How the Supreme Court’s EPA Authority Ruling Will Impact Commercial Real Estate

The U.S. Supreme Court recently ended one of its most controversial sessions in recent memory, setting off protests nationwide and hours upon hours of heated debate. Overturning Roe v. Wade has been the most talked-about decision, but one of SCOTUS’s decisions this term regarding the EPA’s authority to decarbonize their electricity sectors will have a direct impact on the real estate sector.

The decision in West Virginia v. EPA is nuanced, and the reaction so far has been mixed. It’s not necessarily a nail in the coffin to federal efforts for climate regulations, as some headlines have suggested, but the judicial reasoning behind the decision could rein in the regulatory powers of other federal agencies. The court’s ruling in the case may affect commercial real estate in surprising ways, from watering down a pending Securities and Exchange Commission emissions disclosure rule to creating a reactive uptick in state and local regulations that seek to decarbonize the real estate industry.

Congressional gridlock

The Supreme Court’s ruling in West Virginia v. EPA doesn’t strip the EPA’s authority to regulate greenhouse gases. It’s also unlikely to change how the Biden administration plans to regulate power plant emissions, and it probably won’t do much to save the coal industry. The case centered on EPA’s implementation of the Clean Air Act and, specifically, the Obama-era Clean Power Plan that never actually went into effect. The 6-3 majority said EPA erred when establishing the Clean Power Plan to reduce power plant emissions. EPA effectively tried to shift how utilities generate power by mandating they switch from coal to gas and renewable energy.

Siding with the 17 Republican state attorneys general that sued the EPA, Chief Justice John Roberts wrote that there’s little reason to believe Congress gave the agency the authority to regulate “how Americans get their energy.” So, essentially, the court majority ruled EPA’s Clean Power Plan was a regulatory overreach. “What the Supreme Court is saying is we expect anything that has a large impact on the economy and nation to be explicitly authorized by Congress,” said Allison Wood, an attorney at McGuireWoods.

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Because the court has grown more conservative recently, Biden’s EPA was more likely to draft narrower, plant-specific greenhouse gas standards and the Supreme Court’s recent ruling doesn’t prevent the EPA from doing so. The ruling doesn’t necessarily help the coal industry, either. U.S. coal plants are aging, and utilities aren’t replacing them. Solar energy accounts for about half of all planned new power plant construction this year, according to the U.S. Energy Information Administration. Federal tax credits and technological improvements have made renewables cheaper and spurred their rapid growth.

Many scientists promote the idea that the world needs to get to net-zero carbon emissions as quickly as possible. This ambitious objective would require a full-scale refashioning of the world’s energy systems and a phase-out of the fossil fuels, despite the fact that the U.S. and all of the world’s largest and fastest growing populations, such as India and China continue to rely on fossil fuels for energy. For example, 84% of China’s energy is derived from fossil fuels according to data from research organization, Our World in Data.

For its part, the U.S. is probably never going to achieve net-zero goals through local regulations alone. Several studies have shown congressional legislation would be needed to accomplish this. Big congressional legislative packages, though, don’t happen too often in 21^st century America. Congress has been partisan so often that presidents resort to advancing policy agendas through administrative means, such as executive orders and agency regulations. The predictable outcome is court challenges to these administrative actions, no matter if the president is Democrat or Republican, leaving the Supreme Court as the arbiter of the disputes. So, if the Supreme Court thinks significant issues that affect the national economy, like climate change policy, must be expressly authorized by Congress, Americans could be waiting a while for that to happen.

Major questions, few answers

The Supreme Court decision in West Virginia v. EPA may not derail decarbonization efforts, but it will set them back. Many legal experts have noted the judicial reasoning behind the decision sets a precedent whereby the scope and power of other federal regulatory actions are limited. The court’s ruling could affect pretty much any regulation in the future issued by agencies like the EPA. That would include federal regulations that impact the real estate industry, such as eviction moratoriums, rules regarding the pandemic and public health, and financial regulations. The ruling may also have an outsized impact on the SEC’s proposed carbon emissions disclosure rule that real estate firms have so many concerns about.

The Supreme Court invoked the “major questions doctrine” in the recent climate change ruling. In layman’s terms, the major questions doctrine means some national economic and policy matters are so significant that a federal agency shouldn’t decide them, and it should only be a matter for an elected Congress to address.

Liberal justices, such as Justice Elena Kagan, don’t agree. In her dissent in West Virginia v. EPA, Justice Kagan claims that when Congress passed the Clean Air Act in 1970, the law was passed intentionally broadly, giving EPA the flexibility to issue regulations to protect public health. She claims Congress takes a similar approach in passing other laws that protect consumers and investors. But this Supreme Court has stated that if Congress wants to specify these regulations, it can do so through more narrowly crafted language in the bills it passes.

SEC rule scrutinized

Going forward, legal experts expect the major questions doctrine to have significant implications on federal rulemaking, and it’s already happening in lower courts. In every federal policy that gets litigated now, including ones with substantial impacts on commercial real estate, opponents to the rules may claim the question the agency is trying to answer is a major one, and the agency should be restricted from the rulemaking.

This legal defense could be applied to the SEC’s climate disclosure rule. The SEC proposed the law in March, hoping to bring U.S. regulations closer to international standards. The rule would require publicly-traded companies to track carbon emissions from direct and indirect operations, like purchasing electricity, every year beginning in the fiscal year 2023. Companies would then be required to report an estimate of those emissions at the start of 2024 and then report a revised, more accurate disclosure later that year.

Major real estate industry groups like Nareit and the Commercial Real Estate Finance Council are saying it’s too hard to compile the data needed for the disclosures. Real estate groups have recently submitted comments to the SEC advocating against companies being required to report emissions generated by specific building materials and tenants, among other complaints. Now, the Supreme Court’s ruling in West Virginia v. EPA could jeopardize SEC’s climate rule. “If the Supreme Court shows that it’s pretty strongly supportive of the major questions doctrine—that is, they care about narrowing constructions of regulatory authority—it should give commissioners on the SEC some pause,” said Andrew Vollmer, a former deputy general counsel for the SEC.

SEC’s climate rule also faces opposition from House Republicans, who have called for hearings. If Republicans retake control of the House in the midterm elections later this year, they could pressure the SEC to make changes to the rule or entirely stop the regulation’s implementation. 

West Virginia Attorney General Patrick Morrisey, who led the lawsuit against EPA recently decided by the Supreme Court, is also questioning the SEC’s rule, arguing the Biden administration and federal agencies are sidestepping Congress to promote their climate change agenda. “We’ll be looking at many other rules the Biden administration and independent agencies are putting forth, particularly the SEC’s rule,” Morrisey said.

The front line of the climate crisis

Another side effect of the Supreme Court climate ruling could be shifting the climate change fight further from the federal level to cities and states. The Court’s decision will make it harder for the Biden administration’s stated goal of reducing U.S. carbon emissions by 50% by 2030 and creating a carbon-free electric grid by 2035. Some scientists are already saying the U.S. isn’t on track to meet those emissions targets, and with the EPA now thwarted by the Supreme Court’s ruling, those goals may be impossible without major congressional legislation. All of this leads to increased pressure from Democrats on state and local governments to help them push their climate policy, which they notably attempted during the Trump administration.

Cities can work on decarbonizing buildings, but reducing citywide emissions becomes harder without federal support. The Supreme Court decision will stall Biden’s plans to create a 100 percent electric grid, perhaps making it harder for cities that want to procure renewable energy. There are still things those cities can do depending on state law, though, such as entering purchasing power agreements, community choice aggregation, and community solar projects. 

For example, Community Choice Aggregation (CCA) programs enable local governments to procure power for residents and businesses from alternative electricity suppliers while still receiving transmission services from existing utility providers.

Also known as municipal aggregation, these programs give local governments more control over electricity sources, and typically more renewable energy is offered than from default utilities. CCAs are currently authorized in 10 states, including California, Illinois, Maryland, and New York, and they helped about 4.7 million customers procure approximately 12 billion kilowatts of electricity in 2020, according to the EPA.

Strategies like community choice aggregation may help, but for the most part, cities need the federal government and states to ensure all the power on the electric grid is green. Most times, cities can’t do this independently because they don’t have as much control over the amount of renewable grid energy.

Despite these challenges, some cities have responded to the climate fight in the past decade by doubling down on their efforts, even though federal policy has been largely absent. After the Trump administration pulled the U.S. out of the controversial Paris Agreement in 2017, membership in the Climate Mayors, a network of 470 U.S. mayors, rapidly grew, and many cities continued to honor the international climate pact. Clean energy purchases made by local governments totaled more than 2,800 megawatts in 2018 and about 3,200 megawatts in 2019, nearly 2,000 megawatts more than in 2017, according to the World Resource Institute.

National climate policy faces numerous setbacks, but many cities will likely continue scaling up efforts to reduce carbon emissions, such as New York City’s Local Law 97 and policies in Washington, D.C., and Boston. Mayors and city officials will also pressure federal lawmakers to pass major climate policies in Congress. Whether they want it or not, real estate owners in urban areas should expect more building decarbonization efforts in the coming years, not less. “Cities are on the front line of the climate crisis, and they are also at the forefront when it comes to solutions,” claims Kate Johnson, the head of U.S. federal affairs at the C40 Cities coalition. “This Supreme Court decision is not going to change that.”

Decarbonization slowdown

The Supreme Court’s ruling in West Virginia v. EPA is a setback for climate change activists and will have varying effects on commercial real estate. The consequences could be good or bad depending on how real estate owners and investors feel about climate regulations. For one thing, landlords should expect Democrat-led cities and states’ decarbonization efforts to ramp up in the years ahead because of the absence of federal support for their climate policies.

The ruling also means many federal agencies, such as the SEC, could see proposed and maybe even existing rules watered down or scrapped altogether. America’s approach to public policy has always led to a confusing patchwork of state, local, and federal rulemaking, and the Supreme Court’s climate change ruling could add more to the confusion. But the move toward clean energy and building decarbonization is already speeding up, and the trend away from fossil fuels has accelerated. That probably won’t change.

The Supreme Court’s ruling is part of the conservative majority’s distaste for the administrative state, but it probably won’t be enough to slow down the transition to a so-called clean energy economy significantly. Building owners may not have to worry as much about federal regulations in the coming years, and court challenges against various federal rules could become more successful.  

It’s hard to see most building owners scaling back sustainability plans just because federal regulatory authority is curtailed, especially if there continues to be demand for “green building” initiatives from tenants. The Supreme Court’s recent decisions have been controversial, but it won’t leave real estate owners entirely off the hook when it comes to reducing carbon emissions and other regulatory matters. And we don’t think most building owners would want that anyway.