EPA Administrator Testifies At Senate Hearing On Carbon Pollution Standards

Two months after EPA announced its proposal to limit carbon emissions from power plants, outlines of the coming legal battles are emerging. EPA’s rule would require states to limit power plant carbon emissions through a variety of system-wide “building block” measures, including plant improvements; increased deployment of natural gas, renewable and zero-carbon energy sources; and programs for demand management and energy efficiency. State programs – or EPA backstops, in the event states do not act – would be required to meet interim targets by 2020, and ultimately achieve 30% reductions below 2005 emissions levels by 2030.

Not surprisingly, the proposal has generated massive controversy. Less than halfway through the comment period, EPA has received more than 100,000 submissions. Public hearings convened by EPA last week in Denver, Atlanta, Pittsburgh, and Washington, D.C. included vocal demonstrations from both sides. On Capitol Hill, House and Senate Committees have already held hearings on the proposal seeking to advance their respective political agendas.

EPA’s rule has the potential to fundamentally reshape state energy markets. EPA projects that the rule will result in deployment of an additional 12 gigawatts of renewable power generation by 2020; add 5% to annual U.S. demand for natural gas; and accelerate the ongoing shifts towards demand management and energy efficiency. Clean energy companies, project developers and investors will see major opportunities if this rule is implemented, and should seek to incorporate potential outcomes in their strategic planning.

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While political opposition will no doubt intensify, the outcome of the proposal at EPA is fairly predictable, given the strong position the Administration has staked out on climate change. At some point in the second half of 2015, EPA likely will finalize a version of its proposal, perhaps with modifications, based on the fundamental framework it announced in June.

The real uncertainty is in the courts. Litigation already has commenced, and much more will come after the rule is final. Given the enormous stakes, the broad sweep of the rule and the innovative approaches EPA is proposing, the final decision likely will rest with the Supreme Court.

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What outcomes can be expected from these court challenges? It is still very early. But based on the first wave of lawsuits and the legal positions voiced by opponents in comments, here are four initial observations.

  • Timing matters.

Murray Energy Corp., a major coal company, joined by attorneys general (AGs) from 9 states, has already filed a complaint asking the D.C. Circuit Court of Appeals to block EPA from proceeding with the proposal. Last week, 12 state AGs filed another suit in the D.C. Circuit, arguing that EPA’s proposed rules are the result of an allegedly illegal settlement with environmental groups in 2010. However, it is extremely unlikely that either of these suits will result in any immediate relief against EPA. Courts generally are not empowered to rule on agency proposals that lack force of law. There may be a lot of political posturing around these cases, but the real litigation will be expected to start in late 2015.

  • Technicalities will only go so far.

The Murray Energy complaint alleges that EPA’s regulation is prohibited by technical language added to the U.S. Code by the 1990 Clean Air Act amendments. Murray argues that this language prohibits EPA from regulating additional pollutants from power plants. From the broader statutory perspective, the argument makes little sense. Moreover, because the language conflicts with other text enacted as part of the 1990 Amendments, EPA’s interpretation likely will be given substantial deference. As seen in the D.C. Circuit’s recent 2 to 1 decision rejecting federal health exchanges in Halbig v. Burwell, some judges may be willing to take the step of overturning a major Administration program based on technicalities. However, it is unlikely that those kinds of arguments ultimately will prevail in the broader context here, as the Supreme Court has already upheld EPA’s Clean Air Act regulation of carbon emissions on three separate occasions.

  • How much deference for EPA?

The sweeping and innovative “building block” approach is where EPA is probably most exposed. The courts may balk at aspects of the proposal that go far afield from typical Clean Air Act source controls, such as relying on deployment of zero-carbon energy elsewhere on the grid as a mechanism for utility compliance.

Will courts defer to EPA’s interpretation that these “outside the fence” requirements are a “system of emissions reduction” for carbon pollution as that term is used in the Clean Air Act? Or will they say that when Congress used the word “system” it intended to mean a system that would apply to a specific emitting source of the regulated pollutant? Normally courts will defer to agency interpretations of statutory language on the ground that the agencies are the experts. Such deference may not be applied here, however, where EPA can be characterized as regulating energy production, an area outside EPA’s statutory realm, in which it has limited expertise.

  • State politics will be key.

Given the deference issues, there is a significant chance the courts may cut back or even overturn EPA’s rule. However, the timing is important. Once EPA finalizes the rule in 2015, initial challenges could take up to two years. In the event the rule is largely upheld by the full D.C. Circuit (a good prospect, given its composition), there may be substantial implementation at the state level before the case even reaches the Supreme Court, perhaps in 2018 or later.

Thus, before there is any final judicial outcome, many states may make decisions whether to go forward with legislative and regulatory actions to implement the programs. Those actions then could take on a life of their own, with new structures, incentives, and compliance paths under state law that may survive regardless of court rulings imposed on EPA.

On the other hand, in states where the political environment is anti-EPA,  there may be no practical implementation resulting from EPA’s proposal until 2018 at the earliest. In those states, there is little to expect in terms of market opportunities generated by the rule unless and until there is final judicial vindication.

As EPA’s proposal unfolds, clean energy companies and investors should carefully monitor state implementation efforts and opposition. State political outcomes ultimately may be just as important as court decisions in shaping business opportunities.

Jim Wrathall is a member of the Energy Finance and Policy Practice of Sullivan & Worcester, LLP in the firm’s Washington, D.C. office. His practice includes energy project development, finance and corporate transactions; energy policy matters; licensing and intellectual property projects; and federal court litigation and arbitration. Mr. Wrathall served as Majority Senior Counsel with the U.S. Senate Environment and Public Works (EPW) Committee from 2007 – 2011, where he was responsible for clean energy, climate change and clean air legislation as well as EPA oversight. He previously was a partner at WilmerHale LLP for more than ten years.