition to inside-the-fenceline measures like heat rate improvement and co-firing coal plants with natural gas, EPA might choose to grapple with what, if any, beyond-the-fenceline measures are available to set the standard and also whether, once the standards have been set, approaches such as emissions averaging and trading programs are available as a means to comply with the targeted standards, in addition to whatever measures were used as the “best system” to set the standard.

In addition, advances in GHG emissions mitigation technologies could broaden EPA’s approach to inside-the-fence line emissions-reduction technologies. The existing Section 111(b) standards for new sources already functionally require any new coal-fired power plants to be constructed with partial carbon capture and sequestration (“CCS”) technology.19 Given this, EPA may feel free to propose partial CCS for existing sources, although EPA could face a steep climb in justifying such a command given that Section 111(d) and EPA’s implementing regulations recognize that existing sources will rarely have the ability to achieve, at reasonable cost, the same levels of control as new sources.

Another tool in the CAA tool box is the authority and, arguably, the mandate to adopt a national ambient air quality standard (“NAAQS”) for carbon dioxide. The CAA requires EPA to identify pollutants “which, in [its] judgment, cause or contribute to air pollution which may reasonably be anticipated to endanger public health or welfare; [and] the presence of which in the ambient air results from numerous or diverse mobile or stationary sources,”20 and then adopt NAAQS for such “criteria pollutants.”21 EPA made such broad findings in connection with its adoption of automotive GHG limits in 2009, and various environmental groups have sought to compel EPA to adopt NAAQS based on that finding. West Virginia’s constraining of EPA’s authority under Section 111(d) might spur EPA to more strongly consider using the NAAQS program to regulate GHGs.

EPA also has proposed to more tightly regulate emissions of non-GHG pollutants which may, in effect, discourage fossil fuel combustion. One example is the pending proposal of amendments to the cross-state air pollution rule, which would reduce nitrogen oxides emissions budgets in 25 states in the name of protecting the ozone NAAQS, but with the added consequence of greatly constraining the viability of coal- and gas-fired power that may need to rely on an ozone-based allowance trading program.22 The proposal would also bring in combustion sources other than power generation.23

Implications for Other Government Regulators

The Court’s reaffirmation of the major questions doctrine and its decision to make that doctrine the centerpiece of its reasoning in West Virginia is likely to have significant implications for future environmental regulations — and administrative law in general. The Court’s embrace of the major questions doctrine means that federal agencies asserting “[e]xtraordinary grants of regulatory authority” must “point to clear congressional authorization” and more than “modest words, vague terms, or subtle device[s]” in the underlying statute.24 Opponents of future rules are certain to test the bounds of what constitutes an assertion of “extraordinary” regulatory authority, although Justice Kagan’s dissent addresses the complexities such challenges will present: “Apparently, there is now a two-step inquiry. First, a court must decide, by looking at some panoply of factors, whether agency action presents an ‘extraordinary case.’ If it does, the agency ‘must point to clear congressional authorization for the power it claims,’ someplace over and above the normal statutory basis we require.”25 Contentious litigation regarding whether the major questions doctrine applies in other contexts, beyond environmental rulemakings, is certain to follow, and the stakes will be high: As West Virginia itself illustrates, the applicability of the major questions doctrine may often be outcome-determinative, making the difference between a regulation surviving or failing judicial scrutiny.

Thus, the major questions doctrine will play a significant role as the Biden administration continues to execute its whole-of-government approach to climate change, and it will likely feature prominently in legal challenges to future climate change regulations. For example, the Securities and Exchange Commission recently closed the public comment period on its proposed climate change disclosure rules for public companies. The SEC’s proposing release asserts that the Commission “has broad authority to promulgate disclosure requirements that are necessary or appropriate in the public interest or for the protection of investors.”26 Commenters on the proposing release have suggested, in response, that a final rule may implicate the major questions doctrine to the extent that rule has “considerable impacts on the U.S. economy” without clear congressional authorization.27

Time will tell how much of a setback West Virginia is for EPA as to climate regulation given the options that may remain available to it. But the continued ascent of the major questions doctrine leaves open many questions regarding the scope of federal agencies’ discretion in implementing federal statutes.

1 No. 20-1530, slip op. (June 30, 2022).

2 42 U.S.C. § 7411(d).

3 42 U.S.C. § 7411(a)(1).

4 Before turning to the merits the Court rejected a challenge to the States’ standing to bring the case and also noted the case was not moot because, if it prevailed in the case, the EPA might choose to reimpose emissions limits predicated on generation shifting.

5 Slip op. at 19 (emphasis added).

6 Id. at 18-19 (emphasis added and internal quotation marks omitted).

7 467 U.S. 837 (1984).

8 Slip op. at 18.

9 Id. at 20 (citation omitted).

10 Id. (citation and internal quotation marks omitted).

11 Id. at 27-28.

12 Id. at 28 (citation omitted).

13 Id. at 4 (Kagan, J., dissenting).

14 IEA, Renewables 2021: Executive Summary, https://www.iea.org/reports/renewables-2021/executive-summary.

15 Id.

16 See Edison Electric Institute, Clean Energy & Climate Change, https://www.eei.org/issues-and-policy/clean-energy.

17 See Press Release, The White House, Fact Sheet: President Biden Sets 2030 Greenhouse Gas Pollution Reduction Target Aimed at Creating Good-Paying Union Jobs and Securing U.S. Leadership on Clean Energy Technologies (April 22, 2021), https://www.whitehouse.gov/briefing-room/statements-releases/2021/04/22/fact-sheet-president-biden-sets-2030-greenhouse-gas-pollution-reduction-target-aimed-at-creating-good-paying-union-jobs-and-securing-u-s-leadership-on-clean-energy-technologies/.

18 Slip op. at 30-31.

19 See 80 Fed. Reg. 64,510 (Oct. 23, 2015).

20 42 U.S.C § 7408(a)(1)

21 Id.

22 87 Fed. Reg. 20,036, 20,036 (Apr. 6, 2022).

23 Id.

24 Slip op. at 18 (citation and).

25 Id. at 15 (Kagan, J., dissenting) (citation omitted).

26 87 Fed. Reg. 21,334, 21,335 (April 11, 2022) (citation and internal quotation omitted).

27 U.S. Chamber of Commerce, Comments on SEC Proposing Release 25 (June 16, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20131892-302347.pdf.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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