EPA Paradigm Shift: Climate Regulation Moves Toward the States

On March 12, EPA announced sweeping deregulatory actions as part of the Trump administration’s policy of unleashing American energy resources. While most of the regulatory relief directly affects upstream energy producers, EPA’s reconsideration of its 2009 Greenhouse Gas (GHG) Endangerment Finding is a significant development. This move is central to many of the planned regulatory rollbacks, including automotive emission standards and refinery regulations. It is worth noting that the withdrawal of the Endangerment Finding and the following deregulatory actions will undoubtedly result in protracted litigation.

EPA’s authority to regulate GHG emissions under the Clean Air Act (CAA) hinges on the Endangerment Finding. The Obama-era EPA concluded that GHG emissions threaten public health and the environment, legally obligating the Agency to regulate these emissions. If EPA finalizes the withdrawal of the Endangerment Finding, the legal basis for the dependent regulations goes away. Further, with the recent Supreme Court decisions reversing the Chevron Doctrine and setting out the Major Questions Doctrine, it will be difficult for EPA to regulate GHG emissions under many CAA programs.

Tailpipe emission standards would be among the first on the chopping block based on EPA’s announcement. While policies encouraging the use of biofuels are not directly connected to the Endangerment Finding, GHG reduction concerns are embedded in those programs.

As federal climate policy enters a period of relaxation, states are pursuing bold GHG reduction initiatives. State Climate Superfund laws, which seek to impose strict and retroactive financial liability on fossil fuel producers based on GHG contributions, are part of a larger trend in which states seek to capture funding from carbon-intensive operations to finance climate mitigation and resilience projects.

Market-based carbon pricing regulations, such as cap-and-trade programs, are also expected to grow at the state level. Thirteen states already participate in the Regional Greenhouse Gas Initiative, the first multi-state mandatory cap-and-trade program to limit carbon dioxide emissions from the power sector. At the fuels level, New York is preparing to launch a robust cap-and-invest program, in which the state will set declining caps to meet reduction targets, requiring fuel distributors to purchase state-issued allowances. Other states are also considering setting declining caps to tackle in-state fuel combustion by pricing emissions across the value chain, many of which accrue outside state boundaries.

Meanwhile, several states and private petitioners continue to file lawsuits against oil companies demanding compensation for climate impacts. The U.S. Supreme Court has declined to hear state climate lawsuits as recently as this week, signaling deference to states to handle climate policy and disputes. The bottom line is that states will increase regulatory efforts to close the federal gap, potentially setting rules that could meaningfully shape the liquid fuels market.

“EMA fully supports EPA’s actions to lower prices at the pump by addressing electrification mandates,” said EMA President Rob Underwood. “EMA will continue to remain vigilant as climate policy develops at both the federal and state levels to ensure motor fuel and heating oil markets can thrive.”

See EPA’s Announcement here.