by: Wilson Fong and Braeden Larson | July 28, 2022

On June 30th, the Supreme Court ruled in the case of West Virginia vs. the U.S. Environmental Protection Agency that federal agencies, including the Environmental Protection Agency (EPA), have limited regulatory powers unless they have the explicit authority from Congress, otherwise known as the “major questions doctrine.” This decision limits the executive branch’s power to allow federal agencies to regulate significant economic and political issues. In this case, it limits the EPA’s power to regulate emissions reductions from power plants under the Clean Air Act. However, the decision made on the premises of the “major questions doctrine” will trickle down to all federal agencies’ regulatory operations that have been granted through executive power. Concerning climate change policy, this means the EPA is paralyzed from taking country-wide actions on emissions reductions until Congress gives the EPA regulatory authority. While some states have already been implementing emissions reduction regulations, this Supreme Court decision will necessitate states taking their own leadership roles in climate change policy.

States Are Taking the Lead

At the time of this writing, the U.S. Congress is split on how to address climate change: it’s either through Congress-approved regulatory action or through a neutral approach, where emissions reductions are driven by industry-led initiatives. As a result, the onus falls on the individual states to develop emission reduction frameworks that align with their political, economic, and environmental realities. There have always been states, like California, that have been at the forefront of climate action in the U.S., though there has been a recent uptick in new, state-level climate action, despite the mosaic of political and environmental positions existing throughout the U.S.

The emerging state-level approaches vary from general, all-encompassing, state-wide environmental climate action plans to more focused actions, such as those that singularly promote the build-out of carbon capture and storage (CCS). State-level climate action, through differing approaches, attempts to fill the holes in climate policy and abdication of regulatory authority at the federal level. At a high level, the key actions being taken can be broken down into four policy categories: State Action Plans, Carbon Pricing Systems, Low Carbon Products, and CCS and Class VI Well Primacy.

State Policy Categories: A Primer

To better understand the actions being taken and the implications they may have on your business, we will walk through the four policy categories below.

1. State-Wide Environmental Action Plans: State-wide environmental action plans are the overarching climate policy and strategy toolkits that can be used to reduce emissions and achieve sustainable environmental outcomes. Within these plans, states often include their climate goals, emissions reduction targets, and emissions baselines to ensure the policy and strategy toolkit is utilized to meet these targets. A typical toolkit may include a state’s environmental action plan, along with policies such as carbon pricing systems, greenhouse gas (GHG) reporting regulations, clean fuel standards, low carbon product bid-preference, energy efficiency requirements, and carbon capture and storage (CCS) deployment regulations. Multiple states have committed to environmental action plans with mid-century emissions reduction targets. Most recently, Maryland passed an environmental action plan under the Climate Solutions Now Act of 2022. Maryland has committed to being carbon neutral by 2045, with an interim goal of reducing GHG emissions by 60% by 2030, compared to 2006 emissions levels. Maryland’s Department of the Environment is required to submit a draft environmental action plan by June 30, 2023, along with the policy and strategy toolkit the state will be using to meet the 2030 and 2045 targets.

2. Carbon Pricing Systems: Carbon pricing systems are one of the most effective and efficient emissions reduction policies within the policy and strategy toolkit that are available to states. Carbon pricing systems internalize the economic cost of pollution and provide incentives to industries, governments, and individuals to reduce their carbon emissions. The two most popular systems are a carbon tax and a cap-and-trade system. A carbon tax sets a price per tonne of CO₂ emitted that is paid by all participants of the economy. A cap-and-trade system sets a cap on emissions for industries and businesses within covered sectors but allows for individual flexibility through the development of emission trading schemes. Washington state is currently finalizing its rulemaking processes for the Climate Commitment Act, which requires the enactment of a cap-and-trade program (known as cap-and-invest) on January 2023. The rulemaking includes provisions for setting the emissions cap, setting price floors and ceilings on allowances, GHG reporting, establishing emissions-intensive-trade-exposed criteria for industries vulnerable to international and inter-state trading, and establishing carbon offset usage rules.

3. Low Carbon Products: In an attempt to incentivize new technological innovation, some states have introduced and passed low carbon product procurement policies. These types of policies provide a bid preference for businesses that have reduced the embodied carbon emissions associated with producing the product. Other policies include the promotion of industrial recycling through regulation. The state of California is currently in the process of passing Senate Bill 1297 (SB 1297), which requires public agencies in the state to provide preference to low-embodied carbon building materials where feasible and cost-effective for public projects.

4. Carbon Capture and Storage, and Class VI Well Primacy: While perhaps the most inequitable policy category due to the availability of geological storage in different states, CCS regulations have the potential to lead to the greatest emissions reductions through the geological storage or utilization of industrial CO₂. Storing CO₂ in the Earth is predicated by the need for a Class VI well permit, which is issued by the EPA (federal jurisdiction). Class VI wells are used to inject CO₂ into deep rock formations. In an effort to support the build out of CCS in the U.S., the EPA has created a process to transfer permitting authority to states, thereby reducing administrative burden and improving efficiency. The current Class VI well landscape across the U.S. is fragmented due to the varied control over carbon sequestration rights, or ‘primacy’ over Class VI wells. Primacy identifies whether the Federal or State Government has enforcement authority over Class VI wells permitting. The vast majority of Class VI wells are under the direction of the U.S. EPA and follow a lengthy application process. As companies increasingly discuss and mobilize resources for CCS, the administrative burden on the U.S. EPA grows in parallel. The U.S. EPA lacks the staff and resource capacity necessary to take on a large number of Class VI well applications, which are necessary to sequester CO₂ in deep saline aquifers. For this reason, while states are developing regulations and action plans for CCS deployment and sequestration, they are also active in the primary enforcement application process with the U.S. EPA to take primacy over regulating Class VI wells within their state. To receive primacy over Class VI wells, the state must align its standards with the EPA. Class VI primacy is an enabling action that will support the rapid and widespread deployment of CCS throughout the United States.

Conclusion

In the absence of federal authority on climate change regulation, 24 states and the District of Columbia are establishing emissions reduction targets and implementing a plethora of emission reduction initiatives. While one of the most effective policies for reducing emissions is a carbon pricing system, the adoption of regulated carbon markets in the U.S. has been slow.

As states contemplate policy action to reduce the effects of climate change, it elevates the growing need for support of different technological, industrial, and nature-based policy solutions. With properly designed policies, states can support the deployment of CCS solutions and increase acceptance and demand for low carbon products, both of which have significant emission reduction potential.

ClimeCo has vast experience in a wide array of emission reduction initiatives and actively monitors developments throughout the U.S. Please contact us if you want to learn more about our Policy Team’s complete range of services that help companies improve readiness and resilience in the ever-changing regulatory environment.

Update Note: On July 27th, Senator Joe Manchin (D-WV) and Senate Majority Leader Chuck Schumer (D-NY) announced a deal to pass a budget reconciliation bill that would include $369 billion in spending towards climate and energy policies. Most of the incentives from this package are long-term tax credits, which include relief for clean hydrogen fuel development, direct-air-capture deployment, and advanced nuclear projects for heavy industry. Other tax credits are provided for renewable projects in the energy economy, new EV purchases, and residential retrofits for heating, cooling, and power. However, this announcement, as it stands, continues a federal trend to take a bottom-up approach to climate change, which leaves the states taking the regulatory lead on climate change.

About the Authors

Wilson Fong is an Associate on ClimeCo’s Sustainability, Policy, and Advisory team, based in Calgary, Alberta. Wilson collaborates with corporate clients to navigate the complexities of carbon markets, model their carbon position, and advise them on emission reduction strategies. He holds a Master of Global Business and Master of Science in International Business from the University of Victoria and Montpellier Business School.

Braeden Larson is a Policy Analyst on ClimeCo’s Sustainability, Policy, and Advisory team, based in Calgary, Alberta. Braeden supports the tracking and analysis of carbon policies throughout North America. He holds a Master of Public Policy from the University of Calgary and a Bachelor of Arts (Honours) with a major in Politics from Acadia University.