Supreme Court Curbs EPA’s Approach to Regulating GHG Emissions from Existing Power Plants

On June 30, 2022, the United States Supreme Court issued its long-awaited decision in West Virginia v. EPA, a case challenging the scope of the United States Environmental Protection Agency’s (“EPA’s”) authority to regulate greenhouse gas (“GHG”) emissions from existing fossil fuel-fired power plants. In this case, a conservative 6-3 majority held, in a surprisingly narrow ruling, that § 111(d) of the Clean Air Act (“CAA” or the “Act”) did not authorize EPA to address GHG emissions by essentially requiring the affected power plants to shift from coal combustion to lower or zero carbon sources to generate power.

The immediate impact of this ruling on power plants is minimal because the challenged rule, the Obama Administration’s Clean Power Plan (“CPP”), was never effective, and the Court did not limit EPA’s ability to regulate GHG emissions under the CAA generally. That said, this ruling will affect any future EPA regulation of GHG emissions from existing power plants and it may also affect the scope of other federal administrative regulations.

Background

The history here is fairly complicated. This matter began as a challenge to the CPP, which EPA issued in 2015 under § 111(d) of the CAA – a rarely used provision of the Act designed to ensure the regulation of emissions from existing sources that would be subject to performance standards under § 111(b) if new, modified or reconstructed, but that would not be subject to hazardous air pollutant regulations or National Ambient Air Quality Standards (“NAAQS”). GHG emissions from existing power plants fit into this limited category.

Under § 111(d), EPA is required to issue regulations pursuant to which states submit individual plans that establish standards of performance for the affected existing sources. These standards of performance are based on the “best system of emission reduction” (“BSER”). BSER must be adequately demonstrated and take into account the cost of achieving such reductions and any non-air quality health and environmental impact and energy requirements. In the case of the CPP, EPA found BSER to be comprised of several building blocks which included the transition of generation from coal to natural gas and renewable/zero-carbon sources (aka “generation shifting”).

The inclusion of “generation shifting” in the evaluation of BSER was novel and controversial because prior standards of performance were based on technologies or work practices that could be undertaken at the affected source (i.e., “within the fence line”). The CPP, however, never became effective. In 2016, the Supreme Court stayed the regulation pending judicial review, and in 2019, the Trump Administration’s EPA repealed the CPP and replaced it with the Affordable Clean Energy (“ACE”) Rule, which was based on a more traditional scheme of “within the fence line” emission reductions.

Like the CPP, the ACE Rule was also challenged before it became effective. In that challenge, the Court of Appeals for the D.C. Circuit held that the repeal of the CPP was improper and vacated the ACE Rule. This decision was appealed to the Supreme Court.

In the meantime, the Biden administration notified the Court of Appeals that it was working on a new rule and did not intend to implement the CPP. The Court of Appeals stayed the effect of the CPP based on these representations. Even with this stay and the Biden Administration’s representations that it did not intend to implement the CPP, the Supreme Court found that the petitioner still had standing to challenge the CPP because the rule was not moot. The Court went on to issue an essentially advisory decision which will not prevent EPA from regulating GHG emissions from existing power plants but will foreclose what could be the most cost-effective path for doing so.

Generation Shifting and the “Major Questions” Doctrine

The question before the Court in West Virginia was a limited one – whether the BSER identified by EPA in the CPP, which included the concept of generation shifting, was within the statutory authority granted to EPA in § 111(d) of the CAA. The conservative majority found that it was not, using the “major questions” doctrine.

The “major questions” doctrine is a fairly new legal theory – labeled for the first time by the Court in this decision – which holds that Congress must clearly authorize federal agencies to establish regulations that would have “vast economic and political significance.” According to the Supreme Court, the “major questions” doctrine applies to “extraordinary cases” where the history and breadth of the authority asserted by the federal agency and the economic and political significance of that assertion provide “reason to hesitate before concluding that Congress intended to confer such authority.”

Examples of previous “major questions” cases include the Food and Drug Administration’s use of its authority to regulate “devices” and “drugs” to regulate tobacco products, and the Center for Disease Control’s use of its authority to prevent the spread of disease to support a national eviction moratorium during the COVID-19 pandemic. In each of the “major questions” cases, the Court acknowledges the regulatory assertions had a “colorable textual basis,” but it was very unlikely that Congress intended to grant the applicable agency the scope of regulatory authority asserted through the use of general language in the statute.

In West Virginia, the Court noted that, historically, EPA established BSER based on emission reductions that could be achieved by installing technologies or implementing work practices at the affected source. The Court found this to be true even where the Agency proposed the use of emission trading to demonstrate compliance. In the CPP, however, the Court found that EPA took a broader approach to improve the overall power system by reducing the amount of coal used to generate power and shifting toward other “cleaner” sources. While the Court noted that capping GHG emissions at a level that would force a nation-wide shift from coal generation may be a “sensible” solution, it was not plausible that Congress gave EPA the authority to issue regulations requiring it under § 111(d) of the CAA.

Ramifications for the Power Sector and Beyond

The immediate impact of this ruling on the power sector is likely limited because the CPP was never effective. Additionally, the emission reductions required to occur by 2030 under the CPP were achieved without regulation by 2019 due to market-based changes in the national generation mix. There does not appear to be any indication that this decision will impact the on-going transition away from the use of coal for power generation. Moreover, this decision does not prohibit EPA from continuing to regulate GHG emissions from emission sources, like power plants, vehicles, and natural gas production, storage and transmission operations.

This decision, however, will impact the content of the new GHG standards of performance for existing fossil fuel-fired power plants on which EPA is currently working. While, under this decision, generation shifting is off the table, the Court left open the possibility that EPA could include other “beyond the fence line” measures as a “system of emission reduction” in a new regulation under § 111(d). EPA could also base future regulation on technological changes at a power plant, including, potentially, carbon capture and sequestration to the extent that EPA could show that such technology has been adequately demonstrated. The Court doubted whether EPA could require fuel switching under § 111(d), but co-firing of other fuels may be a possibility. Additionally, while the Court expressed disbelief that a cap-and-trade system was the type of system of control anticipated by § 111(d), it did not rule on whether to prohibit in all instances the use of emission trading to comply with a standard of performance. In short, EPA retains regulatory options.

While the Court’s ruling in West Virginia is expressly limited to the authority granted to EPA under § 111(d) of the CAA, there could be broad implications associated with the Court’s enunciation and application of the “major questions” doctrine. While Congress may include specific mandates in federal legislation, Congress frequently grants federal agencies general authorization to issue regulations based on their expertise. These general authorizations are often contained in decades old laws that do not expressly address current concerns. Plus, compliance with new regulations is often costly and, therefore, can have significant economic impacts. These factors raise the potential for many regulatory actions to fall into the “major question” category. It remains to be seen whether continued use of this doctrine will chill federal rulemaking. This doctrine, however, will likely come into play if the U.S. Securities and Exchange Commission finalizes its proposed climate disclosure regulations.

If you have any questions concerning this decision and how it may impact your operations, please do not hesitate to contact your Quarles & Brady attorney or:

• Cynthia A. Faur: (312) 715-2609 / cynthia.faur@quarles.com