Why the Trump Administration’s Environmental Rollback is Increasingly Seeing Pushback

Last week, the U.S. Environmental Protection Agency (EPA) revoked California’s waiver under the Clean Air Act to set state-specific greenhouse gas emission standards for new cars and trucks. The press is referring to this action as the latest Trump administration “rollback” of an Obama-era climate regulation.

Upon careful examination, the term “rollback” appears to be an inapt description of the administration’s deregulatory agenda, particularly in the context of climate change policy. Rather than seeking to simply return to some kind of pre-Obama baseline, the administration appears to be pursuing a more ambitious agenda: to neutralize the Clean Air Act as a mechanism for greenhouse gas (GHG) regulation. This agenda is revealed through a closer look not only at the California waiver action but also at rulemakings affecting the power sector and the oil and gas sector. The administration is pressing new interpretations of the law, hoping that the judiciary will affirm these interpretations into case law that prevents a future administration from reversing course. However, this deregulatory agenda is eliciting a range of increasingly negative responses by U.S. industry.

Power Sector—Serving for an ACE

The Obama administration sought to regulate GHGs in the power sector through a proposal called the Clean Power Plan. The Trump EPA has replaced the Clean Power Plan with the Affordable Clean Energy (ACE) rule, which claims that it will achieve roughly equivalent GHG reductions. But the primary motivation is not rolling back the Clean Power Plan. The aim is to constrain EPA’s future authority to set GHG standards for the power sector.

In the Clean Power Plan, the Obama EPA set emission standards for power plants based on the reductions achievable by shifting generation from coal-fired generation to natural gas or renewables. The Trump EPA asserts that this “generation-shifting” approach to standard-setting exceeded the agency’s authority under Section 111 of the Clean Air Act. Accordingly, the ACE rule replaces the Clean Power Plan standards with standards based only on reductions achievable through actions implemented at an individual plant, which mostly consist of efficiency upgrades. The ACE rule also denies the use of generation-shifting as a means of complying with the standards; the rule forbids states and utilities from relying on emissions trading programs.

The Trump EPA has argued that the ACE rule will achieve comparable environmental results. But the point is not to replace the Clean Power Plan—which has been largely overtaken by market-based changes anyway—but rather to prevent Clean Power Plan 2.0. The objective is to keep a future EPA from using Section 111 to force even deeper GHG reductions from the power sector through an even more stringent generation-shifting standard.

The legal arguments in the ACE rule illuminate this objective. Appropriately, the arguments anticipate a legal challenge heard under the two-step standard of judicial review established under the Supreme Court’s decision in Chevron U.S.A. v. Natural Resources Defense Council, Inc. Under Chevron, the first step for the reviewing court is to evaluate whether the “plain language” of the statute compels the approach used by the agency; in that case, that is the only approach that is allowed. On the other hand, if the relevant statutory language is ambiguous, then the agency has a forgiving fallback; the court will uphold the agency’s interpretation if it is a “reasonable” read of its statutory authority, even if it is not the best interpretation.

In the ACE rule, the agency has not made a “Step 2” fallback argument. Instead, it has only made a “Step 1” argument, asserting that its “inside-the-fence” interpretation is the sole permissible interpretation of Section 111. And because the EPA has not made a Step 2 fallback argument, the reviewing court cannot do such an evaluation on its own. Rather, the court must make an up or down call based on Step 1. In effect, the EPA has denied itself the easiest pathway for replacing the Clean Power Plan with the ACE rule.

What is the reason for this “go-for-broke” legal strategy? The reason is that a Step 2 victory does not serve the Trump administration’s interests. If the ACE rule’s “inside-the-fence” approach is not the sole permissible interpretation of Section 111, then a generation-shifting approach might remain a reasonable alternative. This would leave the door open for a future EPA to adopt a generation-shifting set of standards that drives an even more aggressive decarbonization of the power sector. The priority of Trump administration is to obtain a court decision that ties the hands of its successors. It appears that the Trump EPA cares less about preserving its ACE rule than preventing this future use of the Clean Air Act.

That is why the Trump EPA has adopted a legal strategy akin to a tennis player forgoing her second serve. The legal strategy for ACE rule is an ace-only strategy.

Oil and Gas Sector—Rescinding Methane Limits

In the oil and gas sector, the Trump EPA has proposed to remove methane standards for new and modified facilities, which were established through another Obama-era rule issued under Section 111 of the Clean Air Act.

The proposal would achieve this outcome through a number of interpretive steps; but the core of the proposal is to drop the methane limits for new and modified facilities on the grounds that existing limits on a different pollutant—volatile organic compounds (VOCs), a precursor pollutant for ground-level ozone—achieve the same amount of methane reductions from the regulated facilities. The Trump EPA argues that the VOC standards for new and modified facilities render the methane standards redundant.

Underlying this outwardly appearing environment-neutral proposal is a more sweeping deregulatory action. Under Section 111, the EPA may not impose emission standards on existing facilities in a sector unless it first has promulgated standards for new and modified facilities in that sector. Withdrawing the Obama-era methane standards for new and modified oil and gas facilities, therefore, would also prevent a future EPA from setting methane standards for the much larger universe of existing facilities. As with the ACE rule, the proposal is less of a rollback to preexisting limits than an initiative to forestall more comprehensive future limits.

To be sure, some existing facilities in the oil and gas sector are also subject to VOC limits. However, the coverage is patchy due to how that regulation is applied. In addition, relying on the co-benefit methane reductions of VOC regulation would tie the future scope and ambition of methane controls to the imperatives of addressing ozone—a pollution problem with decidedly different geographic and temporal characteristics than climate change. Again, all signs point to a core aim of neutering the Clean Air Act as a tool for climate policy by complicating or foreclosing the ability of a future EPA to regulate methane under the Clean Air Act.

Transportation Sector—Sidelining California

The signature climate policy achievement of the Obama administration was its joint greenhouse gas and fuel economy standards for new motor vehicles, which were forged through agreements among the EPA, the Department of Transportation, states, and automakers. The standards increase in stringency by a set percentage each year.

The Trump administration is moving on a number of fronts to modify these standards. First, it is widely expected that the administration will either slow or suspend the pace at which the standards become more demanding. However, as with the other rules, the administration is also considering steps that not only provide near-term regulatory relief but would also complicate the future use of the Clean Air Act to address transportation emissions.

In particular, the administration is targeting the policy-setting role of California and like-minded states. Since the 1970s, the Clean Air Act has included a special provision under which California may request a waiver from the EPA to set vehicle emission standards that are stricter than the federal standards if needed to “meet compelling and extraordinary conditions.” If the EPA grants the waiver, other states may adopt the California standard in lieu of the federal standard. In 2013, the Obama administration granted a waiver for California to adopt vehicle GHG standards; ultimately, 13 other states and the District of Columbia adopted the California standards. California’s standard-setting authorities have provided these states (which account for more than 40 percent of the national market) with significant leverage in reaching agreement among the states, the federal government, and the automakers to move forward with joint standards.

The Trump EPA and the National Highway Traffic Safety Administration (NHTSA) have issued a final rule revoking California’s waiver for GHG standards. They cite two grounds. First, the agencies are asserting that the state has failed to demonstrate “compelling and extraordinary conditions.” Second, they are claiming that, regardless of their purpose, the California standards are “related to fuel economy standards or average fuel economy standards” and therefore preempted by a different law—the Energy Policy Conservation Act.

The waiver would reverse several years of legal interpretations and practice by the EPA. The EPA has routinely granted waivers to California, and the agency has never revoked one. As with the other actions, the primary aim appears to be not just moderating or rolling back the current standards but also prospectively removing California and like-minded states from a critical part of the equation of climate policy for the transportation sector.

Industry’s Split Response and Increasing Pushback

The industry response to these rule changes has been far from uniform. To be sure, a number of companies and trade associations have hailed the changes. However, in other instances, companies have moved away from the apparent relief offered by the changes—sometimes through their actions and sometimes through their expressed opposition.

For example, in the power sector, notwithstanding the effort to eliminate generation-shifting requirements, generation is in fact shifting, and at a rapid rate. As described in a 2018 CSIS workshop and a related Van Ness Feldman white paper, utilities are decarbonizing their portfolios in real-time, and many of the larger companies are making significant commitments for 2030, 2040, and 2050.

In the oil and gas sector, even the Trump administration has acknowledged widespread voluntary industry efforts underway to reduce methane leakage—and many companies would prefer to retain the voluntary approach. But some companies have made clear that voluntary standards are insufficient. Even before the proposed rule was published, Equinor, BP, Shell, and Exxon had made statements asserting that it is necessary to have federal methane regulations for both new and existing facilities in the sector.

The most pointed industry break with the administration to date has come in the context of the vehicle standards. At the beginning of the president’s term, a number of automakers had asked the Trump administration to provide them with more time and flexibility to meet the vehicle standards, and in so doing supported the rollback. What the administration is actually proposing, however, is decidedly different, and, for a number of companies, expressly unwelcome. Automakers have raised concerns about regulatory and judicial chaos; in the worst-case scenario, they could be forced to develop different models for different states. Four automakers—Ford, BMW, Honda, and Volkswagen—have gone as far entering into an agreement with California to comply with a version of the rules that is more moderate and flexible than the original but also more stringent than the Trump proposal. The Trump administration has responded by threatening them with an antitrust action.

What explains the various industry responses? Many factors are at work, including changes in fuel prices, technology costs, consumer preferences, and shareholder views. Many companies place a higher value on regulatory certainty than what could be only temporary relief. A significant part of U.S. industry is also worried about pendulum politics in the regulatory arena. They fear a scenario in which dramatic deregulation by the Trump administration merely plants the seed for an equally or more drastic set of regulations from a future administration. After all, the Trump administration’s agenda to neutralize the Clean Air Act could falter in the courts and will not close off every regulatory pathway in any event.

Moreover, as successive administrations seek to advance or retract key energy and environmental regulations over a period of years, states are increasingly in an enduring conflict with the federal government. This ongoing struggle between state and federal authorities in the energy sector is bound to intensify at this rate, leaving companies, market operators, and investors, to wonder where and when a breaking point will occur.

Among all these factors dividing company responses, one increasingly stands out. Different companies have different opportunities and appetite to change their operations. In the power sector, most coal companies are exclusively in the business of delivering coal, and therefore, have hailed the ACE rule. But utilities are in the business of providing electricity and can and will opt for lower carbon fuels for generation to meet consumer demands.

In the oil and gas sector, small producers necessarily are focused on near-term production costs. But the major international oil and gas companies want to be tomorrow’s energy companies, so they are not only actively reducing the carbon footprint of their oil and gas operations but also investing in other low- or zero-emitting energy options outside of oil and gas.

The story is similar in the transportation sector. Smaller pure-play petroleum refiners are here to sell petroleum only. Many automakers, by contrast, are seeking an orderly transition to introduce more non-petroleum vehicles into their fleets.

In other words, many companies are in the midst of their own sector’s version of generation shifting, and they perceive an interest in having federal policies that provide a reasonable and predictable pathway for those changes. These companies see climate policy as inevitable and necessary. They want to be the energy and mobility companies that thrive in a future, carbon-constrained world. So, they are increasingly responsive to a rising class of executives and an increasingly vocal group of younger stakeholders who see an urgent need to address climate change.

Generation shifting, after all, can have two meanings.

Sarah Ladislaw is senior vice president and director and senior fellow of the Energy and National Security Program. Kyle Danish is a non-resident senior associate with the CSIS Energy and National Security Program. He is a partner in the D.C. office of Van Ness Feldman, LLP.

In addition, this publication does not necessarily represent the views or positions of Van Ness Feldman, LLP, or its clients.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

© 2019 by the Center for Strategic and International Studies. All rights reserved.

Kyle Danish
Senior Associate (Non-resident), Energy Security and Climate Change Program
Sarah Ladislaw

Sarah Ladislaw

Former Senior Associate (Non-resident), Energy Security and Climate Change Program