On Thursday, June 30, 2022, the United States Supreme Court issued its decision in West Virginia v. EPA, striking down the Obama-era Clean Power Plan (CPP) and limiting the Environmental Protection Agency’s (EPA’s) authority to promulgate similar cap-and-trade style schemes under Section 111 of the Clean Air Act (CAA). The Court refused to address whether EPA is limited to so-called “inside the fence” regulations that would apply technological systems to specific existing sources (such as direct pollution controls) or whether some other market-based mechanism may be allowed. Additionally, despite deciding the case under the Major Questions Doctrine, the Court did not substantially expand the doctrine.

Background

The case revolved around the legality of the CPP, which never actually took effect. Section 111(d) of the CAA allows EPA to establish the “Best System of Emissions Reduction” (BSER) for existing sources, taking into account various factors including the remaining useful life of existing sources. The CPP would have required states to set an emissions cap for the electric utility sector, either on a mass- or rate-basis, to be approved by EPA and develop a plan to ensure statewide attainment of the cap. In setting the cap, EPA determined that the BSER consists of three “building blocks”: (1) heat rate improvements, or practices that could be undertaken by fossil generation units to improve efficiency; (2) generation shifting from coal-fired plants to natural gas-fired plants; and (3) generation shifting from coal- and gas-fired plants to renewables. Using such building blocks would necessarily have required the closure of many fossil facilities. While the exact path to achieving the goals would be left up to each state, EPA promoted emissions trading schemes as the most cost effective means of achieving compliance.

A group of states and industry groups challenged the rule, arguing that EPA was limited by the statutory language to technological “systems” that could be implemented directly by existing sources without forcing such existing sources out of business. Such systems would likely include direct pollution controls such as scrubbers and carbon capture and sequestration. EPA argued that “system” could be interpreted broadly to include generation shifting schemes and that Congress did not limit it to the more narrow interpretation. EPA pointed to other areas in which it has implemented cap-and-trade type schemes including the acid rain program and mercury rule.

Major Questions Doctrine

Although many observers questioned why the Court heard the case in the first place, (the CPP never took effect, its immediate replacement had been vacated by the DC Circuit, and EPA was already working on a replacement for both), it became clear during oral arguments that members of the conservative wing of the Court viewed the matter as a potential vehicle to provide clarity on the “Major Questions Doctrine”. The Major Questions Doctrine traces its roots to FDA vs. Brown & Williamson, 529 U.S. 120 (2000) in which the Food and Drug Administration (FDA) attempted to regulate tobacco under its authority to regulate “drugs” and “devices.” The Court, looking to the history of FDA’s regulatory activities and subsequent Congressional actions relating specifically to tobacco, held that Congress did not intend to give FDA authority over tobacco products even if they could fit in to otherwise acceptable definitions of “drugs” and “devices.” In subsequent cases, the Court refined the doctrine into its current form which holds that where a regulation addresses a policy decision of vast economic or political significance, there must be “clear Congressional authorization” for the agency to act. Under the doctrine, even if an action could fit within broad statutory definitions, if the action has vast economic or political significance, there must be clear evidence that Congress intended for the statutory language to be interpreted in that way.

Decision

The Court held that the question of whether to intentionally shift the nation’s energy generation mix is a question of vast political and economic significance and thus implicates the Major Questions Doctrine. While the Court acknowledged that “system” could be interpreted according to EPA’s definition, the statute lacks clear authorization for such an expansive interpretation. Instead, the Court found that previous examples of EPA implementing cap-and-trade type schemes were either expressly authorized by Congress (such as the acid rain program) or at least were based on goals actually achievable by existing sources (such as the mercury rule). In this case, the Court reasoned that Congress had considered cap-and-trade programs with respect to carbon emissions and had failed to endorse such a policy. In its ruling the Court emphasized that the question before it was very narrow and the decision only impacts the CPP. The Court declined to answer whether any other market-based, “outside the fence” regulation could possibly be allowed if such policy does not directly resemble a cap-and-trade program and would be achievable by existing sources.

What’s Next?

EPA has been working on a replacement rule for over a year and projects to propose such rule in the first quarter of 2023. Because of the narrow nature of the Court’s decision, EPA will not be limited to inside the fence regulations and may try to craft a market based regulation that is based on caps that could be theoretically achieved by existing sources (although the Court admonished that the mercury rule was controversial when implemented and was never addressed by courts), that would not overtly appear to require a cap-and-trade scheme or other scheme already considered by Congress, and would not obviously implicate a major policy question.

In addition to the replacement rulemaking, we are closely following the case of Jarkesy v. SEC. In May 2022, the Fifth Circuit Court of Appeals held that the use of administrative proceedings by the Securities and Exchange Commission violates a long-dormant doctrine known as the Nondelegation Doctrine. The Nondelegation Doctrine is related to the Major Questions Doctrine in that it requires clear Congressional statements for agency actions. The Nondelegation Doctrine goes further than the Major Questions Doctrine in that it applies to all agency actions, not just those of vast economic and political significance, and it requires Congress to place particular limits on every authority granted to agencies. The Nondelegation Doctrine, which has not been utilized to overturn a law since 1935, narrowly avoided revival in the case of Gundy v. U.S., 139 S. Ct. 2116 (2019), which was argued in between the retirement of Justice Kennedy and confirmation of Justice Kavanaugh and decided by a court with four liberals and four conservatives. Revival of the Nondelegation Doctrine could have significant impacts to the authority of EPA and other executive agencies far beyond the implications of West Virginia v. EPA.

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