Supreme Court’s West Virginia v. EPA decision limits regulatory power of the agency

On Thursday, June 30, 2022, the Supreme Court of the United States reached a long-awaited decision in the case of West Virginia v. the Environmental Protection Agency. In a 6-3 ruling, Chief Justice John Roberts delivered the majority opinion of the Supreme Court in favor of the State of West Virginia.

This case began in 2015 when the EPA ordered coal power plants to reduce their carbon emissions as part of President Obama’s Clean Power Plan initiative. However, the order was never implemented because it was challenged immediately as both unconstitutional and an overreach of a federal agency. Also at question was whether Congress explicitly gave the EPA authority to adopt and enforce its own set of regulations.

The EPA believed it had the authority to make the order on coal power plants under the Clean Air Act of 1970 (the Act), which was enacted by Congress and subsequently led to the creation of the EPA. However, the EPA faced heavy scrutiny, as many argued that the Clean Power Plan exceeded the authority of the EPA to enact and implement national requirements on coal power plants. Ultimately, the Supreme Court agreed the EPA had exceeded its authority under the Act.

Overview of the Supreme Court’s analysis

The Supreme Court reviewed this case under a relatively new framework called the “major questions” doctrine; in fact, this case was the first time the Supreme Court applied the doctrine. The major questions doctrine requires a federal agency, like the EPA, to have clear and explicit statutory authorization from Congress to regulate an area with national significance. Under the major questions doctrine, a federal agency may not simply rely on what the agency believes its authority to be.

When the EPA was founded in 1970, Congress gave the EPA authority to broaden its oversight of carbon emissions, specifically fossil fuel emissions by industrial and motor vehicle companies. However, Congress never gave the EPA explicit authority to regulate and penalize companies in the U.S. for exceeding their annual allotment of carbon emissions.

Why is this case significant?

According to the EPA, transportation is the leading source of fossil fuel emissions in the U.S., followed by power plants. Moreover, the U.S. is only second to China as the second largest contributor of fossil fuel emissions. In its decision, the Supreme Court acknowledged that the EPA was trying to implement a practical solution to shift energy production from fossil fuels to cleaner energy production sources by creating caps for companies' carbon emissions nationwide. The Court ultimately determined, however, that the EPA was constrained in its ability to set limits on greenhouse gas emissions for existing power plants, absent congressional action to provide the EPA with the authority to create a regulatory structure. Nevertheless, international pressure remains for the United States to continue to address its greenhouse gas emissions and a hope that more countries will follow.

While the Biden Administration has been hopeful to achieve a goal of zeroing out the carbon emissions from power plants in the United States by 2035, this decision jeopardizes this goal and creates obstacles to reducing climate change impacts. Nevertheless, the EPA’s authority has not all been lost, as the EPA retains some authority to limit greenhouse gases emissions within the country.

Moving forward

Now that the major questions doctrine is officially in play for the Supreme Court, it is likely that additional regulatory activity by federal agencies will be closely scrutinized.

Two current rules are likely to be challenged:

1. The Securities and Exchange Commission’s proposal to require public companies to disclose their carbon emissions annually
2. The EPA’s standards for new car and light truck tailpipe emissions

While the West Virginia decision strictly targets environmental concerns, the doctrine has the potential to make a big impact in the tax and securities world, specifically with how these fields are regulated.

Many organizations and their stakeholders will continue to face pressure to address climate change. Evaluating energy transition solutions and greenhouse gas emission reduction strategies are necessary for successful companies and entities to continue to be proactive. Questions and buzz around sustainability aren't going away. In addition to driving strategic business decisions, consumers, investors and stakeholders will continue to expect strong benchmarks and transparent strategies around sustainability.

For more information on this topic, or to learn how Baker Tilly specialist can help, contact our team.

Sources

1. On June 30, 2022, the Supreme Court limited the EPA's authority on climate standards for power plants.
2. The Supreme Court's EPA ruling was made using the major questions doctrine.
3. The decision from the West Virginia v. EPA case could likely lead to other current rules being challenged.