The SEC’s Climate Rule Won’t Hold Up in Court

The Supreme Court took an important step toward restoring accountability and democratic oversight to the executive branch when it declared the Environmental Protection Agency’s Clean Power Plan illegal West Virginia vs. EPA, and the Securities and Exchange Commission should take note. The SEC’s proposed climate disclosure rule would expand its authority in a way indistinguishable from the EPA’s failed attempt to seize more power than it deserves. The SEC would be wise to withdraw and reconsider its proposed disclosure rule now.

In its June decision, the Supreme Court ruled that the Clean Power Plan was EPA-barred under major questions doctrine. Agencies only have regulatory powers because Congress gives them that power, so Congressional election limits their ability to regulate. Authorities must not take it lightly assuming that legislators have entrusted them with the major political issues of our time and simply decide those issues for themselves. Allowing the Clean Power Plan would have meant giving the EPA the power to resolve an important policy issue — the makeup of US power generation — that Congress is expected to decide for itself. EPA was unable to point to any clear legal authority for the agency to rule on this issue, and that led to the Supreme Court ruling that the plan was unlawful.

The similarities between the Clean Power Plan and the SEC’s proposed disclosure rule are striking and speak to why both break the law. Both regulations would transform large parts of the American economy. Over time, the Clean Power Plan would have forced US power generation to switch from fossil fuel-powered plants to renewable sources like wind and solar. The SEC’s proposal would prompt capital shifts away from fossil-fuel-based industries, such as oil exploration and heavy manufacturing, to industries that are said to be more environmentally friendly. Both of these monumental economic changes would affect countless businesses large and small, and potentially every American consumer and worker.

The court stated in West Virginia that such sweeping changes to the US economy can only be made by Congress or by an agency with clear direction from Congress. The same principle rules out the rule proposed by the SEC.

Both rules are also outside the expertise of the contracting authorities. In the Clean Power Plan, the EPA attempted to regulate the country’s power generation and transmission mix — a topic well outside their area of ​​expertise. In the Supreme Court’s eyes, this undermined the EPA’s argument that it had tacit authority to set guidelines on the issue. in the West Virginia The judges noted that Congress was unlikely to entrust the agency with important decisions for which it lacks expertise. So also for the proposal of the SEC. The Commission lacks climate science expertise, and Congress has not specifically given it the task of deciding major climate policy issues.

The SEC proposal, like the Clean Power Plan, claims a new understanding of an old law to justify itself. in the West Virginia The court found on strong evidence that the interpretation of the Clean Air Act on which the plan relied conflicted with the EPA’s longstanding interpretation of that act. The SEC disclosure proposal also relies on a new interpretation of old laws — the Securities Act and the Securities Exchange Act — from the 1930s. In nearly every instance where the SEC has used these statutes to require disclosures in the past, it has alleged that it did so because the information required was material — that is, financially significant to the reasonable investor. But the Commission doesn’t even try to show that all of its proposed climate claims are material. The Supreme Court is likely to be as skeptical as the EPA about the SEC’s claim to have discovered new powers in an old statute.

Like the Clean Power Plan, the SEC proposal would significantly expand the regulatory powers of the emissions authority. The Clean Air Act gave the EPA the power to set emission standards for specific facilities based on the emission controls that facilities can implement; The plan would have fundamentally changed this regulatory regime, allowing the EPA to set limits on the network as a whole without limiting the types of changes the EPA could force facilities to make. This also applies to the SEC’s proposal: By deviating from the materiality standard, the Commission would be prepared to enforce any disclosures without standards against which the necessity of disclosures could be measured.

After all, like the Clean Power Plan, the SEC proposal would adopt a measure that Congress has already considered and rejected. In the Clean Power Plan case, the court noted that while Congress “consistently opposed revisions to the Clean Air Act to require a cap-and-trade program,” the EPA made one anyway. The SEC has taken the same approach in its proposed rules. Congress has previously rejected legislation that would have directed the Commission to pass new climate disclosure requirements. The SEC is rushing ahead anyway.

West Virginia vs. EPA leaves no doubt that the agencies must have a clear statement from Congress granting them new powers if they are to seek to transform America’s economy and society. The SEC should acknowledge what is written on the wall and back out of this rulemaking. At the very least, it should reopen the comment period on its disclosure requirements, which ended a few days before the Supreme Court’s decision, so the public can have a say in how this hugely important decision affects its rulemaking.

Mr. Atkins served with the Securities and Exchange Commission from 2002 to 2008. Mr. Ray was Administrator of the Office of Information and Regulatory Affairs from 2020-21.

Wonderland: The administrative state has created ideological divisions that cannot be reversed for a long time. But an updated judgment on climate change could help revive the critical role that substantive politics played at the time of America’s founding. Images: Reuters/Getty Images Composite: Mark Kelly

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