Energy Income Parnters (EIP) and Arbo came together to examine this recent decision and how it might affect investors in the energy and utilities sectors.
This highly technical case about specific language in the Clean Air Act has triggered a lot of commentary about its effect on the EPA and its ability to regulate greenhouse gas emissions. In our view the implications are potentially much larger, as the Court attempts to codify a new doctrine called “Major Questions” but has left the rest of us with, well, major questions about the future of regulation.
What the decision does:
The decision invalidates the Obama era Clean Power Plan (CPP) that would have dramatically increased electric power generation from wind, solar and natural gas while reducing coal-fired power generation by about 29%[1]. But the CPP never went into effect as it was tied up in the courts until the Trump Administration nixed it. Moreover, state-level mandates, federal tax incentives, market forces and innovation in shale gas and renewable power yielded the same result in a shorter period of time.
The decision narrowly interprets “Best System for Emission Reduction” as a technology, a piece of machinery or a device, not a system-wide solution that would optimize the reduction of pollutants. This in spite of the fact that the EPA has previously instituted a successful system-wide cap-and-trade solutions for mercury pollution.
The decision attempts to cement the “Major Question Doctrine”[2] creating a much higher hurdle for regulatory agencies to infer intent from legislation governing their regulatory oversight.
What the decision does not do:
Strike down EPA’s power to regulate carbon dioxide emissions. (Yet).
Implications for investors
The case should serve as a reminder that while each branch of government has specifically delegated powers that can directly affect the businesses investors are exposed to in their portfolios, these powers often conflict and can be secondary to the power of innovation, market competition and state-level regulation. Such has been the case in the evolving, transitioning energy system.
What comes next?
So if the Court did not strike down the EPA’s authority to regulate carbon emissions specifically (or greenhouse gasses generally) why did the Court even take this case? After all, the CPP was designed to reduce carbon emissions.
The answer lies in the long-running battle about “the regulatory state.” Regardless of political party, whenever a regulatory agency like the EPA or the Food and Drug Administration makes a regulatory ruling they don’t like, they rail against the power of that agency to do so outside the power originally delegated to it by Congress. Of course, those who like the ruling argue the opposite.
Under a principle referred to as the Chevron Doctrine[3], past Supreme Court decisions would defer to an agency’s reasonable interpretation of a law if Congressional language was ambiguous. But at least five members of the current court, Justices Thomas, Alito, Gorsuch, Kavanaugh and Chief Justice Roberts, have questioned whether such deference is appropriate. These five Justices, joined by Justice Barrett, invoked a relatively new doctrine, the Major Questions Doctrine, that essentially rejects the concept of the Chevron Doctrine for any regulatory agency decision that has vast “economic and political significance.” In such cases, including the EPA’s adoption of the Clean Power Plan, the Agency’s action will be upheld only if it can point to “clear congressional authorization.”
Here is what the Congressional Research Bureau said just four months ago about the Major Questions Doctrine[4]:
Congress frequently delegates authority to agencies to regulate particular aspects of society, in general or broad terms. However, in a number of decisions, the Supreme Court has declared that if an agency seeks to decide an issue of major national significance, its action must be supported by clear statutory authorization. Courts, commentators, and individual Supreme Court Justices have referred to this doctrine as the major questions doctrine (or major rules doctrine), although the Court has never used that term in a majority opinion.
Until now.
The decision did not reverse the 2007 Supreme Court decision that established the EPA’s authority to regulate greenhouse gas emissions[5].
For Now.
The Clean Air Act makes no mention of carbon or methane as pollutants and none of the five Justices who were in the majority in the 2007 case are still on the court. However, three of the four dissenters still are: Justices Thomas, Alito and Chief Justice Roberts. The decision to not reverse that 2007 decision may simply be because none of the parties in this case asked the Court to do so. Time will tell if a new plaintiff, likely the attorney general of a state that opposes such regulations, will bring a case that seeks to reverse that decision. If regulating carbon emissions from coal plants is something of national significance that rises to a “major question” then the decision to regulate carbon from all sources would certainly be as well.
In Conclusion
There has been a big swing of the pendulum in investor sentiment and political messaging back in favor of oil and natural gas investment in light of recent shortages and the war in Ukraine. Just recently, it appears that Joe Manchin and democratic leadership have agreed on an energy infrastructure permitting reform agreement as a condition of the Senator’s support for the Inflation Reduction Act (IRA). The permitting legislation, if enacted, was endeavored in part to expedite the completion of the Mountain Valley natural gas pipeline that has been 95% completed for over two years. So, while it is possible that an anti-climate state attorney general might challenge the EPA’s authority over greenhouse gas emissions, the actions of the states, federal tax incentives, market forces and innovation in shale gas and renewable power may overcome the lack of such authority just as it did with respect to the goals of the Clean Power Plan.
[1] West Virginia v. EPA, Syllabus, page 2.
[2] Congressional Research Service: The Major Questions Doctrine, April 6, 2022.
[3] Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. 467 U.S. 837 (1984).
[4] Congressional Research Service: The Major Questions Doctrine, April 6, 2022.
[5] Massachusetts v. EPA.
The information provided above is based on data obtained from third party publicly available sources that EIP believes to be reliable, but EIP has not independently verified and cannot warrant the accuracy of such information. In providing the information, EIP has made several assumptions that if changed, materially affect the information and conclusions provided. This information is based upon EIP’s opinion which may change at any time and without notice.