TransCanada Sues U.S. Government For Rejecting Keystone Pipeline

Courtesy of the <a href="https://www.aer.ca/about-aer/media-centre/photos">Alberta Energy Regulator</a>

Courtesy of the Alberta Energy Regulator

On Wednesday, TransCanada filed a complaint against the United States in a federal district court in Houston alleging that the President’s rejection of the Keystone XL pipeline was invalid and unconstitutional because it was not authorized by Congress. If successful, this claim would allow construction of the pipeline.

On the same day, TransCanada filed a notice of intent to submit a claim to arbitration under the North American Free Trade Agreement (NAFTA). Even if successful, this claim would not allow construction of the pipeline, but could entitle TransCanada to money damages from the United States. The company is asking for $15 billion in damages.

Like most private lawsuits against the government, these lawsuits face long odds, but both raise important and novel legal issues that will be difficult to decide. TransCanada’s constitutional claim could change the way that the United States approves international oil pipelines. And TransCanada’s NAFTA claim could endanger the United States’ long winning-streak in NAFTA arbitrations.

TransCanada’s Constitutional Claim

The most unexpected part of TransCanada’s legal salvo was the lawsuit that it filed asking a U.S. district court to rule that President Obama’s rejection of the Keystone XL pipeline was unconstitutional. TransCanada notes that Congress has never passed a statute that gives the President authority to reject international oil pipelines and says that, without such a law, the President had no authority for his unilateral rejection of the pipeline.

Congress has never provided a legal framework for regulating oil pipelines that cross the United States’ international borders. By contrast, there are laws that establish a process for the President to decide on international natural gas pipelines and electricity transmission.

In the absence of Congressional authorization, President Lyndon Baines Johnson simply issued an executive order in 1968, Executive Order 11423, that established a process for issuing permits to proposed oil pipelines that “would serve the national interest.” Then in 2004, President George W. Bush issued a new unilateral order, Executive Order 13337 that expedited review of border crossings. Both executive orders delegate decisions on these cross-border permits to the U.S. Secretary of State.

On November 6, the current Secretary of State, John Kerry rejected the Keystone XL pipeline after seven years of review. The official U.S. Record of Decision stuck by the State Department’s controversial previous conclusion that the pipeline would improve U.S. energy security, benefit the economy, and would be unlikely to increase greenhouse gas emissions in Canada. (It also suggested that the pipeline might even decrease greenhouse gas emissions in the United States by moving oil transport from railroads to pipelines, making oil transport more efficient.) But the U.S. concluded that the pipeline was ultimately not in the national interest because it could undercut the nation’s leadership in climate talks because the pipeline was “perceived as enabling further [greenhouse gas] emissions globally.”

TransCanada’s key argument is that, in the absence of any law, the President does not have unilateral authority to reject an international oil pipeline based on this kind of consideration. Although Presidents have claimed power to decide whether a pipeline is in the national interest since President Johnson in 1968, TransCanada argues that this power has never been fully tested because the President has never rejected an international pipeline.

This creates something of a puzzle: if Congress has never passed a law governing international oil pipelines and the President does not have authority to reject an oil pipeline, then who may, in fact, regulate pipeline border crossings?

One possible answer is that international oil pipelines are primarily regulated by the states, just like domestic oil pipelines. The U.S., unlike Canada, primarily relies on state-by-state regulation for interstate oil pipelines. That is, if no law has been enacted governing international oil pipelines, then the only laws that govern them are the same ones that govern domestic oil pipelines.

President Obama’s administration will raise several counterarguments. First, it will argue that the President has inherent and unilateral constitutional authority to control the nation’s borders, so he must have some kind of ability to control international border crossings. Second, if Congress has not established any criteria for the President to use in this decision, then he is free to create his own criteria. Third, President Johnson established this process almost fifty years ago and it has been frequently used to approve pipelines so Congress has, with the passage of time, acquiesced to this process. Fourth, federal district courts have upheld the President’s unilateral decision to approve international pipelines.*

TransCanada will respond that, whatever power the President has, it does not allow him to reject a pipeline based solely on international perceptions that are inconsistent with the government’s own environmental analysis. TransCanada’s complaint also argues that, far from acquiescing in the President’s unilateral authority to reject international pipelines, recent Congresses have repeatedly sought to constrain the President’s authority, citing Congress’s frequent attempts to approve the Keystone XL pipeline. Finally, TransCanada will point to federal court decisions and executive branch opinions from nearly a century ago, which concluded that in the absence of Congressional authorization the President had, at most, limited authority to control border-crossing facilities. Though old, these opinions may remain relevant in the unusual situation where, as with oil pipelines, Congress has not established a process for permitting border crossings.

The continuing saga of the Keystone XL drama overlaid with a tangle of old and new precedents and conflicting constitutional powers will make TransCanada’s U.S. lawsuit a case to watch. If a Republican is elected President this coming November, then the issue will likely be moot because the Republican contenders say they would reverse President Obama’s decision on the pipeline. But if not, then the U.S. courts will have to resolve the thorny issues raised by TransCanada.

TransCanada’s NAFTA Claim

TransCanada’s other action, its notice of intent to submit a claim to NAFTA arbitration, alleges that the U.S. discriminated against Keystone XL’s Canadian investors, violating its obligations to afford them national and most-favored-nation treatment under Article 1102 and Article 1103 of NAFTA. TransCanada also argues that by delaying a decision on the pipeline for seven years, and then denying it, the U.S. government destroyed the value of its investment, expropriating its property in violation of NAFTA Articles 1110 and 1105.

NAFTA claims are decided by three independent arbitrators. These arbitrators are not bound by the decisions of the arbitrators that decided previous claims. Thus, it is very difficult to predict whether a NAFTA claim will be successful.

If past cases are any indication, a Canadian company like TransCanada begins at a serious disadvantage. The United States has never lost a NAFTA decision to a foreign investor. And arbitrators have sometimes gone to great lengths to avoid a finding of discrimination. In one case, California passed a law that, it admitted, used “narrowly crafted language intended to prevent approval of a specific mining project” owned by Canadian investors. But the NAFTA panel for that case held that the law was not discriminatory because, in theory, that narrowly crafted language could apply in the future if another company proposed a similar project.

On the other hand, the extraordinary facts of the Keystone XL review process could end the United States’s NAFTA winning streak. First, throughout the seven-year review, President Obama repeatedly responded to complaints from pipeline supporters by admonishing them to remember “this is Canadian oil, this isn’t U.S. oil.” And the President’s administration was, at the same time, moving to expedite domestic oil pipelines. Second, after repeatedly delaying the decision on Keystone XL and repeated environmental impact studies, the U.S. denied the permit on the basis of a perception that was not supported by the seven years of analysis it had done. It will be difficult to explain why it took seven years to analyze the pipeline if, in the end, the government chose to ignore that analysis.

Finally, TransCanada’s lawsuits may operate in tandem because one relevant set of laws that Congress has passed concerning international energy trade is the set of laws approving and implementing NAFTA. In U.S. court TransCanada will argue that even if Congress has not prescribed a specific process for international oil pipelines, it has, at least ruled out any discriminatory or arbitrary treatment of Canadian investors in those pipelines. One of the chief challenges for U.S. lawyers will be to explain why the federal government should impose a uniquely lengthy and unpredictable process on Canadian oil pipelines while expediting domestic oil pipelines.

Regardless of the outcome, TransCanada’s Keystone XL challenges set the stage for potential blockbuster decisions that will have a lasting impact on energy, constitutional, and trade law.

 

You can see more legal documents & analysis related to the Keystone XL pipeline and other North American oil pipelines at Oil Transport Tracker (Shortcut link: http://j.mp/OilTransportTracker).

 


 

*Full disclosure: Before my academic career, I worked in private practice and represented TransCanada in two of these earlier cases. 

Alberta’s New Climate Plan: Can Alberta Be a Model for Texas?

Screen Shot 2015-11-26 at 12.36.50 PM

Courtesy of the Alberta Energy Regulator

On Monday, Premier Rachel Notley announced Alberta’s new climate plan, which is supported by a detailed report from a panel of experts. The centerpiece of the plan is a $30/tonne price on carbon emissions in Alberta that is implemented through a modified tax dubbed a “carbon competitiveness regulation.” The plan also includes more targeted measures aimed at phasing out coal power, boosting renewable power, lowering methane emissions, and capping emissions from the oil sands.

The most important question about Alberta’s regulation is whether it will encourage other jurisdictions to follow suit. Alberta’s carbon emissions are just under 1% of the global total so it cannot do much to slow climate change by itself. But if Alberta can make stringent carbon regulations work in an energy-producing economy, it could stand as an important example for other energy producing jurisdictions.

As a result, Alberta’s plan may be the most important climate announcement of the year. To achieve the world’s climate goals, major energy producers around the world will have to lower their carbon emissions. But Texas and North Dakota or, for that matter, Russia and Saudi Arabia, aren’t looking to California or Europe for inspiration on climate policy. They will, however, be watching to see whether Alberta’s plan works out.

Alberta’s Announced Carbon Policy

Under the new plan, Alberta’s carbon price will rise to $20/tonne in 2017 and $30/tonne in 2018 and it will apply to anyone that burns or sells fossil fuels. The carbon tax’s design—known as the “carbon competitiveness regulation”—is more complex than its headline numbers suggest. Large industrial facilities, such as the oil sands, will receive credits from the government toward compliance and the companies that produce the least carbon-per-barrel will have more credits than they need to comply. These companies can then sell their excess credits to less-efficient companies who will snap up any credits sold at less than the headline carbon price. So even after 2018, companies may sometimes pay a bit less than $30/tonne of emissions and they will receive a substantial subsidy for their production, which will limit the net impact of the policy on industry.

On the other hand, the baseline carbon price is intended to rise over time slightly faster than inflation “as long as similar prices exist in peer and competitor jurisdictions.” About 90% of Alberta’s exports go to the United States, where there is no carbon price. So this may mean that the price will stay at $30/tonne until the U.S. takes similar action on climate.

Alberta’s proposed climate plan has other elements but the government has not yet revealed exactly how they will work. First, the province will take steps beyond the carbon price to make sure that coal-power is phased out by 2030. Alberta is targeting coal because it emits more carbon and air pollution than Alberta’s other sources of electricity. At the same time, Alberta will provide extra funding for renewable power through a “clean power call” that pays extra for sources like solar power and wind power.

Alberta also aims to cut methane emissions from the oil and gas sector 40% by 2030. The panel proposes to start cutting methane by providing offset credits to companies that find ways to reduce their emissions; these credits may be a cheaper way to comply with the carbon competitiveness regulation. After five years, the government would begin to mandate reductions to ensure that the oil and gas sector meets the 40% target by 2030.

Finally, Premier Notley also announced that carbon emissions from the oil sands would have a special 100 megatonne annual cap. (This policy is not contained in the panel’s recommendations to the government.) Right now, the oil sands emits about 70 megatonnes of carbon per year so it might eventually bump up against this cap if production continues to expand without efficiency improvements. But given lower oil prices and slower projected growth of the oil sands, emissions will probably not approach this cap for a decade, particularly because the cap includes exemptions for co-generation and crude processing. Ultimately, this supposed cap may be helpful rhetorically but it’s hard to say whether future governments would stick by it if it ever threatened to have real economic consequences.

The Big Question: Will Alberta’s Carbon Plan Encourage Action Elsewhere?

Unilateral climate regulations such as Alberta’s plan are politically challenging because they impose costs without providing any immediately obvious benefit. Clean air and clean water rules impose costs but provide citizens with the benefit of clean air and clean water. Climate change, on the other hand, is caused by global emissions so Alberta’s climate regulation will only provide tangible benefits if it encourages other provinces and countries to follow suit.

Premier Notley also implied that the new climate plan will have an indirect benefit by improving Alberta’s reputation in the U.S, and thus reducing foreign resistance to pipelines carrying Canadian crude such as the Keystone XL pipeline. This is a long-shot. Opposition to the Keystone pipeline was never conditional on the stringency of Alberta’s regulation. As I explain in this presentation, most U.S. opposition to the Keystone pipeline came from groups that are opposed to all new fossil-fuel infrastructure. Many Canadians favor both stronger climate regulation and better access to markets for Canadian crude; it would be pleasant to think that accomplishing one goal would lead to the other, but there is little evidence for this comforting theory.

So the success of Alberta’s carbon policy will be determined by whether it convinces other countries that its stringent carbon policy is workable in a major energy-producing economy. Like any carbon price, Alberta’s will encourage everyone in the province to burn less fuel by raising the price of electricity, natural gas, and gasoline. It will raise the average household’s cost of heat, power, and transport by about $500 a year.

Despite its costs, economists say this kind of carbon tax is the cheapest way to reliably lower carbon emissions because all carbon reduction policies have costs. But if you were a political leader in Texas or North Dakota or Russia would you follow suit? Would you be willing to impose these costs on your local economy to address a global problem like climate change?

There’s reason for hope: after all, governments raise taxes on their own businesses all the time. Carbon taxes may not be any more politically dangerous than other broad-based taxes such as a sales tax. And a carbon tax probably does less harm to the economy than common taxes such as those on corporate income. So countries or provinces can actually help both the planet and their economy by adopting a carbon tax and using the money to lower distortionary taxes like the corporate income tax. When a carbon tax is only used to replace other taxes, that’s called a “revenue-neutral” carbon tax, and it is what British Columbia has been using since 2008.

Alberta, however, chose not to take this route. Instead, Premier Notley said the government would “reinvest” much of the new revenue in green infrastructure, renewable energy, and efficiency programs. Alberta will rebate some of the costs of the program to low and middle-income consumers, but it is not yet clear how it will do this. So far, there is no indication that the government will use the revenue to reduce distortionary taxes.

Oddly, during the announcement, Premier Notley claimed that the new carbon tax would be revenue-neutral, because all the revenue will be “recycled back into the Alberta economy”—apparently she meant that the government will spend all the revenue it takes in. But that’s not what “revenue-neutral” means, and it is dangerous to call such a tax “revenue neutral.” Conservatives often point to British Columbia’s tax as an example of how climate regulation can be consistent with the small government principles that often drive policy in energy producing jurisdictions. These advocates of revenue neutral carbon taxes won’t get very far if “revenue neutral” becomes a euphemism for higher taxes and higher spending.

Alberta’s new climate policy will be one of the most carefully watched experiments in climate policy and it could change perceptions of what is possible in a major energy exporter. Much will depend on its success.

Encouraging Energy Companies to Inform Their Investors About Risks They Face From Climate Regulation

Screen Shot 2015-04-23 at 5.00.29 PMMy recent study compared what oil companies told two audiences—regulators and investors—about how new environmental rules would affect them. It showed that the companies told the two audiences two very different stories: companies warned the Environmental Protection Agency (EPA) that the rules would be unworkable but securities disclosures reassured investors that the rules would be manageable.

To give EPA industry’s honest view on whether rules are manageable, I suggested that companies should file excerpts from their securities disclosures with their comments.

But what if the comments to EPA are accurate—companies really are terrified about new regulations—and they’re just not telling their investors? After all, shareholder groups and proxy advisory firms have complained that energy companies are ignoring Securities and Exchange Commission (SEC) guidance on disclosing risks from climate regulation.

In a new post at Columbia Law School’s blog on corporations and capital markets, I explain how industry’s comments to regulators can be used to encourage companies to inform their investors of real risks that they face from regulation. Here’s the end of the post:

Investors should use company comments to identify risks that companies may be minimizing in their 10-K disclosures. And the SEC should insist that companies tell investors about any risks that they are stressing to regulators. …

In the meantime, corporate counsel should get ahead of regulators and investors by aligning comments and securities disclosures. When a company’s comments and 10-K disclosures are revealed to be inconsistent, it has put itself in a lose-lose situation. Regulators will discount the company’s pessimistic comments. But if a new rule does harm the company, investors will have evidence to support a Rule 10b-5 lawsuit. Although it is harder to sue a company for “soft” information or predictions about the future, in this case company comments would support an inference that the company did not even believe its own assurances. See Omnicare v. Laborers Dist. Council Constr. Ind. Pension Fund, 575 U.S. _ (2015) (slip op. at 6-9). And few companies would relish the prospect of having to prove in court that their dire warnings to EPA were entirely insincere.

Proactive companies could even bolster their credibility by voluntarily filing excerpts from their securities disclosures along with their comments. If they did so, regulators might be more inclined to take their concerns seriously in crafting final rules.

Thus, aligning corporate comments with corporate securities disclosures would not only improve the information available to regulators; it would also protect companies from liability and enhance industry’s credibility in notice-and-comment rulemaking.

May Provinces (or States) Limit Imports on the Basis of Greenhouse Gas Emissions Elsewhere?

By James ColemanMartin Olszynski

Screen Shot 2015-04-15 at 9.03.54 AMLast week, a group of economists known as “Canada’s Ecofiscal Commission” issued a much-discussed report that urged Canada’s individual provinces to drive Canadian climate policy by adopting their own carbon pricing schemes. But the report barely touched on one of the key challenges for provincial or state regulation without the support of the national government: what may places that price carbon do to avoid losing industry to places that don’t?

This is an urgent question across North America because, for different reasons, Canada and the United States are unlikely to adopt uniform nationwide climate policies in the near future.[1] Instead, climate regulation will be somewhat different in each state and province. But states and provinces lack a key power that national governments use when they adopt climate regulation: the power to adopt trade regulations that control imports. The nation is an economic union so provinces can’t limit trade across their borders.

Climate and trade policies often go hand-in-hand because nations that limit carbon emissions worry they will lose industry to nations that do not. After all, if emissions merely shift to other nations, a phenomenon known as “carbon leakage”, a single nation’s carbon policies won’t do much to help the global climate. One way around this problem is to charge a “carbon tariff” on imports that were produced in nations that do not have similar limits on carbon emissions. This charge is calculated by estimating how much carbon was emitted to produce the imported product and then multiplying that quantity by the importing country’s carbon price. These tariffs are sometimes called “border adjustments” because, in theory, they are supposed to level the playing field between domestically regulated producers and unregulated foreign ones.

You can’t set up a customs house between Manitoba and Ontario, so provinces can’t charge a regular carbon tariff. But states and provinces have found a roundabout way to do more-or-less the same thing. For instance, California and Quebec both have cap-and-trade systems that force power plants to purchase a permit for each ton of carbon that they emit into the atmosphere. Crucially, these cap-and-trade systems also apply to power plants in other states that export electricity to California and Quebec. The effect is the same as the customs house: when a purchaser imports electricity into California or Quebec it must pay a charge for all the carbon that was emitted elsewhere to produce that electricity.

So can states and provinces place a charge on imports that accounts for how much carbon was emitted elsewhere to produce them? It’s a crucial question because such charges could apply to all kinds of goods, not just to electricity. Provinces like British Columbia and states like California are already setting standards for motor fuels that effectively charge imported fuels for the greenhouse gases that were emitted elsewhere in their production. And in theory the same charges could apply to any kind of good. You would just add a surcharge to every item based on the greenhouse gases that were emitted elsewhere to produce it: television sets, fruit, toys, you name it.

In fact, state and provincial climate regulations across North America are increasingly adopting exactly these kind of controls, adding urgency to the underlying legal question: may energy importers export their regulation to cover emissions outside their borders? In the absence of national action on climate change, provinces are looking for creative ways to make sure that they don’t lose industry to provinces that don’t regulate, so they’re regulating imports based on carbon emissions elsewhere.

Canada’s Ecofiscal Commission is recommending provincial action on climate but it has little to say on this crucial topic, and what it says is confusing. The report’s section on “competitiveness” has a subheading titled “Border adjustments could level the playing field,” which sounds promising. It then says “border adjustments could not be implemented by a single province, but would require involvement by the federal government,” which is a major qualification. But then it states that, after all, such adjustments are possible for “specific emissions that fall under provincial jurisdiction” and cites the example of Quebec’s electricity imports. For this proposition it cites a white paper on a U.S. cap-and-trade system written by U.S. law students.

This issue is too important to gloss over. If states and provinces are going to lead the fight against climate change, many legal decisions and many academic pieces will be written on the topic before it is resolved. This post merely flags some of the key rules and arguments that will be in play.

The normal rule has been that states and provinces may not adopt regulations for pollution emitted in other states. These forbidden rules are known as “extraterritorial” regulations. In Interprovincial Co-Operatives Ltd. v. Dryden Chemicals Ltd, the Supreme Court of Canada held that Manitoba could not make a law punishing companies that lawfully emitted pollutants in Saskatchewan and Ontario, even if those pollutants made their way into Manitoba. The rule in the United States is more complicated, but under what is known as the “dormant commerce clause”, the U.S. Supreme Court has held that states cannot adopt a law “if the practical effect of the regulation is to control conduct beyond the boundaries of the State.”

One important reason for the normal rule is that if provinces or states began banning products that were produced elsewhere in ways that they didn’t like, they would quickly run afoul of international trade laws. For example, if Ontario banned all products made by laborers that were not paid its $11 per hour minimum wage that would, as a practical matter, end imports from the developing world. It would also conflict with the General Agreements on Tariff and Trade that govern international trade.

On the other hand, the traditional rule against extraterritorial regulation is on somewhat tenuous footing. In Canada, Interprovincial Co-Operatives involved a 3-1-3 split, which makes the primary ruling open to debate. The decision is also four decades old and has been heavily criticized, including by one of Canada’s leading constitutional scholars. See Peter Hogg, Constitutional Law of Canada, 5th ed., (2007) at 13-10. Similarly, in the United States, scholars and judges have suggested that limits on extraterritorial regulation should be abandoned.

Suffice it to say that import regulations may have a better chance of being upheld where their extra-provincial effects are deemed incidental to their primary purpose, or “pith and substance” in Canadian jurisprudential terms. Reference re Upper Churchill Water Rights Reversion Act, [1984] 1 SCR 297. See also Shi-Ling Hsu and Robin Elliot, “Regulating Greenhouse Gases in Canada: Constitutional and Policy Dimensions” (2009) 54 McGill L.J. 463.

And perhaps the normal rule should bend in the case of provincial climate regulation. For one thing, even if carbon emissions occur in Alberta, they still affect the global climate, which could harm Ontario, Quebec, and every other place in the world. For the same reason, it is vital that climate regulation doesn’t just shift carbon emissions to other provinces: few will want to regulate if the provinces that do lose jobs without securing any net benefit for the climate. If we want provinces to set a model for eventual national regulations, maybe they need the same trade powers.

States and provinces also have long-standing authority to manage the mix of sources providing power to their electrical grid, which includes regulating contracts for electricity imports. This helps to ensure that power will always be available at reasonable prices. But there are limits to this authority as well: a province certainly could not prescribe the wages or working conditions for employees at power plants in other provinces. Can provinces prescribe carbon standards for power plants elsewhere under their traditional authority over electricity markets? That remains an open question.

So far, the U.S. courts are divided on whether states may regulate based on carbon emissions elsewhere. An appellate court said that California could regulate fuels based on emissions elsewhere and a district court said that Minnesota could not regulate electricity based on emissions elsewhere. The Canadian courts have not yet addressed the question. And the first two Canadian cap-and-trade systems are poor test cases because both Quebec and Ontario import far less electricity than they export. But the question will become unavoidable as more provinces adopt the kind of policies recommended in the Ecofiscal Commission’s report.

Finally, these questions will grow more pressing as long as national governments delay action to address climate change. As with recent provincial efforts to improve environmental impact assessments of interprovincial pipelines, the federal policy vacuum is pushing provinces to act on their own. In the United States, one interim solution could be for the federal government to allow non-discriminatory state regulation of energy imports. If Canada’s government is serious about sticking with provincial climate policy, it may have to consider similarly creative solutions. In the meantime, these policies will continue to present difficult and novel legal questions about the boundaries of state and provincial authority.

__________________________

[1] In Canada, the conservative government has repeatedly delayed federal climate regulations and the leader of the liberal party has pledged to leave the provinces in charge of carbon pricing. In the United States, congressional inaction has pushed President Obama to rely on a rarely-used Clean Air Act provision that requires states to adopt their own regulations for power plant carbon emissions.

Legal Debate on EPA’s Power Plan Takes Center Stage

Screen Shot 2015-03-30 at 4.26.49 PMFor the past two weeks, the U.S. Environmental Protection Agency’s “Clean Power Plan” for power sector carbon emissions has been the center of an ongoing debate between some of the nation’s foremost constitutional and environmental law scholars.

As described in previous posts, the Clean Power Plan aims to place caps on greenhouse gas emissions (or emissions intensity) from each of the 50 states in the U.S. To comply, states will have to use their coal plants less, increase their use of natural gas and renewable fuels, and improve their energy efficiency. A state can focus its effort more or less on each of these methods, so long as it meets its target.

In two earlier posts, I explained the Clean Power Plan, noting that it would attract legal arguments that the Environmental Protection Agency (EPA) has overstepped its legal authority, and explained how the Supreme Court’s decision in Utility Air Regulatory Group v. EPA would bolster these arguments.

Those arguments are now in full swing. Here is the back-and-forth between Professor Larry Tribe, one of the nation’s most prominent constitutional law scholars, and Professors Jody Freeman and Richard Lazarus, two of the nation’s most prominent environmental law professors. These arguments are framed as a disagreement over the constitutionality of the Clean Power Plan, but many of the arguments are really about whether EPA has the statutory authority that it claimed in the Plan.

On March 17, Harvard Law School Prof. Larry Tribe testified to the House Committee on Energy and Commerce’s Subcommittee on Energy and Power arguing that the Clean Power Plan is unconstitutional.

On March 18, Harvard Law School professors Jody Freeman and Richard Lazarus strongly disagreed, responding in an op-ed published at Harvard Law Today, titled “Is the President’s Climate Plan Unconstitutional?

This started a significant back and forth that included:

You may also want to check out:

  • The testimony of Prof. Richard Revesz, another of the country’s foremost experts on environmental law and federalism, who testified at the same March 17 hearing in favor of the Clean Power Plan.

These arguments are just the opening skirmish in a running legal battle. If the Obama administration (and the administration that follows it) stays the course on the Clean Power Plan, the arguments will finally be resolved in court.

 

TransCanada’s Other Pipeline Problem: Can Provinces Impose Conditions on Energy East?

  • Guest blogger Martin Olszynski is back to discuss Ontario and Quebec’s recent pushback against TransCanada’s Energy East project, a proposed pipeline that would carry over one million barrels a day of oil from Alberta to Canada’s east coast. In the U.S., states generally have authority to approve pipelines, but in Canada the federal government has authority over interprovincial pipelines, so Prof. Olszynski considers to what extent provinces like Ontario and Quebec may influence a pipeline that will pass through their territory. This is a crucial issue because as TransCanada keeps waiting for U.S. approval of its Keystone XL project, companies are pursuing other pipeline projects designed to take crude oil to the west coast through British Columbia, or to the east coast through Quebec and Ontario. As Prof. Olszynski discusses, those provinces are pushing back.

By Martin Olszynski

On November 18th, on the heels of a unanimous vote of non-confidence by Quebec’s legislature in Canada’s national energy regulator (the National Energy Board or NEB), that province’s Environment Minister sent a letter to TransCanada (the company behind Keystone XL) outlining seven conditions that the company must meet before the province accepts the Quebec portion of the company’s proposed Energy East pipeline.

Most of the conditions are similar to those stipulated by British Columbia with respect to Enbridge’s Northern Gateway pipeline (e.g. world class emergency and spill response plans, adequate consultation with First Nations) with three notable differences. First, while Quebec insists that the project generate economic benefits for all Quebecers, unlike British Columbia it is not asking for its “fair share” (whatever that meant). Second, because Energy East involves the repurposing of an existing natural gas pipeline, Quebec insists that there be no impact on its natural gas supply. Finally, and the focus of this post, Quebec insists on a full environmental assessment of the Quebec portion of the pipeline and the upstream greenhouse gas emissions from production outside the province – essentially the analysis conducted on Keystone XL and something that the NEB has consistently refused to assess in its other pipeline reviews. The following week, Ontario joined Quebec in imposing these conditions (see here for the MOU between those two provinces). Premier Kathleen Wynne acknowledged that “Alberta needs to move its resources across the country,” but that two provinces “have to protect people in Ontario and Quebec.”

In this post, I consider whether this state of affairs is consistent with the current approach to the regulation of interprovincial pipelines in Canada. Readers should note, however, that following a visit from the Premier of Alberta, the Premiers of Ontario and Quebec have since backpedalled and are no longer demanding an assessment of the pipeline’s upstream greenhouse gas emissions (as was carried out with respect to Keytsone XL), although they are still insisting on their own environmental assessment.

Not All Conditions Are Created Equal

As noted by my University of Calgary Faculty of Law colleague Professor Nigel Bankes in the context of the Northern Gateway pipeline, the “general proposition is that a province will not be permitted to use its legislative authority or even its proprietary authority…to frustrate a work or undertaking which federal authorities…consider to be in the national interest.” The question thus becomes what kind of conditions might amount to frustration? Fortunately, we have a recent decision of the NEB, in the context of Kinder Morgan’s equally contentious Trans Mountain pipeline application, which sheds some useful light on this issue.

Briefly, Kinder Morgan has applied to the NEB for a certificate of public convenience and necessity (section 52 of the National Energy Board Act RSC 1985 c. N-7) for the expansion of an existing pipeline from Alberta to British Columbia. This past summer, the company indicated that its preferred corridor had been revised and that its preferred routing was now through Burnaby Mountain, which is located in the municipality of Burnaby, British Columbia, and which happens to be a conservation area. Consequently, the NEB determined that additional geotechnical, engineering and environmental studies needed to be completed before it could make its section 52 determination. Although section 73 of the NEB Act gave the company the power of entry required to carry out these studies, Kinder Morgan sought Burnaby’s consent to enter upon the relevant lands to do the work, which included borehole drilling and some site preparation (e.g. the removal of some trees and brush). Burnaby refused to give its consent. In fact, its mayor has long staked out a position of opposition to the pipeline.

After a month of failed correspondence, Kinder Morgan began its work on Burnaby Mountain. Several days into that work, its employees were issued an Order to Cease Bylaw Contravention and a bylaw notice for violations of the Burnaby Parks Regulation Byalw 1979 (Parks Bylaw, which prohibits damage to parks) and the Burnaby Street and Traffic Bylaw 1961 (Traffic Bylaw, which amongst other things prohibits excavation work without consent). Subsequently, Kinder Morgan filed a motion, including a notice of constitutional question, seeking an order from the NEB directing the City of Burnaby to permit temporary access to the required lands.

The NEB granted the order, on both “paramountcy” and “interjurisdictional immunity” grounds. Briefly, federal paramountcy is a Canadian constitutional doctrine that sets out the circumstances when a provincial or municipal law will be rendered inoperative in the face of a conflicting federal law. After summarizing the relevant jurisprudence (at p 11), the NEB concluded that there was a “clear conflict” between the Parks Bylaw and Traffic Bylaw on the one hand, and paragraph 73(a) of the NEB Act on the other. With respect to the Parks Bylaw, for example:

…Section 5 [contains] a clear prohibition against cutting any tree, clearing vegetation or boring into the ground, regardless of whether minimal tree clearing is necessary where the trees would create a safety risk for the drilling work that must occur. While the Board accepts that the Parks Bylaw has an environmental purpose, the application of the bylaws and the presence of Burnaby employees in the work safety zone had the effect of frustrating the federal purpose of the NEB Act to obtain necessary information for the Board to make a recommendation under section 52… (at p 12)

The NEB made the same finding with respect to the Traffic Bylaw: dual compliance was impossible, such that the doctrine of paramountcy applied and the bylaws were inoperable to the extent that they prevented Kinder Morgan from carrying out the necessary work. The NEB made clear, however, that this did not mean that “a pipeline company can generally ignore provincial law or municipal bylaws. The opposite is true. Federally regulated pipelines are required, through operation of law and the imposition of conditions by the Board, to comply with a broad range of provincial laws and municipal bylaws” (at p 13).

With respect to interjurisdictional immunity (IJI), which the NEB considered in the alternative, after acknowledging that its usage “has fallen out of favor to some degree,” the NEB observed that “it is still an accepted doctrine for dealing with clashes between validly-enacted provincial and federal laws” (at p 13). The effect of the doctrine is to “read down” valid provincial laws where their application would have the effect of impairing a core competence of Parliament or a vital part of a federal undertaking. Impairment is key: provincial laws may affect a core competence of Parliament or a federal undertaking (to varying degrees), but this is not sufficient. Applying this test to the facts before it,

The Board finds that the Impugned Bylaws impair a core competence of Parliament… the routing of the interprovincial pipeline is within the core of a federal power over interprovincial pipelines. Actions taken by Burnaby with respect to enforcing the Impugned Bylaws impair the ability of the Board to consider the Project and make a recommendation regarding on the appropriate routing of the Project. The Board requires detailed information from surveys and examinations in order to make a recommendation to Governor in Council and to complete an environmental assessment. Similar to the location of aerodromes being essential to the federal government’s power over aeronautics, detailed technical information about pipeline routing is essential to the Board.

Thus, when considering Quebec’s (and Ontario’s) conditions, the following principles ought to be kept in mind. Generally speaking, provincial laws apply to federal undertakings such as pipelines. Such laws will only be vulnerable to the extent that they conflict with or frustrate the purpose of the NEB Act (federal paramountcy), or impair a core competence of Parliament of vital part of the federal undertaking (IJI). Another point worth keeping in mind is specific to environmental laws. In both Canada and the United States, environmental laws are primarily procedural, not substantive, in nature. At their core they merely confer decision-making authority (e.g. to authorize activity that would otherwise be a contravention of the law), although they do seek to improve that decision-making by imposing certain “guideposts,” such as conducting environmental assessment (see A. Dan Tarlock, “Is There a There There in Environmental Law?” (2004) 19 J Land Use & Envtl L 213). This suggests that it will be very difficult, if not impossible, to conclude whether environmental laws frustrate a federal law or impair a federal undertaking until an actual decision has been made.

Condition 2: Comprehensive EA including Upstream Greenhouse Gas Emissions

In its letter to TransCanada, Quebec states that an EA of the Quebec portion of the pipeline is required pursuant to para 2(j) of the Regulation respecting environmental impact assessment and review, ch. Q-2, r. 23 (“the construction…of more than 2 km of oil pipeline in a new right-of-way”). Seemingly unsure of itself, however, it also suggests that it is in TransCanada’s “interest to respect the will of Quebecers” (my translation) – not that it must. The desired result was a comprehensive assessment of those portions of the project situated in Quebec, which until last week included a marine terminal and storage facility at Cacouna, before Quebec’s EA agency, le Bureau d’audiences publiques sur l’environnement (BAPE). As of last week, however, TransCanada announced that the marine terminal plans are on hold in light of the continuing deterioration of the St. Lawrence Beluga whale population, presumably leaving just the pipeline to be assessed for the time being.

The results of this assessment will “serve to inform Quebec’s decision and in this way its position before the NEB” (my translation). The letter does not state which “decision” it is referring to, but the answer would seem to lie in sections 31.1 and 31.5 of Quebec’s Environmental Quality Act CQLR c Q-2:

31.1. No person may undertake any construction, work, activity or operation…in the cases provided for by regulation of the Government without following the environmental impact assessment and review procedure and obtaining an authorization certificate from the Government.

31.5. Where the environmental impact assessment statement is considered satisfactory by the Minister, it is submitted together with the application for authorization to the Government. The latter may issue or refuse a certificate of authorization for the realization of the project with or without amendments, and on such conditions as it may determine…

Viewed this way, it does not seem unreasonable to suggest that “Quebec’s government has had enough and has taken control of the process in the province,” and that “the proceedings before the [NEB], replete with 30,000 pages of unilingual English text, are now very secondary.” Does such a situation conflict with, or frustrate the purposes of, the NEB Act?

I don’t think it does. Environmental assessment has long been understood in Canada as “simply descriptive of a process of decision-making” (Friends of the Oldman River Society v. Canada (Minister of Transport [1992] 1 S.C.R. 3). There is no conflict between the requirements of the NEB Act and the CEQ; Trans Canada can comply with both. Doing so may seem duplicative but that is a matter of policy, not constitutional imperative. And even as a matter of policy this argument is weak in light of recent changes to the federal environmental assessment regime (including restrictive standing rules and a restricted definition of environmental effects) and the decision by the NEB to exclude upstream greenhouse gas emissions from its own review.

Nor does such a condition impair a core competence of Parliament or a vital part of a federal undertaking, for as old as is the understanding of environmental assessment as process so too is the recognition that jurisdiction with respect to the environment is shared between the federal and provincial governments. And while not determinative, it’s worth noting that the current chair of the NEB would seem to agree that there is room for both levels of government here, having recently suggested that the NEB’s primary environmental concern is to ensure the proper construction and operation of pipelines, and that it is up to the provinces and the company to look after broader issues around climate change.

That being said, what Quebec can actually do with the results of its environmental assessment is another matter entirely. The short answer is probably not very much. It might be able to secure some modifications to the project (e.g. that certain standards or ‘best practices’ be applied during construction and operation), but if the NEB makes a positive recommendation to the federal Cabinet then outright refusal of a certificate of authorization would seem off the table (or would be rendered inapplicable). One might reasonably then ask: why go through all the trouble in the first place? The answer is rooted in the procedural nature of environmental law referred to above. With respect to environmental assessment specifically, while the process is certainly intended to improve governmental decision-making, it is also intended to enable political accountability through the full disclosure of the tradeoffs being made (see e.g. Bradley C. Karkkainen, “Toward a Smarter NEPA: Monitoring and Managing Government’s Environmental Performance” (2002) 102(4) Columbia Law Review 903 at 912; Ted Schrecker, “The Canadian Environmental Assessment Act: Tremulous Step Forward, or Retreat into Smoke and Mirrors?” (1991) 5 CELR 192). Indeed, it is the potential for political accountability that at least partially drives better decision-making.

This dynamic provides a reasonable explanation for why Alberta and Saskatchewan appeared so uncomfortable with the mere idea that upstream greenhouse gas emissions be assessed, which initially prompted Ontario’s Energy Minister to ask what they were so afraid of. And while an upstream assessment of Energy East’s greenhouse gases appears to be off the table for now, time will tell whether that position is deemed consistent with the expressed will of the Quebec legislature. In the meantime, the result is that not a single Canadian jurisdiction – neither Alberta, the federal government (through the NEB), nor any of the other provinces – is assessing the upstream greenhouse gas emissions associated with the various pipeline projects currently being proposed.

An earlier version of this post originally appeared on ABlawg, the University of Calgary Faculty of Law’s Blog.

U.S. Supreme Court Narrows Greenhouse Gas Rules: What It Means for the U.S. Climate Agenda

Today, in Utility Air Regulatory Group v. Environmental Protection Agency (EPA), the U.S. Supreme Court struck down a portion of the United States’ first regulations for greenhouse gas emissions from industrial sources. The Court held that the Environmental Protection Agency (EPA) may not apply its “Prevention of Significant Deterioration” (PSD) program to new industrial sources on the basis of their greenhouse gas emissions. Instead, EPA can only regulate greenhouse gas emissions from new sources that are already subject to the PSD program because they emit other pollutants.

This is the first Supreme Court decision on EPA’s authority to regulate greenhouse gases from industrial sources, so it has important implications for EPA’s future climate agenda—including its recently proposed rule for the electricity sector. And the varied opinions offered by the Supreme Court justices offer hints about how courts will approach the inevitable legal challenges to those regulations.

EPA’s PSD program has two basic requirements:

1) You need a permit before you build a new major industrial source of air pollution.

2) And to get a PSD permit, you must show that you are using the “best available control technology” for the air pollutants that you emit.

In this case, the Supreme Court held:

1) EPA may not require new sources to get a PSD permit simply because they will emit large amounts of greenhouse gases. The Court held that it would be unreasonable for greenhouse gases to trigger the permit requirement, because the PSD permit program is only meant to apply to the thousands of industrial sources that emit conventional pollutants, not the millions of sources that emit significant amounts of greenhouse gases.

2) But if a source needs a PSD permit anyway, because it emits other pollutants, then EPA may require it to adopt the “best available control technology” for greenhouse gases, along with other air pollutants.

I will not say anything more about the complexities of the decision, because I described them extensively in a previous post, which read the tea-leaves of oral argument in the case, and suggested the Supreme Court would reach exactly this compromise. So you can read that post both for a description of the statutory interpretation question and an explanation of the reasoning that the court eventually followed.

The most pressing question raised by the case today may be its implications for the United States’ future climate agenda, including EPA’s recently proposed rule for existing power plants. There are three important implications, and each could spell trouble for EPA’s climate agenda.

First, the Court suggested that one reason for rejecting EPA’s rule is that “it would bring about an enormous and transformative expansion in EPA’s regulatory authority without clear congressional authorization” because millions of sources would be subject to a greenhouse gas permit requirement. EPA, it is true, had suggested it would only regulate a reasonable number of them, but the court was not willing to leave that decision in the agency’s hands.  The court noted: “When an agency claims to discover in a long-extant statute an unheralded power to regulate a significant portion of the American economy, we typically greet its announcement with a measure of skepticism.”

This passage will trouble EPA. In the agency’s recent proposal to cap greenhouse gas emissions from state power sectors, which the agency calls the “Clean Power Plan,” the agency is using a long-ignored statutory provision, Clean Air Act §111(d), to overhaul the nation’s electricity sector. As noted in a previous post, §111(d) has rarely been used, and it is so obscure that when Congress passed the Clean Air Act amendments in 1990, no one even noticed that the House and Senate had passed two different versions. Talk about unheralded.

Second, the Court expressed some skepticism about controlling greenhouse gas emissions through energy efficiency, which is an important part of EPA’s climate agenda. Carbon dioxide, the most common greenhouse gas, is the inevitable result of burning fossil fuels. Clean combustion of clean fossil fuels emits carbon dioxide and water. And once carbon dioxide is emitted, it is hard to pull out of the air. So most attempts to limit carbon dioxide emissions are really attempts to limit fossil fuel combustion. The only other option is carbon capture and storage, which is usually too costly to be feasible. EPA’s Clean Power Plan and its guidance on what is the “best available control technology” under the PSD program both rely on encouraging energy efficiency.

But the Supreme Court was not willing to endorse this approach. First, it stated that it didn’t need to decide whether energy efficiency could be the “best available control technology” because EPA also said states could consider carbon capture and storage. Second, it said that even if EPA could mandate energy efficiency at new sources, it could not redesign the source, require it to consume less electricity, or otherwise micromanage industrial source proposals. In doing so, the Supreme Court handed industry arguments to use against regulators in permit proceedings.

A third important takeaway from the case is that Justice Scalia, the conservative justice that authored the Supreme Court’s opinion, was able to convince Justice Kennedy to join his opinion limiting EPA’s authority to regulate greenhouse gases. Justice Kennedy is generally considered the Court’s swing vote and he was a deciding vote on the Court’s 5-4 decision in Massachusetts v. EPA, which required EPA to consider the climate consequences of greenhouse gases from cars and trucks.

Justice Kennedy has seemed very supportive of EPA’s efforts to regulate greenhouse gases. At oral argument, he admonished industry’s lawyers that he would continue to follow “both the result and the reasoning” of Massachusetts v. EPA—and the reasoning of Massachusetts v. EPA stressed the possible benefits of greenhouse gas regulation. Until now, EPA may have been justified in believing that the Court’s swing justice would sympathize with the challenges they face in adapting the Clean Air Act to address global warming and give them the benefit of the doubt. But today’s decision shows that Justice Kennedy’s sympathy only goes so far: he is quite willing to strike down overly broad climate regulations. That may have much longer-term implications for EPA’s climate agenda—only the coming years will tell.

 


 

Full disclosure: Before entering my academic career in 2011, I represented some of the petitioners in their challenge to EPA’s regulations.

EPA’s New Power Sector Climate Rules: A Brewing Political and Legal Storm

Today, the United States Environmental Protection Agency (EPA) proposed requiring all fifty states to adopt greenhouse gas controls for their existing power plants. And EPA went further, proposing that, together, states would have to cut U.S. power sector emissions to 30% of 2005 levels by 2030.  (You can see a chart of how much each state would have to cut here.)

These rules face strong political and legal opposition and will not go into action until 2020 at earliest. Their ultimate fate will depend on whether President Obama’s administration stands behind them, whether the public elects a new President that supports them, and whether the courts agree that EPA has authority to cap state greenhouse gas emissions. Their immediate impact is twofold: 1) it tells other countries that there’s a chance the U.S. could commit to strong greenhouse gas rules at 2015 negotiations in Paris; and 2) it sets the stage for an epic political and legal struggle over energy policy in the United States.

What happened?

EPA acted under Clean Air Act § 111(d). (The text of § 111(d) is at the bottom of this post.) This provision allows EPA to “establish a procedure” for each state to adopt “standards of performance” for existing sources of air pollutants that would have otherwise slipped through the cracks of the Clean Air Act because they 1) are not new sources, subject to new source performance standards, and 2) are not regulated under other existing source regulations in the Clean Air Act.

This section of the Clean Air Act has rarely been used: it’s designed for sources that somehow escaped the Act’s relatively comprehensive coverage. So there are few precedents for EPA to follow, and the courts that review EPA’s rule will not have past cases to go by. There are several ongoing legal disputes about the extent of EPA’s authority to adopt greenhouse gas rules under § 111(d), summarized below, and EPA is pushing for maximum authority to reduce greenhouse gas emissions across the power sector.

Can EPA Issue Greenhouse Gas Rules for Power Plants?

Some question if the Clean Air Act requires greenhouse gas controls at all for existing power plants. The published U.S. Code says § 111(d) doesn’t apply to sources that EPA already regulates under the “hazardous air pollutants” section of the Clean Air Act, § 112. And EPA already regulates power plants under § 112. So how can EPA regulate power plants under § 111(d)?

Bizarrely, the U.S. Code does not reflect the actual text of the law signed by President George H.W. Bush in 1990, and the signed law, not the Code, controls. The signed law actually included two different § 111(d) that were passed by the U.S. House and Senate, respectively, and never reconciled. (#bicameralism) The House text made it into the U.S. Code, but the Senate version is different: it only says that § 111(d) doesn’t apply to pollutants that are regulated under § 112. Although power plants are regulated under § 112, greenhouse gases aren’t, so this version would allow EPA’s greenhouse gas rules.

In 2013, William Haun, writing for the Federalist Society, suggested that the Senate and House versions should be reconciled by applying the plain text of both exclusions, which would negate EPA’s standards. Kate Konschnik, Policy Director of the Harvard Environmental Law Program, has countered with several reasons to think that Congress intended to adopt the narrower Senate exclusion, and arguing that, at a minimum, EPA should be given deference on which text to apply. EPA issued a legal memorandum with its proposed power rule, echoing Konschnik’s arguments, and noting that a 2011 Supreme Court decision also suggested that EPA can regulate greenhouse gases under § 111(d). (See memo at pp. 20-27).

Can EPA Cap State Power Emissions?

The biggest battle over EPA’s power sector rule will be over its scope.

Remember: section 111(d) lets EPA set a “procedure” for states to set “standards of performance for any existing source” that would be subject to standards of performance for new sources. So EPA is proposing § 111(d) standards to accompany the new source performance standards it has proposed for new coal and natural gas plants.

But EPA isn’t suggesting source-by-source standards of performance for existing coal and natural gas plants. Instead it’s proposing to cap all greenhouse gas emissions from each state’s power sector. How can the agency propose this?

Under previous EPA regulations, § 111(d) standards must mandate the “best system of emission reduction” for each source. You might think that meant making each coal plant cleaner, but EPA says it also means taking steps to replace coal with other power sources: 1) using natural gas plants instead, 2) using low carbon sources like hydro, nuclear, wind, and solar, and 3) lowering electricity demand through energy efficiency. In other words, the best system of emission reduction for a coal plant is simple: don’t turn it on.

EPA recognizes that state-by-state caps are a departure from its usual approach, but it offers several reasons that they might make sense here. First, it notes that a state cap “achieves greater emission reductions at a lower cost”—if EPA limited itself to the coal plants themselves it could only get small greenhouse gas reductions (4-6%) unless it was willing to demand prohibitively expensive carbon capture. Second, a state cap “takes better advantage of the wide range of measures that states, cities, towns and utilities are already using to” cut greenhouse gas emissions, such as renewable power standards and cap-and-trade systems. Third, EPA says statewide caps “reflect the integrated nature of the electricity system and the diversity of electricity generation technology.”

There’s a lot of political rhetoric right now about “power grabs” but over the next months you will see others develop careful arguments that EPA has overstepped its authority by transforming a “procedure” for state “source” standards into state greenhouse gas caps. Even before the rule came out, Nathan Richardson, at Resources for the Future, suggested that it might be illegal to apply a single cap to separate coal & gas source categories—much less use one cap for the entire electric sector. On the other hand, Kate Konschnik and Ari Peskoe of Harvard’s Environmental Law Program have defended the broader approach taken by EPA. If EPA’s rules ever go into effect, those arguments will have to be resolved in court.

Is EPA’s Proposed 30% Cut Reasonable?

EPA also says it decided to include all power sector emissions because states, industry, and interest groups all asked for compliance flexibility. And a state cap is flexible because it allows states to choose any low-carbon path that they like: natural gas or energy efficiency, nuclear or wind.

But calling EPA’s statewide caps “compliance flexibility” takes enough chutzpah to make you smile when you’re reading a 645-page proposed rule. Some states are, of course, delighted by EPA’s caps, which validate their pre-existing attempts to lower their greenhouse gas emissions. But the point of EPA’s state-wide caps is to force more greenhouse gas emissions: if EPA limited itself to coal plants, it could only cut emissions by 4-6% without shutting them all down. Many states requesting “compliance flexibility” were hoping to use alternate methods to make that 4-6% cut. Instead, EPA is requiring a 30% cut on average.

It’s as though you asked for an extension on a ten-page paper and your teacher said, “Sure—and since you have more time, make it twenty pages.” So EPA will have to convince the courts not only that it can sweep all power sector emissions into one rule, but also that it can use that wider scope to justify more dramatic reductions.

Will this Administration and Future Administrations Stand Behind This Rule?

This rule will not require states to cut greenhouse gas emissions until 2020, long after President Obama leaves office in 2016. And the proposed rules would run through 2030, by which time there may have been four more presidencies. So the future of EPA’s proposal will not turn on any particular politician; it will depend on the political and legal sustainability of the rules.

And EPA’s existing carbon rules have long been subject to political winds. In 2010, EPA promised to issue today’s proposal by July 2011, and finalize it by May 2012. Then, in the run-up to the 2012 election, it delayed these rules indefinitely. Now the rules are on again, and EPA says it will finalize this rule in June 2015, and will expect state implementing plans from 2016 to 2018, after President Obama has left office. Whether that schedule will stick remains to be seen.

 


 

(d) Standards of performance for existing sources; remaining useful life of source

(1) The Administrator shall prescribe regulations which shall establish a procedure similar to that provided by section 7410 of this title under which each State shall submit to the Administrator a plan which

(A) establishes standards of performance for any existing source for any air pollutant

(i) for which air quality criteria have not been issued or which is not included on a list published under section 7408 (a) of this title or emitted from a source category which is regulated under section 7412 of this title but

(ii) to which a standard of performance under this section would apply if such existing source were a new source, and

(B) provides for the implementation and enforcement of such standards of performance. Regulations of the Administrator under this paragraph shall permit the State in applying a standard of performance to any particular source under a plan submitted under this paragraph to take into consideration, among other factors, the remaining useful life of the existing source to which such standard applies.

(2) The Administrator shall have the same authority—

(A) to prescribe a plan for a State in cases where the State fails to submit a satisfactory plan as he would have under section 7410 (c) of this title in the case of failure to submit an implementation plan, and

(B) to enforce the provisions of such plan in cases where the State fails to enforce them as he would have under sections 7413 and 7414 of this title with respect to an implementation plan.

In promulgating a standard of performance under a plan prescribed under this paragraph, the Administrator shall take into consideration, among other factors, remaining useful lives of the sources in the category of sources to which such standard applies.

 

State Energy Policy and the Commerce Clause: Spotlight on Colorado and Minnesota

By Alexandra B. Klass
University of Minnesota Law School
aklass@umn.edu

Within the past month, two federal district courts—one in Colorado and one in Minnesota—have issued important decisions on the constitutionality of state clean energy policies. Both cases raised the same legal issue, namely, whether the state laws in question regulate extraterritorially in violation of the dormant Commerce Clause of the U.S. Constitution. But the courts reached different results in each case and, more importantly, the Minnesota and Colorado policies reviewed by each court were quite different from each other even though both involved efforts to promote clean energy within the state. Some of the recent commentary on the two cases has downplayed the significant differences between the two state policies in question, leading to confusion about the implications of the courts’ rulings.

First, a bit about the dormant Commerce Clause. The Commerce Clause of the U.S. Constitution grants Congress the authority to regulate interstate commerce. But the Supreme Court has also interpreted that provision to contains a “dormant” aspect that limits states from interfering with the free flow of commerce among the several states. A law can violate the dormant Commerce Clause if: (1) it facially discriminates, has a discriminatory purpose, or is discriminatory in effect; (2) the law is facially neutral and there is no evidence of discriminatory intent or effect but the burdens of the law on interstate commerce outweigh the in-state benefits; or (3) the law attempts to control conduct completely outside its borders and thus regulates “extraterritorially.” The dormant Commerce Clause has been applied to state laws for over 100 years, including laws banning or limiting out-of-state imports of goods or services, out-of-state exports of goods or services, minimum pricing laws tied to prices in other states, laws attempting to regulate trucks and trains in interstate transportation, and a variety of other state laws intended to promote in-state businesses as well as environmental, health and safety interests over similar out-of-state interests.

Now, onto the recent state energy policy cases. Both cases involve efforts by states to encourage the use of renewable electricity resources in the state and limit the generation of electricity that emits significant amounts of CO2 in an effort to address climate change. But the two state policies under constitutional challenge involve very different ways of reaching that goal. The Colorado lawsuit involves a challenge to a state renewable energy mandate. Such laws, known as renewable portfolio standards, renewable energy standards, clean energy mandates, or renewable energy mandates, have been adopted in over half the states. Such laws require utilities and other electricity providers in the state to generate or purchase a certain percentage of their electricity for retail sale from renewable energy sources by a particular date, often 15%, 20%, or 30% by 2020 or 2025, with lower amounts mandated between now and the targeted date. Such laws encourage the use of wind, solar, geothermal, or hydropower energy with significant variation among the states with regard to what resources “count” and the percentages required.

By contrast, the Minnesota lawsuit does not involve a challenge to the state’s renewable energy mandate, even though Minnesota has one of the most aggressive renewable energy mandates in the nation. Instead, the lawsuit involves a challenge to another Minnesota energy policy that limits the construction, use, or import of new coal-fired power in the state by prohibiting the construction of facilities that emit a certain amount of CO2 each year or imports from such facilities. Only a few states (New York, Oregon, California) in addition to Minnesota have such limits on coal-fired power. All of those states impose those limits on coal-fired electricity in addition to imposing a renewable energy mandate on electricity providers in the state.

The Colorado case

In Energy and Environmental Legal Institute v. Epel, __ F. Supp. 2d __, 2014 WL 1874977 (D. Colo., May 9, 2014), a non-profit organization representing and promoting coal energy interests along with one of its members challenged the state’s renewable energy standard, which requires Colorado electric utilities and other retail electricity providers in the state to provide up to 30% of their retail electricity sales from renewable energy sources by a certain date. Electricity providers can meet their renewable energy mandate by either generating or buying renewable power directly or by purchasing renewable energy credits. The plaintiffs argued on summary judgment that the renewables mandate places a restriction on how out-of-state goods are manufactured, and requires out-of-state electricity to be generated according to Colorado’s terms. Thus, according to the plaintiffs, by projecting Colorado’s policy decisions onto other states, the law regulates extraterritorially in violation of the dormant Commerce Clause.

The court rejected this argument and held that the law did not impact wholly out-of-state transactions. If a Wyoming coal company generates electricity and sells it to a South Dakota business, the Colorado law does not apply. Instead, the court found that the law applies only to energy generators that choose to do business with a Colorado utility and, even then, the law only applies in determining whether the energy the Colorado utility purchases counts towards its renewables mandate. The court agreed that the Colorado law would influence the profits of out-of-state companies whose electricity could not be used to fulfill the mandate, but held that the dormant Commerce Clause “neither protects the profits of any particular business, nor the right to do business in any particular manner.” The court also found that the law did not discriminate against interstate commerce or unduly burden interstate commerce.

The Minnesota case

In North Dakota v. Heydinger, __ F. Supp. 2d __, 2014 WL 1612331 (D. Minn., Apr. 18, 2014), the State of North Dakota, North Dakota lignite coal interests, and multi-state electric cooperatives in the upper Midwest sued the State of Minnesota over limits on coal-fired power in its Next Generation Energy Act. The provisions of the law at issue state that after a certain date, no person shall, without CO2 offsets: (1) construct a new “large energy facility” (defined to encompass coal-fired power plants but not most natural gas-fired plants) in the state; (2) import power from a new large energy facility from outside the state; or (3) enter into a long-term power purchase agreement that would contribute to statewide power sector CO2 emissions. The plaintiffs argued on summary judgment that the limits on imports of coal-fired power from outside the state regulated extraterritorially in violation of the dormant Commerce Clause and discriminated against interstate commerce. Notably, even though Minnesota has a renewable energy mandate that is also part of the state’s Next Generation Energy Act, the plaintiffs in the Minnesota case did not challenge Minnesota’s renewable energy mandate at all. As a result, the state energy policy at issue in the Minnesota case is quite different from the state energy policy at issue in the Colorado case, even though both state policies are intended address climate change by imposing requirements on state electricity providers.

In an April 2014 decision, the U.S. District Court for the District of Minnesota agreed with the plaintiffs that the limits on coal-fired electricity imports regulated extraterritorially. Because the court struck down the import limits on those grounds, it did not reach the claims that the law also discriminated against interstate commerce. In reaching its decision, the court adopted an extremely broad interpretation of the law, finding that it applied to any electric power provider selling electricity on the multi-state, regional electric grid (encompassing more than 10 states), rather than applying only to persons located in or operating in Minnesota. The court pointed to statements made by the Minnesota Department of Commerce in earlier regulatory proceedings that indicated the agency might apply the law to multi-state electric cooperatives based outside the state but with members in Minnesota if the cooperative generated coal-fired power outside the state and sold it into the multi-state grid. Because electrons cannot be tracked once they have entered the electric grid, the court found such a transaction could apply where the buyers and seller were all outside of Minnesota because some of the electricity might enter the state of Minnesota. Because such an application of the law would apply even when no party to the transaction was based in Minnesota, the court found that the law regulated extraterritorially in violation of the dormant Commerce Clause. The court rejected the argument that it should not interpret the law so broadly to encompass all sales of electricity into the multi-state grid even though the state had never actually applied the law to these types of out-of-state transactions that did not directly involve a Minnesota-based actor intending to import coal-fired power to the state.

Conclusions

So what should we take away from these two decisions? First, it is important to keep in mind what was not at issue in either case. For some time now, there has been concern among policymakers and scholars regarding state renewable energy mandates that preference in-state renewable resources over out-of-state renewable resources through multipliers and other provisions that encourage the use of in-state wind, solar, or hydropower. Many state laws contain such a preference for in-state renewable resources because such preferences allowed legislators to argue that a renewable energy mandate would not only promote the use of clean energy but would also help promote new, in-state industries. While this is certainly good politics and may be good policy, such preferences raise dormant Commerce Clause concerns because they expressly benefit in-state industries over identical out-of-state industries. But the Colorado renewable energy mandate at issue does not contain such preferences and thus treats in-state and out-of-state renewable and non-renewable electricity resources alike. Likewise, even though the Minnesota renewable energy mandate was not even at issue in the Minnesota litigation, it is important to point out that Minnesota, like Colorado, does not preference in-state renewable resources over out-of-state renewable resources.

Second, states attempt to meet clean energy and climate change goals through a variety of policies. States have significant authority to regulate electricity sales, transportation, and industrial facilities and in recent years have used that authority to enact renewable energy mandates, place bans on coal-fired power, and impose other regulatory requirements on industrial facilities, fuel providers, electricity providers, and other businesses that contribute to CO2 emissions. Each type of policy has a different impact on in-state businesses and out-of-state parties that do business in the state. As a result, each type of policy raises different legal issues. Thus, the fact that the courts in the Colorado and Minnesota cases reached different results is significant, but it is also important not to lose sight of the fact that each court reviewed state energy policies that have similar goals, but were designed in completely different ways and have very different impacts on in-state and out-of-state actors.

Last, each court’s decision relied in large part on how broadly it found the state law to apply. In the Colorado case, the court stated that the law applied only to Colorado electricity providers and thus did not impact electricity generators in other states except when they chose to do business with electricity providers in Colorado. By contrast, in the Minnesota case the court interpreted the law limiting the use of new-coal fired power to apply to any party selling electricity into the multi-state electricity grid if there was some chance that those electrons could flow into Minnesota. Whether the language of the statute supports such a broad interpretation of the law remains to be seen and will likely be an issue on appeal. The fact remains, however, that how broadly courts interpret the reach of state energy policies will impact significantly whether those laws can withstand dormant Commerce Clause scrutiny.

For more information on the dormant Commerce Clause, its potential application to state energy policy, and recent litigation, see Alexandra B. Klass & Elizabeth Henley, Energy Policy, Extraterritoriality, and the Dormant Commerce Clause, San. Diego J. of Climate & Energy L. (forthcoming 2014), at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2376411.

Federal Court Strikes Down Minnesota’s Limits on Coal Power Imports: A Critical Moment for State Regulation of Imported Fuel & Electricity

State of North Dakota, et al., v. Beverly Heydinger, et al., Case No. 11-cv-3232, (D. Minn., Apr. 18, 2014).

On April 18, the U.S. District Court for the District of Minnesota struck down the State of Minnesota’s restrictions on importing electricity from coal power plants in other states. The court held that these restrictions improperly regulated electric generators and utilities outside the state. The decision sets a precedent that could threaten state regulations of imported fuel and electricity, such as the numerous renewable power standards and California’s low carbon fuel standard. These regulations have been a flashpoint for conflicts between in-state and out-of-state interests, including Canadian energy producers who believe that the standards discriminate against them.

Minnesota adopted the restriction on electricity imports in its 2007 Next Generation Energy Act, which placed a moratorium on construction of new coal power plants within the state. The point of the moratorium was to limit greenhouse gas emissions from coal burning, which contributes to climate change. Without the import restriction, Minnesota’s moratorium might have little effect: companies looking to build a new coal plant could simply build in neighboring states, exporting electricity to Minnesota and increasing greenhouse gas emissions. So Minnesota declared that “no person shall . . . import or commit to import from outside the state power from” new coal plants or “enter into a new long-term power purchase agreement that would increase statewide power sector carbon dioxide emissions.” Minn. Stat. § 216H.03, subd. 3. New coal plants could only avoid this ban if they paid to reduce emissions elsewhere or qualified for an exception.

North Dakota and utilities with coal power plants brought a lawsuit alleging that Minnesota’s restrictions unconstitutionally regulated outside of Minnesota’s territory, and the court agreed. The U.S. Constitution’s Commerce Clause gives the federal government the authority to regulate interstate commerce and implies that states cannot “discriminate against or unduly burden interstate commerce” without congressional authorization. This rule is called the “dormant commerce clause” because it applies when congress has not authorized state regulation. One aspect of this rule is that states cannot adopt a regulation that “has the practical effect of controlling conduct beyond the boundaries of the state.”

The court held that the import restriction necessarily regulated out-of-state conduct because electricity on the grid “does not recognize state boundaries.” Electricity is not like a package that is shipped from a seller to a buyer. Instead, the interstate electric grid creates a pool of power. Electric generators contribute electricity and consumers withdraw electricity. It is as though one group was emptying buckets of water into a lake and another group was filling buckets of water from a lake. Companies may talk about purchasing electricity “from” a specific utility, but that is an accounting convention, not a description of a physical process—the electricity purchased comes from an undifferentiated pool. Thus, when a North Dakota utility sells to a North Dakota customer some of the electricity might be diverted into Minnesota, violating Minnesota’s import restriction. So Minnesota’s law regulates out-of-state conduct, and the court held that it violated the U.S. Constitution and enjoined any enforcement.

The decision raises two potential problems for state regulation of imported electricity and fuel. First, more than half of the fifty states have renewable power standards that apply to imported electricity. Under the court’s decision these standards would be invalid unless they exempted incidental imports from out-of-state utilities serving out-of-state customers. The Harvard Environmental Law Program’s Policy Initiative’s Energy Fellow Ari Peskoe has suggested some ways that states could try to insulate their regulations from a similar challenge.

Second, the court suggested that there may be strict limits on a state’s ability to regulate imported fuel and electricity through renewable portfolio standards or low carbon fuel standards. The usual rule under the dormant commerce clause is that states “may not attach restrictions to exports or imports to control commerce in other states” or otherwise “project” their regulation into other states. But the entire point of state restrictions on imported fuel and electricity is to affect out-of-state greenhouse emissions. States want to regulate imported fuel and electricity because they are concerned that out-of-state energy producers are contributing to climate change—they don’t want to import oil from places where it takes a lot of greenhouse gas emissions to produce oil and they don’t want to import electricity from states that are producing it using a lot of greenhouse gas emissions. And that concern makes sense: even if those greenhouse gas emissions take place in other states or countries, they’re just as bad for the entire world’s climate. As a result, the U.S. Court of Appeals for the Ninth Circuit recently suggested that the dormant commerce clause’s prohibition on extraterritorial regulation is only meant for extraterritorial price-regulation, so it doesn’t threaten California’s low carbon fuel standard or, presumably, state renewable power standards.

The Minnesota court, however, rejected the Ninth Circuit’s reasoning, noting that the Supreme Court and several appellate courts have held that states may not project their regulation into neighboring states, even when the regulation was not about prices. This conflicting reasoning comes at an important moment for state regulation of imported fuel and electricity. There is still no legal consensus on the validity of these regulations, which are being challenged in several lawsuits around the country. Statepowerproject.org, a website created by the Harvard Environmental Law Program’s Policy Initiative, is tracking these lawsuits.

Second, there is no consensus on whether these state import restrictions are a wise way to make climate policy. Although states have good reason to be concerned about the fossil-fuel industry in their trading partners, other states and countries worry that these import regulations are aimed at burdening out-of-state industry. Canada doesn’t think California should tell it how to produce oil, and is concerned that California’s regulation has been rigged to harm it. Quebec believes that state renewable portfolio standards discriminate by refusing to credit its hydropower exports as renewable. And states like North Dakota have the same concerns about Minnesota’s regulation. These conflicting interests may create conflicting regulations and state-to-state trade wars that would splinter interstate energy markets. In a forthcoming article in Fordham Law Review, titled “Importing Energy, Exporting Regulation,” I argue that the federal government should address this problem by supervising state regulation of imported energy, exempting non-discriminatory regulations from dormant commerce clause review.

No one yet knows how this legal and policy debate will be resolved. The Minnesota decision frames the legal debate through its searching dormant commerce clause review and clarifies the stakes by striking down a closely watched state electricity regulation. The one certainty is that the debate will continue.

1 2