West Virginia v. EPA and the SEC climate risk disclosure rule

The Securities and Exchange Commission (SEC) is in the process of finalizing its proposed “climate risk” disclosure rule for public companies. But the SEC has a huge amount of work to do, as the problems with the rule as proposed are legion, reflected by the voluminous economic, legal, scientific and policy- and sector-specific criticism that it has received.

And that was before the Supreme Court issued its decision in West Virginia v. Environmental Protection Agency (EPA). The court ruled that the EPA lacks the legal authority under section 111(d) of the Clean Air Act to change the historical definition of “best system of emission reduction” (BSER) to force a state-by-state shift toward aggregate electricity generation systems – gas replacing coal, and wind and solar power replacing gas and coal – rather than emissions reductions from individual power plants. Before such a change in the definition of BSER is adopted, clear statutory authority must be enacted by Congress.

So, what does this decision have to do with the SEC’s proposed rule? A lot. To see this, it is useful to review Justice Roberts’s language on the “major questions doctrine” (precedent citations deleted).

Precedent teaches that there are ‘extraordinary cases’ in which the ‘history and the breadth of the authority that [the agency] has asserted,’ and the ‘economic and political significance’ of that assertion, provide a ‘reason to hesitate before concluding that Congress’ meant to confer such authority.

Under this body of law, known as the major questions doctrine, given both separation of powers principles and a practical understanding of legislative intent, the agency must point to ‘clear congressional authorization’ for the authority it claims.

Finally, we cannot ignore that the regulatory writ EPA newly uncovered conveniently enabled it to enact a program that, long after the dangers posed by greenhouse gas emissions ‘had become well known, Congress considered and rejected’ multiple times. At bottom, the Clean Power Plan essentially adopted a cap-and-trade scheme, or set of state cap-and-trade schemes, for carbon. Congress, however, has consistently rejected proposals to amend the Clean Air Act to create such a program. It has also declined to enact similar measures, such as a carbon tax.

Under the proposed climate risk disclosure rule, the SEC is seeking to create a new regulatory requirement for detailed disclosures by public companies on climate matters never addressed by the SEC and with respect to which the SEC has no institutional expertise or experience; and that Congress repeatedly has failed to authorize in legislation. Such failed legislation includes the Climate Disclosure Act of 2021 (H.R. 2570), the Climate Disclosure Risk Act of 2019 (H.R. 3623) and the Climate Disclosure Act of 2018 (S. 3481).

There is the further matter that legal authority for SEC information disclosure requirements is limited to information that is “material,” that is, that increases the ability of investors to make “informed, rational investment decisions.” The SEC’s proposed rule would require firms to report direct greenhouse gas (GHG) emissions from their own operations, indirect GHG emissions from the purchase of electricity and other energy, and under some conditions GHG emissions from upstream and downstream operations.

Those disclosure requirements are a major part of a proposed rule that ostensibly is intended to inform investors about the climate risks relevant to investment in a specific firm. But firm-specific GHG emissions, however broadly defined, cannot possibly represent material information for investors because such firm-specific emissions would yield climate impacts effectively equal to zero.

Accordingly, firm-specific emissions cannot affect the prospective returns to investment in that firm; the effects and “risks” of anthropogenic climate change are driven by global emissions. Under West Virginia v Environmental Protection Agency, only under an assumption of congressional acts penalizing GHG emissions can such information be material, and such laws have been “considered and rejected multiple times.”

The proposed rule would create political pressures, regulatory constraints and litigation risks leading public companies to undertake climate risk analyses insulating them from such threats. Such analyses would have little to do with science, but instead would be politicized, biased heavily toward published estimation of climate risks greater rather than smaller on the part of public companies, with no material benefits for investors. This would provide regulators and other public officials a rationale for constraining capital access for disfavored firms and sectors, resulting in a misallocation of capital and a reduction in aggregate economic performance, with no measurable climate benefits.

Congress has enacted no legislation with such intended or even unintended consequences. The court emphasized that protection of our political institutions is consistent only with formal policymaking by Congress, institutional protection that preserves the political accountability of the policymaking process under the institutions of democratic decisionmaking as constrained by the Constitution.

Benjamin Zycher is a senior fellow at the American Enterprise Institute.