United States: Supreme Court Rejects EPA's ‘Clean Power Plan' In Decision Raising Questions About The SEC's Climate-Related Disclosure Rules

On June 30, 2022, the U.S. Supreme Court held in West Virginia v. Environmental Protection Agency, 597 U.S. ___ (2022), that the Clean Air Act did not clearly authorize the Environmental Protection Agency (EPA) to create the Clean Power Plan. The Clean Power Plan was an Obama-era, since-repealed rule that capped carbon dioxide emissions at levels low enough to shift electricity generation toward greener sources. In rejecting the EPA's claimed authority to set emissions caps based on that "generation shifting" approach, the Court — for the first time — expressly applied the major questions doctrine. That doctrine, according to the Court, demands clear congressional authorization for any agency action that (in the Court's view) is "highly consequential" and poses questions of "economic and political significance." This far-reaching decision raises issues for the Securities and Exchange Commission's recent proposed rules regarding climate-related disclosures.

The decision in West Virginia v. Environmental Protection Agency

The case concerned a challenge to the EPA's Clean Power Plan, which the EPA promulgated under Section 111(d) of the Clean Air Act. Section 111(d) directs the EPA to set emissions limits for air pollutants from existing sources, like power plants, at levels "achievable through the application of" the "best system of emission reduction" that "has been adequately demonstrated."¹ In promulgating the Clean Power Plan, the EPA determined that the best system of emission reduction was a grid-wide generation-shifting approach. That approach involved coal- and natural-gas-fired plants transitioning to wind or solar production, and included a cap-and-trade scheme. Based on this "best system," the EPA set emissions caps at levels projected to shift the nation's mix of electricity generation from 38% coal to 27% coal by 2030.

The rule never went into effect. The Supreme Court had stayed its implementation soon after its enactment, the Trump administration later repealed it, and the Biden administration plans to promulgate a replacement. The Court nonetheless deemed the challenge justiciable because the federal government had failed to show that the controversy was moot.

On the merits, the issue before the Court was whether the Clean Power Plan's generation-shifting approach could constitute a "best system of emission reduction" under Section 111(d). In plainer terms, the Court was asked to resolve whether the Clean Air Act authorized the EPA's Clean Power Plan.

Chief Justice John Roberts's majority opinion

The Court held that it did not. The majority decision, by Chief Justice Roberts and joined by Justices Clarence Thomas, Samuel Alito, Neil Gorsuch, Brett Kavanaugh and Amy Coney Barrett, expressly applied (for the first time) the major questions doctrine. Based on that doctrine, the Court ruled that because Congress had not clearly authorized the EPA to consider a generation-shifting approach in setting emissions caps, the EPA lacked statutory authority for the Clean Power Plan.

The major questions doctrine, as the Court defined it, is a statutory interpretation concept based on separation of powers principles and a practical understanding of legislative intent. The doctrine teaches, the Court continued, that "extraordinary cases" exist in which "the 'history and the breadth of the authority that the agency has asserted,' and the 'economic and political significance' of that assertion, provide a 'reason to hesitate before concluding that Congress' meant to confer such authority."² In such cases, "something more than a merely plausible textual basis for the agency action is necessary." An "agency instead must point to 'clear congressional authorization' for the power it claims."

The Court ruled that the major questions doctrine applied here for two main reasons.

First, the Court saw in the Clean Power Plan an unprecedented application of Section 111. Before the Clean Power Plan, the EPA had understood its role as limited to ensuring efficient pollution performance on a source-by-source basis. Based on that understanding, the EPA's prior Section 111 rules had devised emission limits by referencing emission-reduction systems available at the individual source. But under the Clean Power Plan, the EPA devised an emissions cap by referencing a grid-wide, generation-shifting system that would reduce emissions by transitioning energy production from dirtier sources to cleaner sources. That the EPA had never before asserted such authority under Section 111 — when the EPA "presumably would be alert" to its power "to exercise" that authority — was, to the Court, "significant in determining whether such power was actually conferred" to the EPA.

Second, the Court viewed the EPA's action as embodying vital policy judgments about America's energy mix and asserting "unprecedented power over American industry" in the process. On the EPA's interpretation of Section 111(d), the EPA could set emission caps based on the EPA's judgment about the "best" mix of coal, natural gas, wind and solar production. But the Court found it implausible that Congress would delegate such policy trade-offs to the EPA. For one thing, the Court reasoned, the EPA's lack of "comparative expertise" made such a delegation unlikely. The Court also noted that Congress has consistently declined to add a cap-and-trade scheme to the Clean Air Act and has rejected proposals to enact similar measures, like a carbon tax. And the Court concluded that Congress would not have delegated those important decisions of national significance through "the previously little-used backwater of Section 111(d)."

The Court thus determined that the EPA's assertion of authority deserved skepticism. For the Clean Power Plan to survive the Court's scrutiny, the EPA had to show that Congress had clearly authorized its generation-shifting approach.

The Court concluded that the EPA failed to point to that clear authorization. The Court held that Section 111's authorization to determine the best system of emission reduction was too "vague" and "not close to the sort of clear authority required," because almost anything could constitute such a system. And in the Court's view, although other Clean Air Act provisions use the word "system" to describe similar cap-and-trade schemes or other sector-wide mechanisms, that does not make such schemes a system of emission reduction under Section 111. To the contrary, the Court reasoned, Congress's decision to authorize cap-and-trade schemes in those other statutory contexts — while also amending Section 111 without mentioning cap-and-trade — suggested that Congress understood Section 111 not to authorize a generation-shifting approach.

Justice Neil Gorsuch's concurring opinion

In a concurring opinion, joined by Justice Alito, Justice Gorsuch argued even more strongly for the major question doctrine's underpinnings and effects.³ Justice Gorsuch started by noting that, like other clear-statement rules, the major questions doctrine seeks to protect against unintentional, oblique or otherwise unlikely intrusions on constitutional interests like self-government, equality, fair notice, federalism and the separation of powers. He then canvassed precedent to propose additional guidance about the doctrine's two main elements.

First, he concluded that an agency action involves a major question when the agency (a) claims the power to resolve a matter of great political significance or end an earnest and profound debate across the country; (b) seeks to regulate a significant portion of the American economy or requires billions of dollars in spending by private persons or entities; or (c) seeks to intrude into an area that is the particular domain of state law.

Second, he wrote that to determine what qualifies as a clear congressional authorization, courts should consider (a) the legislative provisions on which the agency seeks to rely and their place in the overall statutory scheme; (b) the age and focus of the statute the agency invokes in relation to the problem the agency seeks to address; (c) the agency's past interpretation of the relevant statute; and (d) a mismatch between the agency's challenged action and its congressionally assigned mission and expertise.

Justice Elena Kagan's dissenting opinion

In a dissenting opinion, joined by Justices Stephen Breyer and Sonia Sotomayor, Justice Kagan argued that authorizing the EPA to regulate emissions through generation shifting "is just what Congress did when it broadly authorized EPA in Section 111 to select the 'best system of emission reduction' for power plants."⁴ She noted that the parties did not dispute that generation shifting is the best system, and no other provision in the Clean Air Act suggests that Congress meant to preclude the EPA from choosing that system.

Justice Kagan also rejected the majority's reliance on the major questions doctrine — or, as she put it, the claim "that generation shifting is just too new and too big a deal for Congress to have authorized it in Section 111's general terms." In Justice Kagan's view, empowering agencies to respond to new and big problems is a key reason Congress makes broad delegations like Section 111.⁵ By holding otherwise, the Court overrode Congress's valid legislative choice.

How the decision affects the SEC's proposed climate-related disclosure rules

The Court's wholehearted embrace of the major questions doctrine raises questions about the SEC's recent proposed rules on climate-related disclosures.⁶ To justify those rules, the SEC relies on a "broad" delegation under the Securities Act of 1933 and the Securities Exchange Act of 1934 to "promulgate disclosure requirements that are 'necessary or appropriate in the public interest or for the protection of investors.'"⁷ The rules (which we have discussed here) would require public companies to include a variety of climate-related disclosures in their registration statements and periodic reports. Most notably, the rules would require companies to disclose so-called Scope 3 emissions — greenhouse gas emissions generated "from sources that are neither owned nor controlled by the company" but that are "a consequence of the company's activities."⁸

Critics will argue that the proposed rules share certain features the West Virginia majority focused on in analyzing the Clean Power Plan under the major questions doctrine. For instance, critics will likely say that the SEC rules concern an unprecedented topic — climate change. They may say that the SEC's disclosure rules have traditionally concerned topics closely tied to financial performance, and that disclosure rules about greenhouse gas emissions — especially Scope 3 emissions — represent a new category of information that historically the SEC has not regulated.

In addition, critics also may argue that the rules would exert significant power over American industry and embody important policy judgments about the national response to climate change. While the SEC's rules do not directly set climate-change policy, critics likely will contend that the rules would push corporations to mitigate greenhouse gas emissions throughout the value chain. These real-world reforms could be costly and, critics will assert, could transform the markets, the economy and the environment. Like the EPA, the SEC might lack comparative expertise to make policy judgments about climate change, and Congress has rejected calls to regulate greenhouse gas emissions at the national level.

Critics will also stress that Congress would not have delegated that authority in a broad, open-ended statutory provision about financial disclosures. Indeed, the SEC's grant of authority is perhaps vaguer than the EPA's grant of authority in Section 111(d). The SEC relies on authority to promulgate disclosure requirements necessary or appropriate in the public interest or for the protection of investors. Critics may say that this grant of authority is not the sort of clear authority that the major questions doctrine demands.

In their comments, the rules' supporters anticipate some of these concerns. For instance, a bipartisan group of academics, former SEC officials and market participants points out that the SEC has required environmental disclosures since at least the Nixon administration.⁹ Indeed, the SEC concluded in 1973 that environmental disclosure would "promote investor protection,"¹⁰ and the SEC promulgated disclosure mandates on environmental matters in the years since.¹¹ As a result, those commentators conclude that "the Commission, the courts, and practitioners have understood for decades that the SEC's statutory mandate includes authority to require environmental and climate-related disclosure."¹²

Supporters also disagree that the rules would transform the American economy. They say that the rules simply improve "the specificity and mode of disclosure about long-relegated topics," thus bringing the SEC's requirements in line with "disclosures already made by the majority of large companies."¹³ In addition, supporters distinguish substantive environmental regulations (like the Clean Power Plan), which control primary conduct, from mere disclosure rules (like the ones proposed here), which simply may affect primary conduct. They point out that although "virtually all SEC disclosure rules can be expected to affect conduct," that fact has not stopped the SEC from requiring disclosure of environmental proceedings and executive pay, among other topics.¹⁴

Supporters also reject the claim that the SEC's statutory authority is too vague. Rather, they contend that the statutory text and context "are clear as to the Commission's ability to require the proposed disclosures for the protection of investors."¹⁵ And they stress that Congress consciously created the SEC "as an expert agency with the capacity to address significant problems affecting the nation's securities markets," including those "problems too politically charged to be easily resolved on Capitol Hill."¹⁶ As a result, they conclude that even assuming "a strong belief in the value of the 'major questions doctrine,'" a clear-statement principle has no role to play "when the text and context of a statute are as clear and consistent as the 1933 and 1934 Acts are."¹⁷

How the Court would answer these and the many other questions arising under the major questions doctrine remains to be seen.

Footnotes

1. 42 U.S.C. §7411(a)(1).

2. 597 U.S. ___ (2022) (slip op., at 19) (quoting FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120, 159–60 (2000)) (alterations adopted).

3. 597 U.S. ___ (2022) (Gorsuch, J., concurring) (slip op., at 8–9).

4. 597 U.S. ___ (2022) (Kagan, J., dissenting) (slip op., at 4).

5. Id.

6. See SEC Release Nos. 33-11042; 34-94478, https://www.sec.gov/rules/proposed/2022/33-11042.pdf.

7. Id. at 7 (quoting Section 7 of the 1933 Act (codified at 15 U.S.C. § 77g) and Sections 12, 13 and 15 of the 1934 Act (codified at 15 U.S.C. §§ 78l, 78m and 78o)).

8. Id. at 39.

9. See Letter from Working Group on Securities Disclosure Authority to SEC (June 16, 2022) at 2, https://www.sec.gov/comments/s7-10-22/s71022-20131670-302060.pdf (Working Group Letter).

10. See Disclosure with Respect to Compliance with Environmental Requirements and Other Matters, Release Nos. 33-5386, 34-10116, 38 Fed. Reg. 12,100 (May 9, 1973).

11. See Working Group Letter at 3–4.

12. Id. at 5.

13. Letter from John C. Coates to SEC (June 2, 2022) at 24–25, https://www.sec.gov/comments/s7-10-22/s71022.htm (Coates Letter).

14. Working Group Letter at 8.

15. Coates Letter at 25.

16. Joseph Grundfest, Disimplying Private Rights of Action Under the Federal Securities Laws: The Commission's Authority, 107 Harv. L. Rev. 961, 966 (1994).

17. Coates Letter at 26.

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