SCOTUS ruling could set back efforts to fight climate change, affect energy investments, and increase regulatory risk
The United States Supreme Court today sharply curtailed the Environmental Protection Agency’s power to regulate greenhouse gas (GHG) emissions from coal-fired power plants. In a victory for coal-producing states and fossil fuel companies, the Court ruled that Congress did not grant the EPA the authority to devise caps on GHG emissions based on a system-wide approach intended to shift power generation away from coal to cleaner gas and renewable energy sources. Section 111(d) of the Clean Air Act allows the EPA to regulate only actions at individual plants, not to mandate power sector-wide measures. The 6 to 3 ruling, in West Virginia, et al. vs. Environmental Protection Agency, et al. (Case No. 20-1530), limits the EPA to regulating emissions from standalone power plants without the broader tools necessary to compel a shift toward a cleaner power grid. The ruling could set back efforts to fight climate change. It may also impact investments in energy assets, including renewable power, and create more regulatory uncertainty.
Challenging an Old Climate Rule to Block Future Rules
This complex case, addressing both environmental and administrative law questions, was decided by the Court even though the regulations at issue – U.S. President Barack Obama’s 2015 Clean Power Plan – were never implemented and were later repealed. The Court could have declined to hear the case brought by the State of West Virginia, other states and fossil fuel companies on the basis that, since there is currently no regulatory plan in place to challenge, there is no “case or controversy” susceptible to a court decision. The repeal of the prior regulatory regimes for power plant GHG reductions made the challenge moot, and it is not yet ripe to challenge whatever rules the EPA is expected to promulgate to replace the prior plans.
Instead, the Court took the unusual step of granting certiorari, with oral arguments in February 2022 raising a host of issues that touched on broader questions of regulatory power and Congressional delegation of enforcement authority in future cases.
Although the EPA is not enforcing the Clean Power Plan and is in the process of new rulemaking, the West Virginia vs. EPA case was nonetheless justiciable, according to the majority opinion by Chief Justice John Roberts. He said that West Virginia and other states have standing to sue the EPA because they are injured by a rule (even though it is no longer enforced) that “requires them to more stringently regulate power plant emissions within their borders.” He added that the case is not moot, even though the EPA has expressed no intention of restoring the old Clean Power Plan, because it is not “absolutely clear that the allegedly wrongful behavior could not reasonably be expected to recur” and the government has not carried its burden of proof that future rulemaking will not “reimpose emissions limits predicated on generation shifting.”
EPA’s Clean Power Plan
The EPA regulations implementing the 2015 Clean Power Plan, at issue in the West Virginia case, were issued in August of 2015 pursuant to Section 111(d) of the Clean Air Act. The 2015 regulations set state-specific targets and granted to the states the authority to determine how best to reduce greenhouse gas emissions. That sort of federal-state coordination is typical of Clean Air Act rules. States could achieve emissions reductions in line with the EPA’s directive by balancing each of the plan’s three building blocks:
1. plant-level changes to increase fossil fuel power plant efficiency by reducing the plant’s heat rate (such as by co-firing gas with coal), and otherwise reducing plant-specific emissions;
2. shifting power plants from coal to natural gas, thus reducing GHG emissions across the state’s mix of generation resources; and
3. state-wide shifts to increase renewable energy capacity, to transition from fossil fuels to renewables, to reduce energy demand through enhanced efficiency, or to introduce a cap-and-trade mechanism or take other steps to reduce the carbon intensity of the power grid.
The Court in West Virginia vs. EPA curtailed the second and third building blocks. A rule calling for states to devise system-wide reductions in average GHG emissions across their power grids exceeded the authority given by Congress to the EPA under the Clean Air Act, according to the Court.
Scope of Regulatory Authority and Judicial Review
As crippling as the ruling is for the EPA’s ability to combat climate change in new emissions rules, the case could have been even worse for environmentalists. In examining the scope of the EPA’s authority to regulate greenhouse gas emissions under the Clean Air Act, the Court had a choice on how far to go.
The Court did not overturn precedents that firmly established the EPA’s ability to regulate GHG emissions under Section 111 of the Clean Air Act. It merely tied the EPA’s hands in doing so. The United States government has long determined that greenhouse gas emissions are polluting the atmosphere and causing significant and harmful effects on the human environment. In 2007, in Massachusetts vs. EPA, the U.S. Supreme Court found that the EPA has the authority to regulate greenhouse gases, such as carbon dioxide, as “air pollutants” under the Clean Air Act. Relying on the Massachusetts case and other precedents, courts have accepted this position as settled law. As noted by Justice Elena Kagan in her dissent in the West Virginia case, “Section 111 of the Clean Air Act directs 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.’ 42 U. S. C. §7411(b)(1)(A).”
Statutes enacted by Congress grant authority to regulatory agencies to implement the law. Statutes are, of necessity, less specific that the findings, procedures, standards and mechanisms adopted by agencies in the formal rulemaking process. The Court left in place the Chevron doctrine (dating from a 1984 case) by which courts traditionally grant deference to federal executive agencies in interpreting statutes that they administer, but the Court said that such deference is not appropriate in this case. Because the EPA’s regulation of the energy sector is not clearly authorized by Congress, the majority said, the EPA must point to “clear congressional authorization” for the authority it claims in making ”decisions of vast economic and political significance.” This is a “major question” for the Court to determine, and it found no such “clear authorization” in the statute. The dissent stressed that the “major question doctrine” is typically used when significant agency action runs counter to express direction from Congress, which the Clean Power Plan did not, so deference to the EPA would have been appropriate.
Impact of the Ruling on Climate Regulation
The ability of the EPA to regulate GHG emissions is a key factor for the United States to meet its longer-term climate goals. Although the Clean Power Plan adopted by President Obama, which is the subject of the West Virginia case, was never fully implemented, the Biden Administration is expected to issue its own regulations curtailing GHG emissions this year. How the EPA can cause states to shift from polluting generation sources (like coal-fired power plants) to more efficient gas-fired cogeneration facilities and, especially, renewable energy depends in large part on how the Administration and Congress react to today’s Court decision.
As confirmed by other court decisions, the EPA has the authority to regulate both GHG emissions and (since 1971) thermal power plants. The 2015 Clean Power Plan was designed explicitly to find the best, least cost solution to reducing GHG emissions from power plants. System-averaging of emissions spreads the burden across the grid as efficiently as possible. The EPA has previously determined that it will be impossible to reduce GHG emissions to the levels necessary to meet climate targets if federal environmental regulation is limited to plant-level changes and not system-wide grid decarbonization.
The Biden Administration seeks to cut total greenhouse gas emissions in half by 2030 and to fully decarbonize the power sector by 2035. Electricity generation accounts for 25% of all US GHG emissions, with 60% of those emissions coming from coal-fired power plants and most of the balance coming from gas-fired generation. Only the transportation sector contributes more GHGs, and with the shift to electric vehicles there will be even more urgency to greening the grid.
As a result of today’s Supreme Court ruling, future EPA regulation of power plant emissions will be more costly and less effective. Other tools (such as expensive new requirements for carbon capture and sequestration or indirect regulation of water or other air emissions) may be needed, unless Congress acts to allow the EPA to implement other, less intrusive and more effective solutions in conjunction with state environmental regulators. President Biden’s package of climate and clean energy legislation, passed by the House of Representatives, remains stalled in the Senate.
More broadly, the decision today by the Court creates doubt in future cases about the extent to which courts should defer to agency determinations about the scope of their authority and what constitutes clear direction from Congress. In light of other recent Supreme Court rulings this term limiting administrative enforcement of securities laws and government authority to regulate occupational safety and public health, there is likely in the future to be less judicial deference, more litigation and less clarity around federal regulations in any area having significant economic impact, which is to say nearly all substantial regulations.
Prior Litigation – Obama and Trump Plans Collide
Today’s decision is not the first time the U.S. Supreme Court has examined the Clean Power Plan. The Court, in a 5 to 4 decision on February 9, 2016 in State of West Virginia, et al. vs. EPA, granted an unusual emergency stay of the 2015 Clean Power Plan, suspending its implementation while the case, challenging the EPA’s regulations, was pending in the D.C. Circuit Court of Appeals. From that point, the plan was never enforced. An executive order signed by President Trump in March 2017 mandated EPA review of the 2015 Clean Power Plan and led to the adoption of the new rule in 2019 – the Affordable Clean Energy (ACE) Rule. The D.C. Circuit Court, which was not subject to the stay and heard the West Virginia case on its merits, allowed the Trump Administration extra time to implement its replacement plan (rather than simply repealing the 2015 Clean Power Plan) since, as confirmed by the courts, the EPA has both the statutory authority and the duty to regulate greenhouse gas emissions under the Clean Air Act. The legal question for the EPA was (and today still is) how to regulate emissions, not whether to do so.
The Trump Administration’s attempt to replace the Obama Clean Power Plan with the sharply more limited ACE Rule ultimately failed. The Trump Administration’s 2019 ACE Rule repealed and replaced the Clean Power Plan that had been implemented in 2015 by the EPA under President Obama. The 2019 ACE Rule omitted many of the measures – like encouraging states to consider “cap and trade” carbon markets or shifting power generation from coal to natural gas and from fossil fuels to wind and solar power and other renewable sources – that were key parts of the President Obama’s 2015 Clean Power Plan. The 2019 ACE Rule notably limited the reach of the EPA’s regulation of greenhouse gas emissions to individual stationary sources (standalone coal-fired power plants), rather than systemic programs “outside the fence.” The 2019 ACE Rule extended the timeline for the states to propose plans to meet emissions targets. The 2019 ACE Rule also greatly narrowed the remedial steps that generators needed to take, some of which arguably would not have reduced net carbon dioxide emissions at all.
The D.C. Circuit Court of Appeals dismissed as moot the proceedings in the West Virginia case challenging the 2015 Clean Power Plan on September 17, 2019, eleven days after the effective date of the EPA’s new ACE Rule to replace the Obama Administration’s 2015 Clean Power Plan. That chain of events led to the consolidation of several cases, a petition for review, and today’s Supreme Court decision.
In the meantime, on January 19, 2021, in American Lung Association, et al. vs. EPA, the U.S. Court of Appeals for the District of Columbia vacated the Affordable Clean Energy Rule that the EPA under the Trump Administration had adopted in June 2019. That case was the last major legal decision until today affecting domestic regulation of GHG emissions in the energy sector. The D.C. Circuit Court of Appeals in its American Lung Association decision found that both the EPA’s repeal of the 2015 Clean Power Plan and the adoption of the replacement 2019 Rule were legally flawed, stating that the EPA’s 2019 “amendment of the regulatory framework to slow the process for reduction of emissions is arbitrary and capricious.” Based on its “endangerment finding,” the EPA is required to regulate greenhouse gas emissions under the Clean Air Act.
The decision in the American Lung Association case reaffirmed the EPA’s 2015 finding that carbon emissions from power plants cause or contribute significantly to atmospheric greenhouse gas pollution that may reasonably be anticipated to endanger public health and welfare. According to the D.C. Circuit Court, the EPA applied its expertise to determine, in the statutory language, “the degree of emission limitation achievable through the application of the best system of emission reduction” that “has been adequately demonstrated.” That system must “tak[e] into account the cost of achieving such reduction and any nonair quality health and environmental impact and energy requirements[.]” Once the EPA identifies the best system of emission reduction, the EPA determines the amount of emission reduction that existing sources should be able to achieve based on the application of that system and adopts corresponding emission guidelines.
With the new Supreme Court ruling in the West Virginia case today, the EPA will have far fewer tools at its disposal to reduce power sector emissions.
Energy Transition: Coal to Gas to Renewables
The Clean Power Plan was meant to reduce carbon dioxide emissions from existing fossil-fueled power plants by 32% by 2030, relative to 2005 levels. Those targets were met anyway, in part because many states voluntarily complied with the EPA’s requirements as if the 2015 rules had taken effect. Falling prices of competing technologies are an even more crucial economic driver of the energy transition. Cost savings have been reinforced, like a tailwind, by public policies that favor decarbonization of the power sector and that have made renewable energy technologies cheaper, scalable and more reliable. Low natural gas prices, dramatically lower costs of building wind and solar power plants, and state and federal regulations and incentives for new renewable power investments (mainly renewable portfolio standards, tax credits, transmission upgrades, net-metering and storage) have combined to accelerate the “energy transition” away from coal to a cleaner power grid.
Specifically, coal has become uneconomic for much power generation in the face of sustained low natural gas prices from 2008 until last year. Coal power generation in the United States peaked in 2007. Utilities have retired over 546 power plants (comprising over 100 GW of utility-scale coal-fired electric-generating capacity), mostly ageing power plants built in the 1970s and 1980s, over the past decade. At least 1 in 4 of the remaining coal-fired power plants (out of a total remaining fleet with about 200 GW of generating capacity and about 23% of total power generation) is slated to retire by 2035, according to the U.S. Energy Information Administration, even in the absence of new federal limits on greenhouse gas (GHG) emissions.
These old coal plants are being replaced by new gas-fired or renewable power plants. Coal-fired power plant retirements have been accompanied by construction or repowerings of new, more efficient natural gas power plants. Today, the 278 GW of combined-cycle gas-fired power plants are the prevalent technology to generate power in the United States, and more are planned, particularly in Texas, Pennsylvania and Ohio.
Gas is just part of the story. With the rise in natural gas prices (Henry Hub) from a low of $1.63/MMBtu in June 2020 to $3.26 a year ago to over $6 today, renewables are often the lowest marginal cost generator, causing a slight drop in the share of total kilowatt-hours generated by natural gas from 39% in 2020 to 37% in 2021.
Renewable energy has become big business and a driver of job growth despite tight labor markets. The US solar industry added 17,212 jobs in 2021, a 5.4% increase over the prior year. More than 3 million jobs, 40% of total energy jobs, support reducing U.S. carbon emissions to zero across several sectors – wind, solar, electric vehicles (EVs), energy storage, transmission and distribution, and energy efficiency – according to the Department of Energy’s (DOE) US Energy and Employment Report (USEER) released this week.
The share of the nation’s total energy generation from non-hydro renewables like wind and solar power has soared from under 5% in 2012 to over 15% this year and continues to grow rapidly. The roughly 70 GW of existing solar power generating capacity now operating in the United States is expected to double in the next couple of years.
The vast majority of new additions to power generating capacity over the past two years have been wind and solar power plants, a trend expected to continue. Many new utility-scale solar power projects include battery storage to boost availability of this intermittent resource. Offshore wind, already established in Europe and Asia, is finally taking off at scale in the United States with very large projects under development off the Northeast Atlantic Coast and new lease auctions planned for North Carolina and California.
Challenges For Solar Power: Trade Policy and Supply Chains
The fast pace of new solar installations is challenged by inflation, tight labor markets, supply chain challenges, and trade enforcement actions. Due to a relative dearth of domestic manufacturing capacity, most solar power equipment is imported. The low-cost leader globally is China. Imported Chinese solar equipment has been subject to various tariffs since 2012, and a 30% tariff on imported crystalline silicon photovoltaic (CSPV) cells and modules was imposed in 2018.
Those tariffs are already priced in to new projects. Since April 1, 2022, however, many new solar power projects were put on hold due to uncertainty around the added costs of imported equipment due to the Commerce Department’s so-called Auxin circumvention trade investigation of imported solar equipment from manufacturers in Cambodia, Malaysia, Thailand and Vietnam, many using Chinese components. On June 6, President Joseph R. Biden, Jr. declared a 24-month suspension of antidumping and countervailing duties on solar panels, cells and modules subject to the Auxin inquiry, which affected imports from the four Southeast Asian countries accounting for 80% of U.S. solar cell imports. The U.S. solar power industry breathed a sigh of relief.
Today, there is news of another government action threatening supply chains for imported solar equipment. China accounts for about 80% of global production of solar-grade polysilicon, an essential component of solar photovoltaic (PV) panels. U.S. Customs and Border Protection this week reportedly started detaining PV modules that cannot show supply chain documentation for the quartzite used to make polysilicon under the new Uyghur Forced Labor Prevention Act, which passed Congress nearly unanimously in January and took effect on June 21, 2022.
Impact on Energy Investments
The Supreme Court ruling in West Virginia vs. EPA could have pronounced effects on private investment in energy and climate-related green technology. Two factors are key to forecasting potential market impacts of the Court’s ruling. First, if the EPA now must be more creative in regulating greenhouse gas emissions within the narrow swim lane suggested by the Court, then valuations of incumbent thermal power generating capacity and related upstream fossil fuel assets may be more challenging. In the current market, investment in added power generation capacity still overwhelmingly favors renewable sources and more efficient combined cycle natural gas-fired generators. Second, investment of all kinds could drop off – and litigation risks could increase for future projects – to the extent that the Supreme Court has created ambiguity in the scope of regulators’ statutory authority generally in this and other rulings. Changes in law, uncertainty about new regulations or agency powers, and fear of judicial pivots: these political risks can chill investment across sectors.
The massive investment in wind energy and solar power expected over the coming decade – along with energy storage, distributed generation and upgraded transmission facilities – to meet increased electricity demand coincides with economic growth, the decarbonization of the transportation sector, increasing digitalization of the economy, and the need for enhanced resilience of critical infrastructure in the face of extreme weather. The long-term role of nuclear power remains uncertain. Nonetheless, new, cleaner power plants will be required to compensate for planned retirements of older, less efficient, polluting thermal power plants. Those retirements will likely continue. New technologies, ESG imperatives of investors, state environmental regulations, and economic challenges for coal compared to gas and renewable energy: these factors will continue to drive the energy transition.