Supreme Court Decision Upends Regulatory Framework

Fall 2022 Issue
By: Aquiles Suarez
The U.S. Supreme Court’s recent ruling that the U.S. Environmental Protection Agency can’t set standards on greenhouse gas emissions for existing power plants could affect how all regulations are enacted.

A landmark case involving the EPA could have far-reaching effects on how agencies make and enforce rules.

With its ruling earlier this June in West Virginia v. Environmental Protection Agency, the Supreme Court fundamentally altered the landscape for federal regulations in the United States.

The case involved a proposed Obama administration regulation that would have created a cap-and-trade system to reduce greenhouse gases. The court held that the U.S. Environmental Protection Agency (EPA) did not have the legal authority to set standards on greenhouse gas emissions for existing power plants. But the reasoning behind the court’s decision will have broad repercussions far beyond the particular facts of that case, essentially limiting the power of the executive branch to promote policies through federal agencies that arguably were not intended by Congress when it passed the relevant authorizing legislation.

The decision will likely affect regulatory matters that are important to NAIOP and commercial real estate, such as the climate-disclosure regulation recently proposed by the Securities and Exchange Commission (SEC), as well as the long-running efforts by the EPA and the Army Corps of Engineers to define “Waters of the United States” (“WOTUS”) to determine the jurisdictional reach of the Clean Water Act. (See previous column in the Summer issue of Development magazine.)

The ‘Major Questions Doctrine’

Since 1984, when the Supreme Court issued its opinion in Chevron v. Natural Resources Defense Council, courts have deferred to federal agencies in policy areas, reasoning that they have expertise in the technical aspects of implementing laws passed by Congress. But by expanding the power of administrative agencies, the court also paved the way for subsequent administrations to use the regulatory process to advance controversial policy goals.

Critics argued that the decision undermined congressional accountability, allowing elected officials to use vague statutory language on difficult issues rather than having to legislate clearly to denote congressional intent. This provided openings for executive-branch political appointees to pursue certain goals through expansive readings of statutory authority that could not be achieved through the legislative process, according to Chevron’s detractors.

Without specifically overturning Chevron, the Supreme Court’s 6-3 majority opinion in West Virginia v. EPA, authored by Chief Justice John Roberts, nevertheless seriously weakens its application by its emphasis on the “major questions doctrine.” Essentially, that is a judicial presumption that an executive branch agency can assert authority over questions of great economic and political significance only if Congress has clearly authorized it.  As Roberts wrote in his opinion:

“As for the major questions doctrine, it took hold because it refers to an identifiable body of law that has developed over a series of significant cases all addressing a particular and recurring problem: agencies asserting highly consequential power beyond what Congress could reasonably be understood to have granted.”

Dissenters from the majority’s opinion noted that broad authorizations are sometimes needed to allow agencies the flexibility to adapt to changing conditions and to unforeseen circumstances. Justice Elena Kagan, who authored the minority dissenting opinion, wrote:

“A key reason Congress makes broad delegations . . . is so an agency can respond, appropriately and commensurately, to new and big problems . . . Congress knows what it doesn’t and can’t know when it drafts a statute; and Congress therefore gives an expert agency the power to address issues — even significant ones — as and when they arise.”

The court, Kagan argued, “substitutes its own ideas about policymaking for Congress’s. . . The Court, rather than Congress, will decide how much regulation is too much.” 

Among legal scholars, the debate will no doubt continue. Proponents of the regulation will argue that Congress intended the flexibility; those opposed will argue the opposite. In that sense, relying on something like the “major questions doctrine” may at least make some sense since larger policy decisions should clearly be rooted in the decisions of the elected representatives. 

Impacts on CRE

The fate of two regulations important to NAIOP and commercial real estate — the SEC’s climate disclosure regulation and the EPA and Army Corps of Engineers’ WOTUS regulation — are likely to be affected by the Supreme Court’s decision.    

Earlier this year, the SEC released its proposed “Enhancement and Standardization of Climate-Related Disclosures for Investors” rule, which is designed to increase transparency and standardize the information that public corporations disclose regarding climate-related financial risks and their greenhouse gas emissions (See NAIOP’s April 20, 2022 Market Share blog post, “Challenging Issues for CRE in SEC Climate Disclosure Rule”).

For greenhouse gas emissions, the rule would require disclosure of three different measures, called “scopes”: direct emissions that occur from sources owned or controlled by the company (Scope 1); indirect emissions from purchased electricity and other forms of energy (Scope 2); and indirect emissions from upstream and downstream activities in a company’s value chain (Scope 3). For Scope 3 measures, the larger public corporations subject to the SEC’s disclosure requirements will need information from those they do business with to comply with the rule. Therefore, the impact of the SEC’s regulation will be broadly felt through the larger economy.

The SEC’s statutory mission is to protect the investing public, and providing useful information is the rationale for asserting its regulatory authority in this area. As the SEC stated in the rule’s preamble, investors “need information about climate-related risks — and it is squarely within the Commission’s authority to require such disclosure in the public interest and for the protection of investors — because climate-related risks have present financial consequences that investors in public companies consider in making investment and voting decisions.”

However, while protecting investors and ensuring confidence in capital markets would clearly be in the SEC’s purview, imposing disclosure requirements for greenhouse gas emissions in what many argue is an effort to advance the Biden administration’s environmental agenda is something that could be a “major question” under the West Virginia decision, and outside the SEC’s legal authority. The proposed climate disclosure regulation, therefore, could see some major revisions before the SEC issues it in final form. Even then, it will likely face legal challenges.

The decades-long effort to develop a WOTUS regulation that could withstand judicial scrutiny could also be influenced by the Supreme Court’s decision in the West Virginia case. The vague WOTUS language, which appears in amendments to the Clean Water Act of 1972 and determines which bodies of water or wetlands are subject to the law’s permitting requirements, has resulted in constant legal challenges to regulations that try to define it. The Supreme Court’s effort to interpret the WOTUS language in Rapanos v. United States, a 4-1-4 decision with three different opinions offering no controlling standard, added to the confusion. 

The situation does argue for legislatively clarity, and opponents of the Biden administration’s recent efforts to implement its own WOTUS regulation will use the West Virginia case to buttress arguments that the EPA has overstepped its authority. But in this case, Congress did delegate to the agencies the responsibility for defining WOTUS, and legislative clarifications are not forthcoming anytime soon. 

The issue may yet again be decided, ultimately this time, by the Supreme Court this fall when it considers Sackett v. EPA.  That case will allow the Supreme Court to revisit its ruling in Rapanos, and the court’s conclusion in West Virginia would indicate that any agency regulatory definition for WOTUS would need to fit within the parameters of congressional intent.

Aquiles Suarez is the senior vice president for government affairs for NAIOP.