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US Supreme Court blocks EPA right to regulate emissions

© Shutterstock / Brandon BourdagesPost Thumbnail

In the US, the Supreme Court delivered a ruling that limits the Environmental Protection Agency (EPA) from regulating GHG emissions in the power sector, potentially undercutting the US goal of reaching net zero by 2050.

Biden committed the US to cuts in GHGs by 50% to 52% by 2030, with a target of net zero emissions by 2050. According to the latest research from analysis firm Rhodium Group, given trends in technology costs and performance, changes in energy markets and policy frameworks, the US is well off track.

The report said: “the US is on track to reduce emissions 24% to 35% below 2005 levels by 2030, absent any additional policy action. This falls significantly short of the US’s pledge under the Paris Agreement to reduce emissions by 50-52% below 2005 levels by 2030.” That means that without significant climate action, net zero is getting further out of reach and the EPA ruling has been a major setback at the federal level.

US Supreme Court rules EPA action on emissions is out of bounds

June 30 saw the Supreme Court rule on the West Virginia v. EPA  case, in a 6:3 opinion that limits the EPA’s powers under the Clean Air Act and limits the agency’s authority to enact almost any regulation without congressional approval.

The ruling was based on the ‘major questions’ doctrine, which supports a clear separation between federal and state powers. The details of the case were complex, especially given that part of the ruling referred to the Obama Clean Power Act, which was never implemented.

In the end, however, the predominantly Republican Court ruled that “Under that doctrine’s [major questions] terms, administrative agencies must be able to point to ‘clear congressional authorization’ when they claim the power to make decisions of vast ‘economic and political significance.’

Ruling on overreach by federal agencies

The decision has been considered a repositioning by the Court, which has historically allowed a certain degree of freedom for federal agencies on the grounds of their expertise. The ruling added to the polarisation in US politics and for many signalled a determination by the Court to limit the ability of any federal agency to address major issues – such as climate change.

While some US states have taken significant action on climate change, there is a growing disconnection between Republican and Democrat approaches, and there is mounting concern that this binary approach to every challenge will frustrate any systemic solution suggested by the US government.

Risk to SEC action on climate disclosure

Concern has increased given the door opened by the ruling on the EPA, concern that recently proved prescient. March 21 saw the US Securities and Exchange Commission (SEC) issue draft regulations for climate risk disclosure, which are currently under review and are expected to be published by the end of the year.

The draft rule would make companies disclose their climate governance, strategy and risk management approach, alongside many existing ESG frameworks already in place. It would also make companies report their Scope 1 and 2 GHG emissions, and Scope 3 where they are considered material to the business.

July 13 saw 24 attorney generals from Republican states issue a letter threatening to sue if the SEC implements a climate disclosure rule, stating their concern that the SEC is acting in a similar fashion to the EPA.

The letter said that signatories had warned that SEC that it was headed down an unlawful path, and the same ‘major questions’ issue would apply to the SEC which, the letter states, “if anything, the Commission is even less equipped to regulate in areas concerning climate change than EPA.”

US and Europe move further apart on regulation of climate disclosure

For many watching the developing schism between the US and Europe in terms of disclosure frameworks, the idea that the SEC would be legally prevented from requesting disclosure on climate risk is a serious concern.

However, one question does still stand out – even if the SEC doesn’t require climate risk disclosure, if the rest of the world and its investors do, won’t it be easier for companies, and financial institutions, to continue to develop their disclosure in line with the existing voluntary frameworks.

The EU is attempting to move ahead with its double materiality approach, which stipulates that a company’s impacts on the world are as important as the world’s impacts on the company (e.g. companies would have to report on their impacts to the health of local water systems, instead of just how much water remained to supply their operations). The US-headquartered ISSB has no such provision, instead relying on the narrower ‘enterprise value’ approach. If adopted based on this approach, it will have reverberating effects across the markets.

Then, once again, we’re back to the argument as to whether companies should be reporting only on the financial risk to operations, such as in the ISSB approach on financial materiality, or concerned about operational impact on the environment and society, as in the EU’s approach.

The EU’s inclusion of double materiality means that investors, and other stakeholders, can begin to get a better picture not simply of climate risk through emissions, but of the health of systems on which they rely. Under the new CSRD, any company above a certain size operating in Europe will be expected to report through double materiality, so it’s going to be interesting to see how this pans out.

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