Supreme Court: EPA Should Have Considered Cost When Deciding Whether Mercury Limits For Power Plants Were Appropriate

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Screen Shot 2015-06-29 at 9.19.29 PMToday the United States Supreme Court held that the Environmental Protection Agency (EPA) improperly refused to consider costs when determining whether it was “appropriate and necessary” to regulate mercury emissions from power plants under the Clean Air Act. Ultimately, EPA may be able to keep the same rules after going back and explaining why the cost of the regulations is justified in the circumstances. But the decision is an important victory for advocates of cost-benefit analysis and those who think environmental agencies should pay more attention to the costs of regulation.

Section 112 of the Clean Air Act directs EPA to regulate hazardous air pollutants from power plants if it finds “regulation is appropriate and necessary.” 42 U.S.C. §7412. EPA said that regulation was “appropriate and necessary” even without considering costs because 1) power plant emissions posed risks to human health and the environment that were not eliminated by other provisions of the Clean Air Act and 2) there were controls available to reduce those dangerous emissions. So there was no need for EPA to consider costs to make its initial decision to regulate, but it promised to consider costs when adopting the actual final regulations for power plants.

Although EPA said it ignored costs when it made its initial decision to regulate, it still estimated the costs and benefits of the final rules that it adopted. EPA estimated that its rules would cost power plants $9.6 billion dollars a year. EPA couldn’t estimate all the possible benefits of limiting mercury emissions, but the little it could quantify came to about $5 million a year—less than 0.1% of the cost of the rule. On the other hand, EPA said that cleaning up mercury would have massive side benefits: it would lower sulfur dioxide emissions and these reductions would be worth between $37 and $90 billion per year. So these ancillary benefits far outweighed the costs of EPA’s rule, but if you didn’t count them, EPA’s rule imposed costs far in excess of its benefits.

Justice Scalia, writing for a 5-4 majority, held that EPA must consider the costs of regulation before making its initial decision to regulate, reasoning that “No regulation is ‘appropriate’ if it does significantly more harm than good.” The four dissenters conceded that, generally speaking, “an agency must take costs into account in some manner before imposing significant regulatory burdens” but agreed with EPA’s argument that the agency could consider those costs later when adopting regulations for specific source categories.

The Supreme Court’s decision may not have much impact on mercury regulation. Power utilities are already complying with the mercury rules that the court struck down in this case. And the case will now go back to the appellate court, which could decide to leave the rules in place while the agency rethinks whether these rules are “appropriate and necessary” factoring in the costs that they impose. EPA already determined that the benefits of the rules far outweighed their costs if you consider ancillary benefits, so it will probably reach the same decision. On the other hand, the Court’s decision raises very important questions for the future.

First: Can agencies consider ancillary benefits? At oral argument, some justices seemed to suspect it was inappropriate to consider the benefits associated with pollutants other than mercury. After all, if the other pollutants are the problem, why not adopt regulations aimed at the other pollutants? On the other hand, it has long been standard practice for agencies to consider ancillary or “co-benefits” of reducing pollutants other than the main target of regulation. If an agency is going to consider all the important costs of a regulation, why shouldn’t it consider all the important benefits? In some ways, the mercury rule may just be an outlier case because EPA estimated that the co-benefits of reducing sulfur dioxide were 10,000 times greater than the direct benefits of reducing mercury itself. But over half of the benefits of EPA’s Clean Power Plan come from co-benefits in reducing pollution other than greenhouse gases, so the question does have wider importance.

Second: How much cost-benefit analysis will the Court require for other regulations? Today’s decision may be seen as part of a trend that is making cost-benefit analysis a kind of default background principle for agency decision-making. Just fourteen years ago, Justice Scalia wrote an opinion for eight justices, holding that EPA could not consider the cost of regulation when the Clean Air Act demanded a standard at the level “requisite to protect the public health.” In that case, Justice Scalia explained that EPA could consider costs later when it implemented the standard. Last year, the Court held that EPA could consider the cost of emissions controls when it decided whether a State “contributed significantly” to air pollution in another state; Justice Scalia dissented. Now, the Court holds that EPA must consider the cost of regulation when it determines whether regulation is “appropriate and necessary.” Justice Scalia writes the opinion, and all justices agree that EPA must consider costs at some stage. Observing this trend, litigants will feel increasingly bold to demand that EPA consider the costs at each stage of adopting new environmental regulations.

Encouraging Energy Companies to Inform Their Investors About Risks They Face From Climate Regulation

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Screen Shot 2015-04-23 at 5.00.29 PMMy recent study compared what oil companies told two audiences—regulators and investors—about how new environmental rules would affect them. It showed that the companies told the two audiences two very different stories: companies warned the Environmental Protection Agency (EPA) that the rules would be unworkable but securities disclosures reassured investors that the rules would be manageable.

To give EPA industry’s honest view on whether rules are manageable, I suggested that companies should file excerpts from their securities disclosures with their comments.

But what if the comments to EPA are accurate—companies really are terrified about new regulations—and they’re just not telling their investors? After all, shareholder groups and proxy advisory firms have complained that energy companies are ignoring Securities and Exchange Commission (SEC) guidance on disclosing risks from climate regulation.

In a new post at Columbia Law School’s blog on corporations and capital markets, I explain how industry’s comments to regulators can be used to encourage companies to inform their investors of real risks that they face from regulation. Here’s the end of the post:

Investors should use company comments to identify risks that companies may be minimizing in their 10-K disclosures. And the SEC should insist that companies tell investors about any risks that they are stressing to regulators. …

In the meantime, corporate counsel should get ahead of regulators and investors by aligning comments and securities disclosures. When a company’s comments and 10-K disclosures are revealed to be inconsistent, it has put itself in a lose-lose situation. Regulators will discount the company’s pessimistic comments. But if a new rule does harm the company, investors will have evidence to support a Rule 10b-5 lawsuit. Although it is harder to sue a company for “soft” information or predictions about the future, in this case company comments would support an inference that the company did not even believe its own assurances. See Omnicare v. Laborers Dist. Council Constr. Ind. Pension Fund, 575 U.S. _ (2015) (slip op. at 6-9). And few companies would relish the prospect of having to prove in court that their dire warnings to EPA were entirely insincere.

Proactive companies could even bolster their credibility by voluntarily filing excerpts from their securities disclosures along with their comments. If they did so, regulators might be more inclined to take their concerns seriously in crafting final rules.

Thus, aligning corporate comments with corporate securities disclosures would not only improve the information available to regulators; it would also protect companies from liability and enhance industry’s credibility in notice-and-comment rulemaking.

Supreme Court Leaves Room for State Regulation of Natural Gas Sales

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Yesterday, the U.S. Supreme Court held that the federal Natural Gas Act does not preempt the field of state antitrust regulation of natural gas prices, which means states can apply their own policies to natural gas sales as long as those policies do not conflict with federal law.

Vanderbilt’s Jim Rossi has just posted an analysis of the case at SCOTUSblog. As he notes, U.S. courts have been struggling with how to draw a line between state and federal authority in both electricity and natural gas markets.

Under both the Natural Gas Act and the Federal Power Act, the federal government has authority over wholesale energy sales, while the states retain authority over retail sales of natural gas and electricity. As a result, the Supreme Court’s decision on the Natural Gas Act may have important implications for electricity markets as well. And it is another important precedent in the courts’ struggles to balance state’s traditional authority over their own energy markets with increasingly integrated interstate energy markets.

Professor Rossi writes:

According to the majority opinion, written by Justice Stephen Breyer and joined by five other Justices, the [Natural Gas Act] “was drawn with meticulous regard for the continued exercise of state power, not to handicap it or dilute it in any way.” Under Section 1(b) of the [Natural Gas Act], wholesale transactions fall squarely – and even exclusively — within the jurisdiction of federal regulators. For nearly seventy years, the Court has acknowledged the sharp clarity of this federal-state division of authority over wholesale and retail sales, sometimes even calling it a jurisdictional “bright line.”

… The difficult question this case presented was what to do when a practice affects both types of sales.

… Notwithstanding (somewhat confusing) language in the opinion that purports to place this matter on the state “side” of any dividing line, the majority questioned whether the [Natural Gas Act] contains any sharp dividing line at all: “Petitioners and the dissent argue that there is, or should be, a clear division between areas of state and federal authority in natural gas regulation. But that Platonic ideal does not describe the natural gas regulatory world.”

Here is Professor Rossi’s full post and here is the Supreme Court’s opinion.

May Provinces (or States) Limit Imports on the Basis of Greenhouse Gas Emissions Elsewhere?

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By James Coleman & Martin Olszynski

Screen Shot 2015-04-15 at 9.03.54 AMLast week, a group of economists known as “Canada’s Ecofiscal Commission” issued a much-discussed report that urged Canada’s individual provinces to drive Canadian climate policy by adopting their own carbon pricing schemes. But the report barely touched on one of the key challenges for provincial or state regulation without the support of the national government: what may places that price carbon do to avoid losing industry to places that don’t?

This is an urgent question across North America because, for different reasons, Canada and the United States are unlikely to adopt uniform nationwide climate policies in the near future.[1] Instead, climate regulation will be somewhat different in each state and province. But states and provinces lack a key power that national governments use when they adopt climate regulation: the power to adopt trade regulations that control imports. The nation is an economic union so provinces can’t limit trade across their borders.

Climate and trade policies often go hand-in-hand because nations that limit carbon emissions worry they will lose industry to nations that do not. After all, if emissions merely shift to other nations, a phenomenon known as “carbon leakage”, a single nation’s carbon policies won’t do much to help the global climate. One way around this problem is to charge a “carbon tariff” on imports that were produced in nations that do not have similar limits on carbon emissions. This charge is calculated by estimating how much carbon was emitted to produce the imported product and then multiplying that quantity by the importing country’s carbon price. These tariffs are sometimes called “border adjustments” because, in theory, they are supposed to level the playing field between domestically regulated producers and unregulated foreign ones.

You can’t set up a customs house between Manitoba and Ontario, so provinces can’t charge a regular carbon tariff. But states and provinces have found a roundabout way to do more-or-less the same thing. For instance, California and Quebec both have cap-and-trade systems that force power plants to purchase a permit for each ton of carbon that they emit into the atmosphere. Crucially, these cap-and-trade systems also apply to power plants in other states that export electricity to California and Quebec. The effect is the same as the customs house: when a purchaser imports electricity into California or Quebec it must pay a charge for all the carbon that was emitted elsewhere to produce that electricity.

So can states and provinces place a charge on imports that accounts for how much carbon was emitted elsewhere to produce them? It’s a crucial question because such charges could apply to all kinds of goods, not just to electricity. Provinces like British Columbia and states like California are already setting standards for motor fuels that effectively charge imported fuels for the greenhouse gases that were emitted elsewhere in their production. And in theory the same charges could apply to any kind of good. You would just add a surcharge to every item based on the greenhouse gases that were emitted elsewhere to produce it: television sets, fruit, toys, you name it.

In fact, state and provincial climate regulations across North America are increasingly adopting exactly these kind of controls, adding urgency to the underlying legal question: may energy importers export their regulation to cover emissions outside their borders? In the absence of national action on climate change, provinces are looking for creative ways to make sure that they don’t lose industry to provinces that don’t regulate, so they’re regulating imports based on carbon emissions elsewhere.

Canada’s Ecofiscal Commission is recommending provincial action on climate but it has little to say on this crucial topic, and what it says is confusing. The report’s section on “competitiveness” has a subheading titled “Border adjustments could level the playing field,” which sounds promising. It then says “border adjustments could not be implemented by a single province, but would require involvement by the federal government,” which is a major qualification. But then it states that, after all, such adjustments are possible for “specific emissions that fall under provincial jurisdiction” and cites the example of Quebec’s electricity imports. For this proposition it cites a white paper on a U.S. cap-and-trade system written by U.S. law students.

This issue is too important to gloss over. If states and provinces are going to lead the fight against climate change, many legal decisions and many academic pieces will be written on the topic before it is resolved. This post merely flags some of the key rules and arguments that will be in play.

The normal rule has been that states and provinces may not adopt regulations for pollution emitted in other states. These forbidden rules are known as “extraterritorial” regulations. In Interprovincial Co-Operatives Ltd. v. Dryden Chemicals Ltd, the Supreme Court of Canada held that Manitoba could not make a law punishing companies that lawfully emitted pollutants in Saskatchewan and Ontario, even if those pollutants made their way into Manitoba. The rule in the United States is more complicated, but under what is known as the “dormant commerce clause”, the U.S. Supreme Court has held that states cannot adopt a law “if the practical effect of the regulation is to control conduct beyond the boundaries of the State.”

One important reason for the normal rule is that if provinces or states began banning products that were produced elsewhere in ways that they didn’t like, they would quickly run afoul of international trade laws. For example, if Ontario banned all products made by laborers that were not paid its $11 per hour minimum wage that would, as a practical matter, end imports from the developing world. It would also conflict with the General Agreements on Tariff and Trade that govern international trade.

On the other hand, the traditional rule against extraterritorial regulation is on somewhat tenuous footing. In Canada, Interprovincial Co-Operatives involved a 3-1-3 split, which makes the primary ruling open to debate. The decision is also four decades old and has been heavily criticized, including by one of Canada’s leading constitutional scholars. See Peter Hogg, Constitutional Law of Canada, 5th ed., (2007) at 13-10. Similarly, in the United States, scholars and judges have suggested that limits on extraterritorial regulation should be abandoned.

Suffice it to say that import regulations may have a better chance of being upheld where their extra-provincial effects are deemed incidental to their primary purpose, or “pith and substance” in Canadian jurisprudential terms. Reference re Upper Churchill Water Rights Reversion Act, [1984] 1 SCR 297. See also Shi-Ling Hsu and Robin Elliot, “Regulating Greenhouse Gases in Canada: Constitutional and Policy Dimensions” (2009) 54 McGill L.J. 463.

And perhaps the normal rule should bend in the case of provincial climate regulation. For one thing, even if carbon emissions occur in Alberta, they still affect the global climate, which could harm Ontario, Quebec, and every other place in the world. For the same reason, it is vital that climate regulation doesn’t just shift carbon emissions to other provinces: few will want to regulate if the provinces that do lose jobs without securing any net benefit for the climate. If we want provinces to set a model for eventual national regulations, maybe they need the same trade powers.

States and provinces also have long-standing authority to manage the mix of sources providing power to their electrical grid, which includes regulating contracts for electricity imports. This helps to ensure that power will always be available at reasonable prices. But there are limits to this authority as well: a province certainly could not prescribe the wages or working conditions for employees at power plants in other provinces. Can provinces prescribe carbon standards for power plants elsewhere under their traditional authority over electricity markets? That remains an open question.

So far, the U.S. courts are divided on whether states may regulate based on carbon emissions elsewhere. An appellate court said that California could regulate fuels based on emissions elsewhere and a district court said that Minnesota could not regulate electricity based on emissions elsewhere. The Canadian courts have not yet addressed the question. And the first two Canadian cap-and-trade systems are poor test cases because both Quebec and Ontario import far less electricity than they export. But the question will become unavoidable as more provinces adopt the kind of policies recommended in the Ecofiscal Commission’s report.

Finally, these questions will grow more pressing as long as national governments delay action to address climate change. As with recent provincial efforts to improve environmental impact assessments of interprovincial pipelines, the federal policy vacuum is pushing provinces to act on their own. In the United States, one interim solution could be for the federal government to allow non-discriminatory state regulation of energy imports. If Canada’s government is serious about sticking with provincial climate policy, it may have to consider similarly creative solutions. In the meantime, these policies will continue to present difficult and novel legal questions about the boundaries of state and provincial authority.

__________________________

[1] In Canada, the conservative government has repeatedly delayed federal climate regulations and the leader of the liberal party has pledged to leave the provinces in charge of carbon pricing. In the United States, congressional inaction has pushed President Obama to rely on a rarely-used Clean Air Act provision that requires states to adopt their own regulations for power plant carbon emissions.

Conference Announcement: “Integrity of Creation: Climate Change”

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I hope you’re enjoying the newly redesigned Energy Law Prof blog, which is now located at https://www.energylawprof.com/.

If you are announcing a conference in energy/climate/environmental law or policy, please just send me a post in the format below and I’ll be happy to post it. Here’s the example that I’ve been asked to post today:

 

Christine Skrzat of the Center for Healthcare Ethics at Duquesne University asks me to pass on the following conference announcement:

Screen Shot 2015-04-03 at 3.13.55 PMConference, Integrity of Creation: Climate Change

Duquesne University, Pittsburgh, PA

September 30 to October 2, 2015

Duquesne University invites academic Papers & Posters on Climate Change to be presented at this inaugural annual conference. The interdisciplinary conference series provides a scholarly forum to explore topics related to the Integrity of Creation. The deadline for applications is Friday May 15, 2015. There is no fee to register for the conference. For questions contact Glory Smith, at: smithg@duq.edu or 412-396-4504. Please apply on the conference website at: www.duq.edu/ioc

 

 

 

Do Corporations Cry Wolf? — Comparing What Companies Tell Regulators With What They Tell Investors

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6721834473_83e3b6cb95Corporations regularly complain that new regulations will harm their business and the broader economy. How seriously should we take those warnings? I’ve just posted a paper that presents a way of answering this perennial question.

It’s often said that corporations, “Cry Wolf,” falsely predicting that rules will be very costly. A prime example comes from 1970 when Ford’s President, Lee Iacocca warned that the Clean Air Act “could prevent continued production of automobiles” and was “a threat to the entire American economy and to every person in America.” So when industry says that new regulations such as the Environmental Protection Agency (EPA) Clean Power Plan will be unworkable, many suggest that regulators should just ignore those warnings.

But the problem with crying wolf is that there are wolves. That is, false alarms are dangerous because they mean we won’t respond to true threats. And from time to time, regulations really are unworkable, and industry might be the first to recognize this, which is why regulators don’t just ignore industry warnings.

So regulators face a dilemma: they need industry to tell them whether a rule is workable, but they suspect industry will exaggerate the cost of regulation. How can regulators tell how much companies really expect rules to cost?

My paper, titled “How Cheap is Corporate Talk?” compares companies’ comments on proposed rules with what the same companies told their investors about the same proposals. After all, companies have no reason to trick their investors into thinking that a rule might harm the company. In fact, they may want to reassure investors by minimizing the danger from proposed rules. So if regulators want to know how much a company worries about a proposed rule, they should compare the company’s comments on the rule with what it told its investors.

Take Lee Iacocca’s famous warning that the Clean Air Act could “prevent continued production” of cars in America. In its annual report for that year, 1970, Ford told its investors that “the automobile industry has survived and grown even in countries where government policies have made the cost of car ownership several times higher than it is in the United States” and assured them it had “no doubt that our industry will continue to grow.” Who signed that prediction on behalf of Ford’s board of directors? Henry Ford II and . . . Lee Iacocca.

This paper focuses on a contemporary example of the regulator’s dilemma: the EPA’s Renewable Fuel Standard. The Standard requires oil companies to blend ethanol into the fuel they sell, and it requires more ethanol each year. EPA proposes and sets a required percentage of ethanol annually, which gives oil companies plenty of opportunities to comment. The paper matches those comments up with contemporary Form 10-K securities disclosures from the same companies.

The study finds that oil companies made significantly more predictions about how the Renewable Fuel Standard would harm them in comments than they disclosed in their 10-K statements. For example, one oil company told the EPA that if the rules weren’t changed, they would “limit the supply of gasoline and diesel fuel” and cause “severe economic harm.” In its securities disclosure, the only thing its parent company told its investors was that rules like the Renewable Fuel Standard were creating a strong market for biofuels. And it even implied that that was a good thing because of its side business as a biofuel producer.

Regulators should ask public companies to attach relevant excerpts from their securities disclosures to their comments on proposed rules. This would help regulators assess when a proposed rule might present a true threat to an industry or the economy. In the meantime, securities regulators should scrutinize company comments to find regulatory risks that companies may be concealing in their disclosures to investors. By comparing what companies tell their regulators with what they tell their investors, we’ll all know whether to come running when a corporation cries, “Wolf!”

Legal Debate on EPA’s Power Plan Takes Center Stage

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Screen Shot 2015-03-30 at 4.26.49 PMFor the past two weeks, the U.S. Environmental Protection Agency’s “Clean Power Plan” for power sector carbon emissions has been the center of an ongoing debate between some of the nation’s foremost constitutional and environmental law scholars.

As described in previous posts, the Clean Power Plan aims to place caps on greenhouse gas emissions (or emissions intensity) from each of the 50 states in the U.S. To comply, states will have to use their coal plants less, increase their use of natural gas and renewable fuels, and improve their energy efficiency. A state can focus its effort more or less on each of these methods, so long as it meets its target.

In two earlier posts, I explained the Clean Power Plan, noting that it would attract legal arguments that the Environmental Protection Agency (EPA) has overstepped its legal authority, and explained how the Supreme Court’s decision in Utility Air Regulatory Group v. EPA would bolster these arguments.

Those arguments are now in full swing. Here is the back-and-forth between Professor Larry Tribe, one of the nation’s most prominent constitutional law scholars, and Professors Jody Freeman and Richard Lazarus, two of the nation’s most prominent environmental law professors. These arguments are framed as a disagreement over the constitutionality of the Clean Power Plan, but many of the arguments are really about whether EPA has the statutory authority that it claimed in the Plan.

On March 17, Harvard Law School Prof. Larry Tribe testified to the House Committee on Energy and Commerce’s Subcommittee on Energy and Power arguing that the Clean Power Plan is unconstitutional.

On March 18, Harvard Law School professors Jody Freeman and Richard Lazarus strongly disagreed, responding in an op-ed published at Harvard Law Today, titled “Is the President’s Climate Plan Unconstitutional?”

This started a significant back and forth that included:

You may also want to check out:

  • The testimony of Prof. Richard Revesz, another of the country’s foremost experts on environmental law and federalism, who testified at the same March 17 hearing in favor of the Clean Power Plan.

These arguments are just the opening skirmish in a running legal battle. If the Obama administration (and the administration that follows it) stays the course on the Clean Power Plan, the arguments will finally be resolved in court.

 

Conference Announcement: Sustainability Conference of American Legal Educators, May 8, Tempe, Arizona

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Troy Rule, Faculty Director of the Program on Law and Sustainability at Arizona State University’s Sandra Day O’Connor College of Law asks me to pass on the following conference announcement:

Screen Shot 2014-12-24 at 12.11.56 PMThe Law and Sustainability Program at the Sandra Day O’Connor College of Law is pleased to announce its First Annual Sustainability Conference of American Legal Educators (SCALE) Conference to be held on May 8, 2015 at the Sandra Day O’Connor College of Law in Armstrong Hall on the Arizona State University Campus in Tempe, Arizona.

This new conference will be an annual, national event for legal academics researching in sustainability-related areas. The conference will offer a unique forum for panels and presentations falling within one or more broad subject matter areas pertaining to sustainability, including but not limited to:

  • Climate Change Law
  • Energy Law
  • Water Law
  • Environmental Law
  • Natural Resources Law
  • Land Use and Zoning Law
  • Agricultural and Food Law
  • Disaster Law

The conference’s inaugural keynote speaker will be Professor Daniel Esty, Director of the Yale Center for Environmental Law & Policy at Yale Law School.

Presenters who are interested will also have an opportunity to join in an organized hike of a nearby mountain on the morning of Saturday, May 9, 2015.

For information on how to submit panel or presentation proposals, please click here.

TransCanada’s Other Pipeline Problem: Can Provinces Impose Conditions on Energy East?

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  • Guest blogger Martin Olszynski is back to discuss Ontario and Quebec’s recent pushback against TransCanada’s Energy East project, a proposed pipeline that would carry over one million barrels a day of oil from Alberta to Canada’s east coast. In the U.S., states generally have authority to approve pipelines, but in Canada the federal government has authority over interprovincial pipelines, so Prof. Olszynski considers to what extent provinces like Ontario and Quebec may influence a pipeline that will pass through their territory. This is a crucial issue because as TransCanada keeps waiting for U.S. approval of its Keystone XL project, companies are pursuing other pipeline projects designed to take crude oil to the west coast through British Columbia, or to the east coast through Quebec and Ontario. As Prof. Olszynski discusses, those provinces are pushing back.

By Martin Olszynski

On November 18th, on the heels of a unanimous vote of non-confidence by Quebec’s legislature in Canada’s national energy regulator (the National Energy Board or NEB), that province’s Environment Minister sent a letter to TransCanada (the company behind Keystone XL) outlining seven conditions that the company must meet before the province accepts the Quebec portion of the company’s proposed Energy East pipeline.

Most of the conditions are similar to those stipulated by British Columbia with respect to Enbridge’s Northern Gateway pipeline (e.g. world class emergency and spill response plans, adequate consultation with First Nations) with three notable differences. First, while Quebec insists that the project generate economic benefits for all Quebecers, unlike British Columbia it is not asking for its “fair share” (whatever that meant). Second, because Energy East involves the repurposing of an existing natural gas pipeline, Quebec insists that there be no impact on its natural gas supply. Finally, and the focus of this post, Quebec insists on a full environmental assessment of the Quebec portion of the pipeline and the upstream greenhouse gas emissions from production outside the province – essentially the analysis conducted on Keystone XL and something that the NEB has consistently refused to assess in its other pipeline reviews. The following week, Ontario joined Quebec in imposing these conditions (see here for the MOU between those two provinces). Premier Kathleen Wynne acknowledged that “Alberta needs to move its resources across the country,” but that two provinces “have to protect people in Ontario and Quebec.”

In this post, I consider whether this state of affairs is consistent with the current approach to the regulation of interprovincial pipelines in Canada. Readers should note, however, that following a visit from the Premier of Alberta, the Premiers of Ontario and Quebec have since backpedalled and are no longer demanding an assessment of the pipeline’s upstream greenhouse gas emissions (as was carried out with respect to Keytsone XL), although they are still insisting on their own environmental assessment.

Not All Conditions Are Created Equal

As noted by my University of Calgary Faculty of Law colleague Professor Nigel Bankes in the context of the Northern Gateway pipeline, the “general proposition is that a province will not be permitted to use its legislative authority or even its proprietary authority…to frustrate a work or undertaking which federal authorities…consider to be in the national interest.” The question thus becomes what kind of conditions might amount to frustration? Fortunately, we have a recent decision of the NEB, in the context of Kinder Morgan’s equally contentious Trans Mountain pipeline application, which sheds some useful light on this issue.

Briefly, Kinder Morgan has applied to the NEB for a certificate of public convenience and necessity (section 52 of the National Energy Board Act RSC 1985 c. N-7) for the expansion of an existing pipeline from Alberta to British Columbia. This past summer, the company indicated that its preferred corridor had been revised and that its preferred routing was now through Burnaby Mountain, which is located in the municipality of Burnaby, British Columbia, and which happens to be a conservation area. Consequently, the NEB determined that additional geotechnical, engineering and environmental studies needed to be completed before it could make its section 52 determination. Although section 73 of the NEB Act gave the company the power of entry required to carry out these studies, Kinder Morgan sought Burnaby’s consent to enter upon the relevant lands to do the work, which included borehole drilling and some site preparation (e.g. the removal of some trees and brush). Burnaby refused to give its consent. In fact, its mayor has long staked out a position of opposition to the pipeline.

After a month of failed correspondence, Kinder Morgan began its work on Burnaby Mountain. Several days into that work, its employees were issued an Order to Cease Bylaw Contravention and a bylaw notice for violations of the Burnaby Parks Regulation Byalw 1979 (Parks Bylaw, which prohibits damage to parks) and the Burnaby Street and Traffic Bylaw 1961 (Traffic Bylaw, which amongst other things prohibits excavation work without consent). Subsequently, Kinder Morgan filed a motion, including a notice of constitutional question, seeking an order from the NEB directing the City of Burnaby to permit temporary access to the required lands.

The NEB granted the order, on both “paramountcy” and “interjurisdictional immunity” grounds. Briefly, federal paramountcy is a Canadian constitutional doctrine that sets out the circumstances when a provincial or municipal law will be rendered inoperative in the face of a conflicting federal law. After summarizing the relevant jurisprudence (at p 11), the NEB concluded that there was a “clear conflict” between the Parks Bylaw and Traffic Bylaw on the one hand, and paragraph 73(a) of the NEB Act on the other. With respect to the Parks Bylaw, for example:

…Section 5 [contains] a clear prohibition against cutting any tree, clearing vegetation or boring into the ground, regardless of whether minimal tree clearing is necessary where the trees would create a safety risk for the drilling work that must occur. While the Board accepts that the Parks Bylaw has an environmental purpose, the application of the bylaws and the presence of Burnaby employees in the work safety zone had the effect of frustrating the federal purpose of the NEB Act to obtain necessary information for the Board to make a recommendation under section 52… (at p 12)

The NEB made the same finding with respect to the Traffic Bylaw: dual compliance was impossible, such that the doctrine of paramountcy applied and the bylaws were inoperable to the extent that they prevented Kinder Morgan from carrying out the necessary work. The NEB made clear, however, that this did not mean that “a pipeline company can generally ignore provincial law or municipal bylaws. The opposite is true. Federally regulated pipelines are required, through operation of law and the imposition of conditions by the Board, to comply with a broad range of provincial laws and municipal bylaws” (at p 13).

With respect to interjurisdictional immunity (IJI), which the NEB considered in the alternative, after acknowledging that its usage “has fallen out of favor to some degree,” the NEB observed that “it is still an accepted doctrine for dealing with clashes between validly-enacted provincial and federal laws” (at p 13). The effect of the doctrine is to “read down” valid provincial laws where their application would have the effect of impairing a core competence of Parliament or a vital part of a federal undertaking. Impairment is key: provincial laws may affect a core competence of Parliament or a federal undertaking (to varying degrees), but this is not sufficient. Applying this test to the facts before it,

The Board finds that the Impugned Bylaws impair a core competence of Parliament… the routing of the interprovincial pipeline is within the core of a federal power over interprovincial pipelines. Actions taken by Burnaby with respect to enforcing the Impugned Bylaws impair the ability of the Board to consider the Project and make a recommendation regarding on the appropriate routing of the Project. The Board requires detailed information from surveys and examinations in order to make a recommendation to Governor in Council and to complete an environmental assessment. Similar to the location of aerodromes being essential to the federal government’s power over aeronautics, detailed technical information about pipeline routing is essential to the Board.

Thus, when considering Quebec’s (and Ontario’s) conditions, the following principles ought to be kept in mind. Generally speaking, provincial laws apply to federal undertakings such as pipelines. Such laws will only be vulnerable to the extent that they conflict with or frustrate the purpose of the NEB Act (federal paramountcy), or impair a core competence of Parliament of vital part of the federal undertaking (IJI). Another point worth keeping in mind is specific to environmental laws. In both Canada and the United States, environmental laws are primarily procedural, not substantive, in nature. At their core they merely confer decision-making authority (e.g. to authorize activity that would otherwise be a contravention of the law), although they do seek to improve that decision-making by imposing certain “guideposts,” such as conducting environmental assessment (see A. Dan Tarlock, “Is There a There There in Environmental Law?” (2004) 19 J Land Use & Envtl L 213). This suggests that it will be very difficult, if not impossible, to conclude whether environmental laws frustrate a federal law or impair a federal undertaking until an actual decision has been made.

Condition 2: Comprehensive EA including Upstream Greenhouse Gas Emissions

In its letter to TransCanada, Quebec states that an EA of the Quebec portion of the pipeline is required pursuant to para 2(j) of the Regulation respecting environmental impact assessment and review, ch. Q-2, r. 23 (“the construction…of more than 2 km of oil pipeline in a new right-of-way”). Seemingly unsure of itself, however, it also suggests that it is in TransCanada’s “interest to respect the will of Quebecers” (my translation) – not that it must. The desired result was a comprehensive assessment of those portions of the project situated in Quebec, which until last week included a marine terminal and storage facility at Cacouna, before Quebec’s EA agency, le Bureau d’audiences publiques sur l’environnement (BAPE). As of last week, however, TransCanada announced that the marine terminal plans are on hold in light of the continuing deterioration of the St. Lawrence Beluga whale population, presumably leaving just the pipeline to be assessed for the time being.

The results of this assessment will “serve to inform Quebec’s decision and in this way its position before the NEB” (my translation). The letter does not state which “decision” it is referring to, but the answer would seem to lie in sections 31.1 and 31.5 of Quebec’s Environmental Quality Act CQLR c Q-2:

31.1. No person may undertake any construction, work, activity or operation…in the cases provided for by regulation of the Government without following the environmental impact assessment and review procedure and obtaining an authorization certificate from the Government.

31.5. Where the environmental impact assessment statement is considered satisfactory by the Minister, it is submitted together with the application for authorization to the Government. The latter may issue or refuse a certificate of authorization for the realization of the project with or without amendments, and on such conditions as it may determine…

Viewed this way, it does not seem unreasonable to suggest that “Quebec’s government has had enough and has taken control of the process in the province,” and that “the proceedings before the [NEB], replete with 30,000 pages of unilingual English text, are now very secondary.” Does such a situation conflict with, or frustrate the purposes of, the NEB Act?

I don’t think it does. Environmental assessment has long been understood in Canada as “simply descriptive of a process of decision-making” (Friends of the Oldman River Society v. Canada (Minister of Transport [1992] 1 S.C.R. 3). There is no conflict between the requirements of the NEB Act and the CEQ; Trans Canada can comply with both. Doing so may seem duplicative but that is a matter of policy, not constitutional imperative. And even as a matter of policy this argument is weak in light of recent changes to the federal environmental assessment regime (including restrictive standing rules and a restricted definition of environmental effects) and the decision by the NEB to exclude upstream greenhouse gas emissions from its own review.

Nor does such a condition impair a core competence of Parliament or a vital part of a federal undertaking, for as old as is the understanding of environmental assessment as process so too is the recognition that jurisdiction with respect to the environment is shared between the federal and provincial governments. And while not determinative, it’s worth noting that the current chair of the NEB would seem to agree that there is room for both levels of government here, having recently suggested that the NEB’s primary environmental concern is to ensure the proper construction and operation of pipelines, and that it is up to the provinces and the company to look after broader issues around climate change.

That being said, what Quebec can actually do with the results of its environmental assessment is another matter entirely. The short answer is probably not very much. It might be able to secure some modifications to the project (e.g. that certain standards or ‘best practices’ be applied during construction and operation), but if the NEB makes a positive recommendation to the federal Cabinet then outright refusal of a certificate of authorization would seem off the table (or would be rendered inapplicable). One might reasonably then ask: why go through all the trouble in the first place? The answer is rooted in the procedural nature of environmental law referred to above. With respect to environmental assessment specifically, while the process is certainly intended to improve governmental decision-making, it is also intended to enable political accountability through the full disclosure of the tradeoffs being made (see e.g. Bradley C. Karkkainen, “Toward a Smarter NEPA: Monitoring and Managing Government’s Environmental Performance” (2002) 102(4) Columbia Law Review 903 at 912; Ted Schrecker, “The Canadian Environmental Assessment Act: Tremulous Step Forward, or Retreat into Smoke and Mirrors?” (1991) 5 CELR 192). Indeed, it is the potential for political accountability that at least partially drives better decision-making.

This dynamic provides a reasonable explanation for why Alberta and Saskatchewan appeared so uncomfortable with the mere idea that upstream greenhouse gas emissions be assessed, which initially prompted Ontario’s Energy Minister to ask what they were so afraid of. And while an upstream assessment of Energy East’s greenhouse gases appears to be off the table for now, time will tell whether that position is deemed consistent with the expressed will of the Quebec legislature. In the meantime, the result is that not a single Canadian jurisdiction – neither Alberta, the federal government (through the NEB), nor any of the other provinces – is assessing the upstream greenhouse gas emissions associated with the various pipeline projects currently being proposed.

An earlier version of this post originally appeared on ABlawg, the University of Calgary Faculty of Law’s Blog.

Conference Announcement: St. Gallen International Energy Forum

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Alexander Goebel, head of organization of the St. Gallen International Energy Forum, asks me to pass on the following conference announcement:

After a one year intermission, the St. Gallen International Energy Forum will return on November 27th and 28th 2014. We will welcome more than 15 speakers – from practice, academia and the EU institutions – from both sides of the Atlantic. They will present on up-to-date topics, including inter alia: the EU internal energy market, shale gas as well as energy dispute resolution.

Date: 27th (evening) and 28th (full day) of November 2014

Location: St.Gallen, Switzerland

Programme: http://www.sg-ief.ch/programme/

Flyer: http://www.sg-ief.ch/flyer

Registration: Registration is possible on our website: http://www.sg-ief.ch/conference-registration/

Chairs: Prof. Dr. Dr. h.c. Carl Baudenbacher & Dr. Dirk Buschle

Please refer to our flyer at www.sg-ief.ch/flyer for a full list of our speakers and the topics covered.

If you have any questions, do not hesitate to contact us at contact@sg-ief.ch.

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