Decisions on regulations affecting carbon dioxide emissions will be a big issue in 2007. This week, the U.S. Supreme Court heard arguments for whether the Environmental Protection Agency (EPA) should regulate GHG emissions under existing statutes (read Washington Post article). In response to a 1999 petition, the EPA determined that it lacks statutory authority to regulate CO2 emissions (although it concluded the opposite under previous administrations), giving rise to Massachusetts v EPA, a lawsuit by 12 states, the District of Columbia, New York City, Baltimore, and American Samoa.
The central issue in the case is whether CO2 should classified as a "pollutant" and thus treated like other criteria pollutants (e.g., carbon monoxide, ozone, sulfur dioxide) under the Clean Air Act. The case will most directly affect whether and how the EPA regulates CO2 emissions from new vehicles. But the "domino effect" on state-level global warming policy is likely to be even greater, for auto sector investors as well as state-level policy. A recent Merrill Lynch report on automobile sector regulations and implications for investors, prepared in collaboration with WRI, lays out the significance of this decision:
- In late 2004, California passed what is known as the Pavley law (named after its sponsor in the Assembly). Pavley reduces GHG emissions from cars in California by about 30%. Several automaker associations are challenging the law in federal court. They contend that California has no authority to regulate GHG emissions from vehicles because they are strongly tied to fuel efficiency, and only the federal government can regulate fuel efficiency. If the Supreme Court determined that CO2 is an air pollutant, the federal court would be more likely to rule in favor of Pavley.
- At least 10 states have indicated they will follow California's lead on regulating vehicle GHG emissions