Clifford Chance

On June 30, 2022, in West Virginia v. Environmental Protection Agency, the U.S. Supreme Court limited the authority of the Environmental Protection Agency ("EPA") to regulate carbon dioxide ("CO2") emissions from existing coal- and natural-gas-fired plants under the Clean Air Act using a sector-wide approach.

The 6-3 majority opinion, authored by Chief Justice John Roberts, invoked the "Major Questions Doctrine" in holding that Congress did not grant the EPA authority under the Clean Air Act to force a reduction in carbon emissions using the "generation shifting" approach that it adopted under the Clean Power Plan ("CPP").

The decision curtails the authority of the EPA to regulate CO2 emissions from existing power plants as part of broader efforts by the Biden administration to combat climate change. The Court's invocation of the Major Questions Doctrine may also call into question the long-term viability of other tools within the Biden administration's ambitious climate agenda that may be subject to litigation, such as rules proposed by the Securities and Exchange Commission ("SEC") regarding climate-relate financial disclosures.

The decision in West Virginia v. EPA is otherwise narrower than some feared, in that it does not address CO2 emissions from new plants and leaves open options for the EPA to regulate carbon emissions from existing plants through its other authorities. The defeat may nonetheless compel President Biden to heed calls to take alternative bold executive action on climate change, such as declaring a National Climate Emergency or invoking the Defense Production Act.

I. BACKGROUND ON THE CPP

In 2015, the Obama Administration's EPA enacted the CPP to regulate CO2 emissions from existing coal- and natural-gas-fired power plants. For its authority, the EPA relied on Section 111(d) of the Clean Air Act, which directs the EPA to create standards limiting the emission of air pollutants – known as "performance standards" – from existing sources such as coal and gas power plants. Section 111(d) provides that while individual states ultimately create and enforce the rules for those existing sources, the EPA's performance standards set the target that the rules must be designed to meet. The remainder of Section 111 focuses on emissions form new sources, and the little-used Section 111(d) has been understood even by the EPA to have a "gap-filling purpose" for existing sources not otherwise covered by other EPA authorities.

To establish emissions limits under Section 111, the EPA must determine "the best system of emissions reduction," or "BSER," "taking into account the cost of achieving such reduction and any non-air quality health and environmental impact and energy requirements." In the CPP, the EPA determined that the BSER for CO2 emissions from existing sources comprised three measures, which the EPA referred to as "building blocks":

1. Improve "heat rate" efficiency such that coal plants burn coal more cleanly;
2. Shift generation from existing coal plants to gas plants, which produce less CO2; and
3. Shift generation from coal and gas plants to low- or zero-carbon energy sources, such as wind, solar, or hydroelectric power.
   

To implement the latter two building blocks, which the EPA referred to as "generation shifting" from higher-emitting sources to lower-emitting sources, a plant operator could:

1. Reduce the plant's own production of electricity;
2. Build or invest in lower- or zero-carbon energy source; or
3. Purchase credits at a marketplace for carbon emissions as part of a cap-and-trade program.

The EPA's aim was to set a CO2 emission limit that, in its view, was "reasonable" and would catalyze a sector-wide energy generation shift from coal to cleaner sources without provoking undue cost burdens or reductions to the power supply. In this way, the EPA projected that the CPP could feasibly reduce coal-based electricity generation from 38% of the US power supply in 2014 to 27% by 2030.

II. PROCEDURAL HISTORY

Tangled in litigation from its inception in 2015, the CPP never entered into force. Dozens of state and private energy stakeholder parties challenged the CPP within days of its announcement, culminating in a stay issued by the Supreme Court that prevented the rule from taking effect. In 2019, the Trump Administration's EPA formally repealed the CPP, replacing it with the Affordable Clean Energy ("ACE") Rule, which effectively shed the second and third CPP building blocks in favor of the first – technology-based improvements to heat rate efficiency.

The repeal of the CPP and enactment of the ACE Rule prompted other states and stakeholders to file petitions for review in the D.C. Circuit. On January 19, 2021, ruling on those consolidated petitions, the U.S. Court of Appeals for the D.C. Circuit vacated the ACE Rule and its repeal of the CPP, remanding both to the EPA for further consideration. With the transition to the Biden Administration underway, the EPA sought and was granted a partial stay while it considered whether to promulgate a new Section 111(d) rule. Several parties sought review, which the Supreme Court granted.

The Court held as a preliminary matter that the petitioners had standing to seek review and that the repeal of the rule did not moot the case. As the Court explained, there could be "little question" that the CPP injured petitioning states by requiring them to more stringently regulate plants within their borders – despite the Biden EPA's stated intent to voluntarily replace the CPP with a new rule.

III. THE OPINION

Proceeding on the merits, the Court assessed whether the "generation-shifting" BSER for CO2 emissions from existing plants fell within the intent of Congress when it created Section 111(d). According to the majority, "where the statute at issue is one that confers authority upon an administrative agency, that inquiry must be 'shaped, at least in some measure, by… whether Congress in fact meant to confer the power the agency has asserted."

At the heart of the majority's answer to this question was its application of the Major Questions Doctrine ("MQD"), which the Court articulated as providing that it should apply stricter scrutiny to agency authority – a "reason to hesitate" – where its estimation of the sheer breadth and economic and political significance of the purported authority presents an "extraordinary case." In such extraordinary cases, the Court said that it would require the agency to provide "clear congressional authorization" for its claimed authority, as the Court itself is "'reluctant to read into ambiguous statutory text' the delegation claimed to be lurking there."

Citing recent examples of what it considered so-called "administrative state" overreach subject to the MQD, the majority referred to its decision to strike down a moratorium on evictions enacted by the Centers for Disease Control to combat the spread of COVID-19. According to the Court, Congress had previously declined to issue such a moratorium, and while "[f]orbidding evictions may slow the spread of disease," such a measure from the CDC "certainly 'raise[s] an eyebrow.'" Analogously, the majority argued, it would not expect the Occupational Safety and Health Administration to enact energy generation shifting even though such measures would reduce injury from coal dust.

As for Congressional intent, the majority pointed to the "seemingly universal view" that Congress intended a technology-based approach focusing on improving the emissions performance of individual sources – an approach that might resemble the first of the CPP's building blocks as opposed to a sector-level overhaul of the power grid compelled by the second and third building blocks. According to the majority, there is "little reason" to believe that Congress intended Section 111(d) – a "gap-filler" given Section 111's principal focus on new sources of emissions – to assign to the EPA an authority that requires system-wide technical and policy expertise beyond the EPA's competence or discretion as to the desirable amount of coal-based generation in the US energy supply in the coming decades. As the majority wrote, "[t]he basis and consequential tradeoffs involved . . . are ones that Congress would likely have intended for itself," rather than delegate it through "the previously little-used backwater of Section 111(d)." Congress has, for example, previously considered and rejected legislation to adopt a type of cap-and-trade scheme for carbon similar to the CPP, and "just because a cap-and-trade 'system' can be used to reduce emissions does not mean that it is the kind of 'system of emission reduction' referred to in Section 111."

Reversing the decision of the Court of Appeals for the D.C. Circuit, the Court concluded: "it is not plausible that Congress gave EPA the authority to adopt on its own such a regulatory scheme in Section 111(d). A decision of such magnitude and consequence rests with Congress itself, or an agency acting pursuant to a clear delegation from that representative body."

IV. IMPACT ON THE BIDEN CLIMATE AGENDA

The Supreme Court's use of the MQD to limit the EPA's authority appears to solidify a nascent, controversial, and potentially aggressive judicial doctrine, which may lead to future limitations on the power of administrative agencies generally. A concurring opinion authored by Justice Neil Gorsuch and joined by Justice Samuel Alito, for example, laments the "explosive growth of the administration state since 1970" and envisages a more expansive application of the MQD, including when an agency claims the power to resolve a matter of great political significance or end an "earnest and profound debate across the country," such as banning most forms of physician-assisted suicide or imposing wide COVID-19 vaccine mandates in the workplace. By contrast, the dissenting Justices led by Justice Elena Kagan opined that it was the Court that was overstepping its role, warning that in "prevent[ing] congressionally authorized agency action to curb power plants' carbon dioxide emissions . . . [t]he Court appoints itself — instead of Congress or the expert agency — the decisionmaker on climate policy. I cannot think of many things more frightening."

This decision will be of particular concern to the SEC, which alongside the EPA, has been among the key administrative and regulatory actors within the Biden Administration's ambitious climate agenda. The Commission has taken an aggressive regulatory and enforcement posture on climate change related issues, reflected in developments like the creation of the Climate and ESG Task Force, greenwashing related enforcement action, and the proposed rules for climate-related financial disclosures. Like the EPA's CPP, the SEC's climate-related actions, particularly the proposed mandatory climate-related disclosures, are considered by many to be a potentially far-reaching regulation that lacks explicit authorization by Congress. Prior to the West Virginia decision, the SEC's authority to take such climate-related action was already under fire from critics who claim it is inappropriate for the Commission to be engaging in environmental policy. For example, SEC Commissioner Hester Peirce challenged the proposed rules in her statement "We are Not the Securities and Environment Commission - At Least Not Yet" voicing her concerns that the SEC is acting beyond its statutory limits. Litigation incorporating the reasoning of the Court's decision to challenge the legitimacy of the climate disclosure rules can be expected.

V. PATHWAYS FORWARD

Despite the ruling, climate advocates believe paths forward remain for the EPA in its regulation of greenhouse gases ("GHGs"), particularly as only one other Justice signed on to Justice Gorsuch's concurring, broader opinion. For example, the majority opinion leaves open a more conservative route for regulation of existing plants under Section 111(d), focusing on technology-based solutions for individual plants.

Alternatively, the EPA may also opt for another of its authorities, the National Ambient Air Quality Standards ("NAAQS") program, to declare CO2 and other GHGs a pollutant that "may reasonably be anticipated to endanger public health or welfare," and "the presence of which in the ambient air results from number of diverse mobile or stationary sources." Such a declaration would authorize the EPA to "determine the maximum safe amount" of GHGs in the air. Under the NAAQS program, the EPA would not select which sources must reduce their GHG emissions or by how much. Instead, the NAAQS program delegates that task to the states, which much submit to the EPA "a plan designed to implement and maintain such standards within its boundaries." Climate advocates support this option, despite logistical challenges, because it would apply to all sectors of the economy, not just power plants, and would provide states with flexibility around how to meet the GHG cap, including through multistate trading programs. By the majority's own acknowledgement, "capping carbon dioxide emissions at a level that will force a nationwide transition away from the use of coal to generate electricity may be a sensible 'solution to the crisis of the day" – provided such a measure does not rely on Section 111(d).

Finally, the Biden Administration must continue to weigh bold executive action. Last month, President Biden authorized use of the Defense Production Act ("DPA") to accelerate domestic production of clean energy technologies, but funding under the DPA will require support from Congress. Climate advocates continue to call on the President to declare a National Climate Emergency. Legislation introduced in the House of Representatives would require the President to do so, and sheds light on what steps the President might take under such circumstances, including "investments in large scale mitigation and resiliency projects, upgrades to public infrastructure, modernization of millions of buildings to cut pollution, investments in public health, protections for public lands, [and] regenerative agriculture investments that support local and regional food systems." The Administration has not indicated which avenues it will pursue, but the President did announce in a statement immediately after the Court's decision: "I will not relent in using my lawful authorities to protect public health and tackle the climate crisis."