On Tuesday, March 28, 2017, President Trump signed his much-anticipated Executive Order rolling back President Obama’s climate-change policies. The President touted the Order as the first step in a process to roll back federal regulations that hurt jobs and returning decision-making power to the states.
While the Order was widely expected to direct the EPA to begin overturning the Clean Power Plan, which it did, it also took aim at the foundations of the entire Obama Administration climate initiative. The Order rescinded several key climate actions with a stroke of a pen, including Executive Order 13653 which outlined the former administration’s action plan for climate, the Social Cost of Carbon and Interagency Working Group, and the Council on Environmental Quality’s final guidance on consideration of climate change in environmental reviews.
However, these immediate actions were just the tip of the iceberg for a sweeping regulatory reform initiative. Trump’s Executive Order also included provisions for the review and possible rescission of a broad range of energy and environmental agency actions, including recent methane restrictions, which will have deep-seated and long-term effects for the energy industry.
The Order specifically compels all federal executive departments and agencies to review any regulations, rules, or policies which “burden” the “safe, efficient development of domestic energy resources” and to begin proceedings to suspend, revise, or rescind them. The Order defines “burden” broadly to mean:
[U]nnecessarily obstruct, delay, curtail, or otherwise impose significant costs on the siting, permitting, production, utilization, transmission, or delivery of energy resources.
This requires agencies such as the DOE, NRC, FERC, MSHA, PHMSA, and DOD to immediately undertake comprehensive reviews of their regulations affecting energy resources. Federal executive departments and agencies must finalize the results of their reviews within 180 days through the following process:
- Identify any existing regulations, orders, guidance documents, or policies within the agency with “burdened” domestic energy resources;
- Make specific recommendations to suspend, revise, or rescind the existing regulations (or publish for notice and comment for proposed rules suspending, revising, or rescinding) within a draft final report generated within 120 days of the Executive Order; and
- Once the report is finalized (within the 180 days), act as quickly as possible and “as appropriate and consistent with law” to implement the recommendations outlined in the final report.
The effects of the Order are comprehensive. First, the language fundamentally changes the legal standard for evaluating energy and environmental regulations, both retroactively and in the future. Once regulations are identified as burdening energy development, it will trigger a new regulatory balancing test between the burden on industry development and the public interest:
Accordingly, it is the policy of the United States that executive departments and agencies (agencies) immediately review existing regulations that potentially burden the development or use of domestically produced energy resources and appropriately suspend, revise, or rescind those that unduly burden the development of domestic energy resources beyond the degree necessary to protect the public interest or otherwise comply with the law.
Second, the language effectively serves as an opportunity for industry groups to challenge rules from all executive departments and agencies. For this reason, companies should confer with counsel to conduct reviews of the environmental regulations that adversely impact their industry.
Finally, the Order tips the scales on balancing domestic versus international impacts in future cost-benefit analyses, cementing President Trump’s “America First” strategy into the analyses themselves. Although the Office of Management and Budget generally considers compliance costs and impacts on public health in its analyses, the Order would suggest a new emphasis on energy independence issues.
The remainder of the Order can be divided into three main components: (1) rewriting and rescinding the Clean Power Plan, (2) promoting fossil fuel extraction, and (3) removing climate change from consideration in government decision-making.
1. Rescinding or Rewriting the Clean Power Plan
The centerpiece of the Executive Order is the formal kick-off of the administrative process for rolling back the Clean Power Plan (CPP). The CPP was designed to cut carbon dioxide emissions from electricity generation by 32% by 2030 compared to 2005 levels. The CPP’s requirements were scheduled to become effective in 2022; however, that date was likely to be delayed as the Supreme Court in February 2016 stayed the CPP rule pending D.C. Circuit Court of Appeals review of that rule.
Today’s Executive Order directs the EPA to “review” the CPP — prompting the agency to commence the rulemaking and stakeholder engagement process required to rescind or materially alter it. In parallel, the Executive Order authorizes the U.S. Department of Justice to effectively abandon active defense of the CPP before the D.C. Circuit by asking the court to stay pending litigation during the EPA review process.
The process for rolling back the Clean Power Plan is likely to take several years to complete. The rulemaking and stakeholder engagement process required as part of the EPA review would be time-consuming under the best of circumstances. Industry experts anticipate the process could be prolonged if EPA funding is reduced as proposed by the Trump Administration. Additional delay is likely to arise from legal challenges from environmental groups, who have signaled in advance of the release of the Executive Order that they will vigorously challenge the legality of Executive Order’s CPP-related directives in the courts.
For the Trump Administration, the Executive Order’s CPP-related directives represent the fulfilment of President Trump’s campaign promise to end the Obama Administration’s “war on coal” and restore “common sense” to U.S. environmental and energy policy. But the practical impact of the CPP-related directives could be broader and more nuanced than Trump Administration press releases may suggest:
- The CPP’s near-term significance was likely overstated. Despite the heated political rhetoric from both sides of the aisle regarding the CPP, practically speaking, its near-term impact on the U.S. generation mix would likely have been limited. The CPP’s carbon reduction requirements were by design intended to be implemented by the states over time: initial, relatively undemanding requirements would not be effective until 2022, with more stringent requirements not kicking in until 2029. So the CPP would not have required significant near-term change in many state energy generation portfolios. Further, the Supreme Court’s stay of the CPP could have pushed those CPP compliance timelines even farther into the future, thereby reducing pressure on the states to reconfigure their energy generation portfolios even more.
- The political firestorm certain to result from the Executive Order’s CPP-related and other elements could result in more aggressive state action on climate change. Policymakers in many coastal and northeastern states have already signaled that they intend to fill the leadership vacuum on climate change resulting from the rollback of the CPP and other elements of the Executive Order. Some of those states could make direct pressure on industry a centerpiece of their efforts to address climate change — an unintended consequence for the business-friendly Trump Administration. Additionally the Order will spark more private party action such as citizen suits from the environmental community. Statements from organizations like the Sierra Club and NRDC have indicated they intend to fight the rollback both through advocacy and in the courts.
- The CPP was merely one of many factors driving the significant changes in the national energy generation mix. The CPP is hardly the only or even the principal reason for decline of coal within the United States. According to Ventyx, ca. 49.0 GW of coal generation was retired between 2011-2016 (before and immediately after the CPP was finalized). Those retirements were driven by a combination of market forces (specifically increased penetration of renewable generation and historically low natural gas prices) and state energy (specifically, renewable energy portfolio standards) and U.S. tax policies favoring other generation types. Even if the CPP were completely scrapped, those forces are expected to continue current trends away from coal generation.
- The regulatory position that will ultimately emerge from what is bound to be a multi-year “review” of the CPP is difficult to predict. The Trump Administration EPA will not have a free hand to scrap the CPP as a result of its “review” of the regulation. This is because of a bedrock principle of administrative law that an administrative agency cannot rescind or change rules issued by a previous administration without a substantial basis in the form of an evidentiary record supporting the change.
Compilation of that record takes a significant amount of time in the best of circumstances, which is likely to increase as the EPA is facing historic budget cuts. Thus, the EPA’s review process is likely to take several years. Further, the well-developed evidentiary basis compiled by the Obama Administration in support of the CPP will complicate EPA’s ability to completely scrap the CPP. EPA may decide instead that a more defensible position would be to merely alter particularly controversial elements of the CPP (e.g., its “outside-the-fence” application).
- The legal significance of the EPA’s 2009 Endangerment Finding within EPA’s CPP review is unclear. In 2009, EPA determined after a review of available scientific evidence that greenhouse gases such as carbon endanger the public health and welfare, thereby triggering an obligation under the Clean Air Act to regulate carbon as a pollutant. That 2009 Endangerment Finding was the justification required by the Clean Air Act for the EPA’s promulgating the CPP. But the Executive Order’s CPP-related directives do not disturb the EPA’s 2009 Endangerment Finding. Although the precise legal significance of retention of the Endangerment Finding is unclear, environmental groups are likely to contend that it will constrain the Trump Administration’s legal posture in pending litigation involving CPP, or the EPA’s ability to rescind or materially alter the CPP through notice and comment rulemaking.
- Final resolution of pending legal challenges to the CPP before the D.C. Circuit may not occur for many years. Although the D.C. Circuit could conceivably already have an opinion in hand resolving the pending litigation on the CPP, it will likely honor any Department of Justice request to stay that litigation pending EPA’s review. As a result, final resolution of the legal issues raised in the litigation may not occur until the results of EPA’s notice and comment rulemaking process are ripe for legal challenge—several years from now at a minimum.
- The long-term implications for U.S. climate change–related treaty commitments are uncertain. Although it is not mentioned in the Executive Order, the Paris Agreement contemplates reductions in U.S. carbon emissions beyond those required by the CPP. However, by effectively suspending or delaying the CPP’s near-term carbon reductions, the Executive Order could complicate U.S. efforts to comply with long-term national carbon reduction obligations under international law, unless the United States withdraws from the Paris Agreement.
And although the long-term impacts of the Executive Order are more difficult to discern, its CPP-related directives could create immediate winners and losers among U.S. generation resources:
- The effect on renewables (wind, solar) and natural gas generation is unclear. Recent trends toward increased penetration of renewable and natural gas generation throughout the country are the result of a variety forces — not just CPP compliance. Because those other forces will continue in the absence of the CPP, the Executive Order’s effect on renewable and natural gas generation is hard to predict.
For renewables, the principal drivers have been state renewable portfolio standards and federal tax credits, as well as decreasing costs. With respect to the latter, the levelized cost of energy for wind in particular has plummeted nearly 61 percent over the 2009-2015 time period, with many industry analysts predicting further decreases in the years ahead. The cost of solar has fallen precipitously as well over the same time period.
For natural gas, the principle impetus has been historically low natural gas prices from the shale gas boom. According to Ventyx, those low natural gas prices have resulted in ca. 52.3 GW of new natural gas-fired generation that is expected to come online by 2020.
- Some of the pressure on coal generation may be relaxed — but ultimately market forces will continue to inhibit coal generation. Industry experts expect that coal plants will continue to disappear as a function of market forces (specifically increased penetration of renewable generation and historically low natural gas prices) and other regulations (e.g., the EPA rules limiting mercury air pollution by power plants) unaffected by the Executive Order.
- Because nuclear generation may have the most to lose from Executive Order’s CPP-related directives, the Trump Administration’s public commitments in support of the nuclear industry become even more important. The need to achieve long-term carbon reductions to comply with CPP requirements reinforced the importance of many financially-challenged nuclear plants in serving as bridge to a renewables-focused energy industry. The rescission or watering-down of the CPP as a result of the EPA review process could weaken the argument for those plants’ continued operation. Further, other elements of the Executive Order (in particular, the scrapping of the Social Cost of Carbon) could threaten state zero emissions credit subsidy programs intended to provide a lifeline to those financially-challenged nuclear plants.
Importantly, however, all signs are that the Trump Administration remains committed to supporting the nuclear industry. The Order itself declares that it is in the national interest to ensure electricity can be produced from “nuclear material” among other resources and specifically calls for agencies to review regulations which burden the development of domestic energy “with particular attention to oil, natural gas, coal, and nuclear energy resources.”
2. Promoting Fossil Fuel Extraction
Several regulations of the Interior Department’s Bureau of Land Management (BLM) were also targeted in the Order with the aim of increasing fossil fuel production. The first lifts the current moratorium on coal leasing from federal lands. The impact of that change may be limited in scope, as the current market appetite for increased coal extraction is quite low due to the competition from low-cost natural gas, wind, and solar. A recent report from Moody’s Analytics highlighted that approximate 56 GW of Midwest coal-fired generation was at risk due to the low price of wind in the region.
The Order also calls for review of BLM’s hydraulic fracturing rule, finalized March 2015, which sets mandates for oil and gas fracking on federal lands, requires companies to disclose the chemicals used in fracking operations, and to seal off waste water in storage tanks.
Finally, the Order provides for rescinding BLM’s Methane and Waste Prevention Rule, finalized in November 2016, which requires oil and gas producers to cut flaring on federal and tribal lands. While legislation has been introduced in Congress to overturn this rule through the Congressional Review Act, it has not moved for a vote in the Senate.
3. Removing Climate from Consideration in Government Decision-Making
Tuesday’s Executive Order rescinds the use of the Social Cost of Carbon, an estimated value of avoided carbon emissions developed by a federal Interagency Working Group (IWG) to assist in valuation of climate impacts within federal decision-making. The Social Cost of Carbon, currently valued at around $36 per ton, is used by federal agencies to value the climate impacts of rulemakings. The Executive Order disbands the IWG and withdraws six IWG-generated technical documents, claiming they are “no longer representative of governmental policy” and did not follow sound guidelines governing cost-benefit analysis. These claims were made despite the fact that the IWG’s process and output was upheld in a unanimous decision by the Seventh Circuit in Zero Zone Inc. v. U.S. Dep’t. of Energy in August 2016.
The Order also rescinds the Council on Environmental Quality’s (CEQ) final guidance directing federal agencies to consider greenhouse gases and the effects of climate change in their National Environmental Policy Act (NEPA) reviews. Since the CEQ guidance was issued in August 2016, some federal agencies have already taken steps to incorporate it into their own manuals. For example, in February 2017, the Federal Energy Regulatory Commission issued a “Guidance Manual for Environmental Report Preparation” which relied heavily on the CEQ guidance.
However, the rescission of the CEQ guidance may have only limited practical impact. At the heart of several cases currently before the D.C. Circuit Court of Appeals is the sufficiency of NEPA review, and while the CEQ guidance may have been a boon for environmental groups challenging the exclusion of upstream and downstream impacts from the government’s review, the courts will ultimately decide the issue.
It is important to underscore the potential significance of the Order’s call for a full review by all agencies of any existing regulations, orders, guidance documents, or policies which “burden” domestic energy production which will have deep-seated and far-reaching effects on the future of U.S. energy and environmental policy, the extent of which remains to be seen. This also presents an opportunity for affected industries to raise additional issues with federal executive department and agencies under the “burden” standard. Those federal executive departments and agencies may now be more inclined to provide regulatory relief to those requests. Interested clients should closely monitor the reports by agency and department heads to be submitted within the next 180 days.