At first glance, the principle behind last week’s US Supreme Court decision preventing the Environmental Protection Agency from regulating carbon emissions seems perfectly sensible.
While federal agencies are empowered to regulate specific sectors, the court said, unelected bureaucrats cannot rush into new areas and pump out whatever costly rules they want. On “major questions”, Chief Justice John Roberts wrote in West Virginia vs. EPA, “the agency must point to ‘clear congressional authorisation’ for the power it claims.”
It all sounds as American as apple pie, or the separation of powers, and it might have made sense in earlier times. But the country’s angrily divided politics have changed the equation. For decades, Congress has been unable to write new laws except in the most serious situations. Think about how many school shootings it took to shame legislators into passing even modest gun restrictions.
Requiring legislative authorisation for regulation that addresses “major questions” is tantamount to shelving it. That means the US government’s ability to address novel policy issues has been badly hamstrung.
Even worse, the decision is likely to become a club to beat back ordinary rulemaking at a swath of federal agencies. Conservative politicians and business groups including the US Chamber of Commerce have been trying for years to get the courts to reduce the power of what they call the “administrative state”. They have already seized on the “major questions” language as a way to challenge the administration’s efforts to impose almost any new regulation.
The Securities and Exchange Commission is specifically empowered to supervise markets and corporate filings, but that will not head off lawsuits trying to prevent it from regulating cryptocurrencies and disclosures related to climate change. Similarly, efforts by the Federal Trade Commission to strengthen antitrust rules are likely to be attacked on the grounds that they lack Congressional approval.
Even if the new regulations survive, the lawsuits could delay their implementation by several years. “This new doctrine really adds uncertainty. What are the courts going to consider a major question? It creates an opening for lots of challenges and inconsistent judicial decision-making,” says Gillian Metzger, a Columbia University expert on constitutional and administrative law.
Though fossil fuel companies and conservative business groups have hailed the EPA decision as a victory, they should be careful of celebrating too much. Uncertainty makes it hard for businesses to plan and regulators who are blocked from making new rules often try to change practices by bringing enforcement cases instead.
This method is harder to predict and gives industry less chance to influence policy. Last December’s $200mn fine of JPMorgan Chase for failing to properly control staff use of personal devices has set all of Wall Street scrambling to review their employees’ texting and write new policies even without formal SEC rulemaking.
Over the long term, unbridled deregulation tends to be followed by scandals that send the pendulum swinging back the other way. A 1990s effort to speed up the approval of new prescription medicines left US patients dangerously vulnerable when drugs such as the painkiller Vioxx turned out to have major side effects. The SEC’s hands off approach in the late 1990s was followed by financial scandals that prompted the Sarbanes-Oxley accountability law. Bank deregulation helped fuel the 2008 financial crisis, spurring the Dodd-Frank reform law, which further empowered the agencies conservatives detest.
Markets are already enduring a painful downturn. If the EPA decision prevents regulators from addressing abuses such as dodgy special purpose acquisition vehicles and deceptive cryptocurrencies, the political backlash could be significant. Do financial services companies really want to poke that bear?
The Supreme Court decision also puts big investors in the hot seat on climate change. Reducing carbon emissions is vital but expensive. Many companies, focused on quarterly earnings, simply will not do it unless someone holds their feet to the fire. The results could be catastrophic both for long-term profits and the planet as a whole.
Big US asset managers have been walking a fine line. While encouraging companies to go green, they also insist that they do not want to become “the environmental police”. But with Congress divided and the EPA and SEC hobbled, there may be no one else to do it.
Follow Brooke Masters with myFT and on Twitter
Read the full article here