This article begins a series of communications with our clients on developments of particular interest to their businesses.
As the first week of the Trump Administration closed and the second is underway, it is increasingly evident that a new era of uncertainty in environmental law and regulation may be underway. Following through on campaign promises, the new administration has already taken steps to pause the grind of the U.S. Environmental Protection Agency (EPA) as a regulatory machine. While the temporary freeze on regulations, an Executive Order (EO) requiring two regulations be cut for every one regulation promulgated, promises to gut the Agency’s budget, and reported “gag orders” placed on EPA staff provide the first concrete evidence of the possible direction chosen by the Trump Administration, it remains to be seen whether the new administration will secure long-term transformation of federal environmental regulation and enforcement. Achieving a fundamental shift that lasts beyond just the next four years will require not only halting the “machine”—i.e., how and why EPA implements and enforces regulation—but also re-tooling or dismantling the “machinery”—i.e., the underlying regimes built over the course of the past several decades established by and through the Clean Air Act (CAA), the Clean Water Act (CWA), the National Environmental Policy Act (NEPA), and other statutes. Securing such a legacy will require consistent and systematic effort by the new EPA Administrator—presumably nominee Scott Pruitt—as well as new legislative action by the Republican-controlled Congress.
Though certainly a tall order, all necessary elements are present, making unprecedented change to these regulatory regimes and even the statutes themselves more likely than ever before. The pursuit of such transformation will not be achieved without opposition, however, as many states and environmental advocacy groups appear poised to directly oppose the new administration through litigation on several fronts, while continuing to pursue aggressive environmental regulation within the borders of their own states. Industry may also support certain actions that will also be caught up in the slowdown of regulatory action, perhaps creating uncertain tension at times.
This landscape of short- and long-term uncertainty will drive tremendous challenges for companies involved in regulated business activities as they attempt to make compliance and investment decisions. Below we outline emerging developments in specific regulations and the regulatory process that are on our watch list. Wherever possible, we identify whether the change represents a shortterm shift in the existing regulatory machine or portends a more fundamental dismantling of the machinery of federal environmental regulation.
The Fate of High-Profile Environmental Regulatory Initiatives
The potential fate of high-profile environmental regulations has dominated discussion in trade press and other media—particularly the Clean Power Plan, the Waters of the United States (WOTUS) rule, the Renewable Fuel Standard (RFS), the regulation of hydraulic fracturing, and the Stream Protection Rule. EPA has several options to pursue its new initiatives with respect to these regulations. These changes on their own will impact many business activities and planning decisions only in the short-term, but may signal more fundamental changes to come that could have longer-term impacts on the regulated community.
The Clean Power Plan: The Clean Power Plan, which would have imposed greenhouse gas (GHG) emissions limits on existing coal and gas-fired electric generation plants, can be undone through one of several available avenues. The EPA could moot the current Clean Power Plan litigation by requesting the U.S. Court of Appeals for the D.C. Circuit to pause the proceedings while EPA reconsiders the rule. Alternatively, if the rule survives challenge at the D.C. Circuit, the Department of Justice could simply refuse to further defend it. Finally, EPA could undertake a new rulemaking specifically to rescind the Clean Power Plan, regardless of the outcome in the courts. While regulated industry can expect the Clean Power Plan to disappear, EPA remains legally required to develop a new rule in its place. EPA is not expected to rescind the underlying finding that GHGs are a pollutant requiring EPA regulation. Any such rule developed under the Trump Administration is expected to be far less burdensome on regulated industry. Any future rule could also be impacted by the anticipated withdrawal from the Paris Agreement for international reductions in carbon emissions. Withdrawal would remove EPA’s ability to rely on other nations’ climate action to justify its own regulatory authority under CAA Section 115, an often cited alternative for regulating GHGs.
Waters of the United States: The WOTUS rule is also likely to be undone, but companies should not expect a new rule in its place. Promulgated jointly by EPA and the U.S. Army Corps of Engineers (the Corps) under the CWA, the WOTUS rule defines the wetlands for which federal permitting is required and severely limits the rights of property owners to develop on wetlands identified under the rule. Although articulated by EPA and the Corps as providing more certainty and consistency to the current permitting regime determined on a “case by case basis,” 32 states have already challenged the rule in court for the intense regulatory uncertainty created. The industry challenge to the rule currently is stayed at the U.S. Court of Appeals for the Sixth Circuit while the U.S. Supreme Court considers a jurisdictional question precipitated by further ambiguity in the CWA. In this climate, EPA could pursue a similar litigation strategy as available under the Clean Power Plan. A new WOTUS rule, if any, could define jurisdictional waters much more narrowly than the current rule, though the lift this would require is unlikely of interest to the new administration, and any new rule could be challenged in court.
Renewable Fuel Standard: What the new administration and the new Congress will do with the RFS, which requires certain amounts of ethanol, biodiesel and other renewable fuels to be used in the United States each year, has been the subject of significant debate. It is expected by many that the new administration will seek to move the RFS’s “point of obligation,” which refers to the entity that must comply with the program. Presently, refiners and importers of gasoline and diesel must purchase renewable fuel credits, known as RINs, to comply with the RFS. Carl Icahn—recently named to be the “special adviser on regulatory reform”—supports moving the point of obligation to the entities that blend renewable fuel with gasoline and diesel. However, in November 2016, EPA issued a proposed denial of several petitions requesting that EPA move the point of obligation from refiners, blenders and importers of petroleum fuels downstream to terminal position holders and/or blenders of petroleum products and renewable fuel. While EPA clearly does not have to act on a proposed action, in order to affirmatively move the point of obligation, EPA would need to initiate either a new acceptance of the petition or initiate a proposed rulemaking. In either event, it would be difficult to have a final rule in place by January 1, 2018.
It is also possible that the new administration and Congress will seek to amend the RFS legislatively as part of a larger energy package in the next two years, but we view it as highly unlikely that the RFS will be repealed. There does not appear to be sufficient support in Congress for a wholesale repeal given the influence of corn-state Senators and the number of renewable fuel plants located across bipartisan districts. Nonetheless, there could be a move to lessen the burdens on independent and merchant refiners and reduce the impact of the RFS on the price of gasoline and diesel fuel, and there are rumors that the House Energy and Commerce Committee will propose an RFS reform bill late winter or early spring, the details of which are forthcoming.
The RFS volumes finalized for 2017 are currently on hold while the new administration reconsiders them. It is possible that the administration will seek to lower the ethanol volumes for 2017, but this seems less likely, particularly given the recent statements of Scott Pruitt, the EPA Administrator nominee. Regulation of Hydraulic Fracturing: On December 13, 2016, EPA released a report concluding that fracking for oil and natural gas can contaminate drinking water under “some circumstances.” Because this report changes EPA’s original finding that drilling processes do not cause threats to drinking water, EPA is now being criticized by the oil and gas industry for reversing course in its final days. The report is a scientific finding, and not a rule or final agency action. It provides agency documentation that supports the Obama Administration’s methane regulations for the oil and gas industry, which would increase the burden to undo those regulations. President Trump pledged to roll back these regulations. A part of that effort may involve directing EPA to conduct scientific studies to support the rollback, which may conflict with the current study.
Stream Protection Rule: The Senate intends to revoke the Department of the Interior’s stream protection rule, which updates a 1983 regulation that defines how close coal mining operations can get to waterways. The updated rule, which has been in the works for nearly a decade, adds new water-quality monitoring requirements and increases restoration requirements. The rule took effect on January 19, 2017. If Congress successfully passes a joint resolution to revoke the rule under the Congressional Review Act (CRA), it could then go up for the President’s almost-certain signature and approval. The agency would then be prohibited from issuing a substantially similar rule absent congressional action.
Other Developments to Watch
Congressional Review Act: The U.S. Congress could revoke a small universe of final rules through the CRA. Under the CRA, rules finalized on or after June 13, 2016 are subject to revocation by this Congress. A joint resolution to revoke a rule passed by a simple majority in Congress signed by the President would revoke a rule, and an agency is prohibited from issuing a substantially similar rule absent congressional action. To date, the CRA has only once been used successfully. However, with Republicans controlling both chambers of Congress and the almostcertain signatures from President Trump, many rules are vulnerable for revocation under the CRA. The sheer volume of the rules may hinder the ability of Congress to pass joint resolutions within the CRA window. To address this potential obstacle, the House has passed legislation to allow Congress to revoke rules en bloc, rather than one by one. If this legislation succeeds, it is likely that many recently finalized rules will be revoked.
Executive Order Cutting Regulations: On January 30, 2017, the President issued an Executive Order to cut back agency regulations. Details are scant, but under the EO, it appears that when EPA proposes a new rule, it must simultaneously propose two rules to rescind. All three actions would be subject to a notice and comment period, and it is unclear how negative comments on the proposed rules to rescind would impact the new proposed rule. It seems clear that delaying new regulatory activity is a primary goal, and one that this EO will achieve in some fashion.
Options Available to EPA: EPA could undertake efforts to alter or withdraw final rules through new rulemakings. This would require assembling new information for the rulemaking record, like economic and environmental studies, that would justify coming to a different conclusion. Appropriate notice and opportunity for public comment in accordance with the Administrative Procedures Act also would be required. Done properly, this approach would take considerably more time and resources to achieve, but results in more certainty for the regulated community. On average, a rulemaking takes two years from proposal to final, and any such rulemakings would remain subject to appeal.
Supreme Court Nominee: President Trump is widely expected to nominate a conservative justice to fill the seat of Antonin Scalia. If confirmed, this could create a Supreme Court more likely to override adverse rulings from the D.C. Circuit. However, the political climate of the new Senate suggests that a nominee is likely to face delays from a filibuster by Senate Democrats, while Senator McConnell will be forced to consider revising Senate rules on filibustering to push the nominee through.
State Role in Environmental Regulation: There is strong indication that the new administration may create long-term change by shrinking the role of EPA and enlarging the role of states in environmental regulation. In general, federal environmental statutes establish a “floor” of standards that must be met, and provide that the federal EPA will implement those minimum standards where individual states fail to do so. This has meant that, historically, EPA has kept a primary role in some instances with states taking a lead role otherwise. As the role of EPA shrinks, states will take the lead in implementing and enforcing environmental regulations within their borders and collaborate with neighboring states on a regional level. Certain states will likely take on the least stringent environmental regulations permitted by federal law to encourage local industry, while other states may continue to adopt more stringent regulations and take on “leadership” of environmental regulation, particularly in the climate change arena.
Public-Private Partnerships: The shrinking role of federal environmental regulation may lend itself not only to a larger state role, as discussed above, but also to a larger role for the private sector through public-private partnerships. For example, under the Water Infrastructure Finance and Innovation Act, state and local governments as well as private developers are eligible for federal loans for developing and improving small municipal wastewater and drinking water systems. As of December 2016, $1 billion was approved for funding these loans. A similar program exists for the transportation sector. These loans pave the way for the new administration and Congress to advance an infrastructure development plan that leverages private sector capital for infrastructure. This could signal significant opportunities for industry in the short-term, but longer-term benefits depend in large part on any changes to the regulatory burden for the private sector.
The Trump Administration has expressed deep skepticism of the federal regulatory machine, but the path to pulling back federal regulation creates both new opportunities and significant uncertainty for regulated industry. In the short term, companies should consider whether the regulations impacting their investment and compliance decisions are subject to change or revocation in the new administration. For the long term, companies should anticipate significant changes in the law from all three branches of government, though the direction and form of those changes remains to be seen. In this climate of immense uncertainty, a patchwork of state environmental regulations will be inevitable as a byproduct of that success. This patchwork of regulatory requirements will require additional scrutiny in assessing due diligence questions in corporate mergers and acquisitions, as well as in traditional compliance efforts across multiple jurisdictions. Meanwhile, investment opportunities may arise in the new administration’s push to encourage private sector activity.