Supreme Court tackles global warming

Corporate America is split on whether the EPA should regulate carbon dioxide

By Marc Gunter,
Fortune senior writer
October 27 2006

NEW YORK (Fortune) -- As the U.S. Supreme Court prepares to take up the issue of climate change, some unusual alliances are forming - and corporate America finds itself on both sides of the debate.

The case before the high court, known as Massachusetts v. EPA, turns on a question that, surprisingly, remains unanswered after seven years of legal wrangling: Does the U.S. EPA have the authority under the 36-year-old Clean Air Act to regulate carbon dioxide as an air pollutant?

It sounds simple, but like the rest of the scientific, legal and political debate about global warming, it's not. Nor is the response from big business.

Carbon dioxide, you may recall from high school science, is a clear, odorless gas that helps trees and crops grow - in other words, not your typical pollutant. Yet rising levels of CO2, most of which is generated by power plants and motor vehicles, contribute to the greenhouse effect, which traps heat in the atmosphere, increasing the earth's surface air temperature.

Here's how the sides have lined up in the case, so far.

Supporting federal regulation are the attorneys general of 13 states, environmental groups, a coalition of church groups, native Americans living in Alaska, - and utility companies Entergy and Calpine, as well the Aspen Skiiing Co.

Such bulwarks of the Fortune 500 as General Electric and Wal-Mart also say they favor federal regulation of greenhouse gases, although they have not joined this case.

On the other side are the EPA, about a dozen mostly-industrial states, the American Petroleum Institute, utilities, car dealers and automakers Daimler Chrysler, Ford and General Motors. It's not every day that the EPA joins forces with big business to ask that its powers be curbed, but that's what's happening here.

"This case makes for strange bedfellows," say the lawyers for Entergy, a $10-billion a year utility company based in New Orleans, in their friend of the court brief. "Entergy's position is atypical of an industry largely opposed to CO2 regulation."

Why? Entergy is the U.S.'s second largest generator of nuclear energy, which does not contribute to global warming. Nuclear power could be advantaged if carbon emissions are regulated or taxed.

Calpine, an $8.7 billion a year utility that also backs regulation, operates natural gas-fired power plants and is North America's largest producer of renewable geothermal energy. It, too, wouldn't mind seeing curbs placed on coal-burning utilities that generate lots of CO2. Then again, Calpine is bankrupt so it has more than global warming to worry about.

As for the Aspen Skiing Co., which filed a friend of the court brief, its CEO has said that the loss of a few dozen days in the ski season because of rising temperatures would wipe out the profits of Colorado ski resorts and lead to "an economic disaster" for the state.

U.S automakers, meanwhile, oppose any regulation that penalizes the big cars and trucks that generate their profits. Coal-burning utilities, too, don't want to have to charge more for electricity, which would likely happen if carbon is regulated or taxed.

Others argue that carbon regulation will curb economic growth. "There are risks of climate change but also of climate change policy," writes Marlo Lewis Jr. of the Competitive Enterprise Institute. Carbon emissions can't be stabilized, much less lowered, he argues, without "heavy constraints on U.S. energy consumption and economic growth."

The Supreme Court case has a tangled history. In 1999, near the end of the Clinton administration, environmental groups petitioned the EPA to regulate greenhouse gas emissions from cars and trucks. The EPA began to look at the issue, but after the 2000 elections the agency's legal counsel decided that it did not have the authority to regulate CO2 for global climate change purposes. That triggered this lawsuit.

Last year, the EPA won an important victory when a three-judge panel of the U.S. Court of Appeals voted 2-1 to support the government's argument. To the surprise of many, the Supreme Court agreed in June to take the case. Oral arguments are scheduled for November 29.

Truth be told, the case may end up having more political than legal impact. A win by the environmentalists "would add to the momentum building for greenhouse gas regulation," Michael Gerrard, a partner at the law firm of Arnold & Porter and author of a fortcoming book on global climate change and U.S. law.

But a win for the environmentalists will merely set off a long round of administrative proceedings, and a defeat probably would not slow down the momentum building for carbon regulation, even in the state and in the corporate world.

"There's a growing unease in many sectors of the economy about the chaotic growth of inconsistent greenhouse gas regulation," Gerrard says.

Already, California's efforts to curb motor vehicle emissions have been joined by 10 other states; California Gov. Schwarzenegger recently signed a bill to regulate industrial sources of CO2; and northeastern states from Maine to Maryland have joined forces to curb CO2 emissions from power plants.

All this brings pressure on the auto industry and electric utilities to find ways to profit from carbon regulation, rather than fight it. The Supreme Court case is "one move in a big chess game," says David Doniger, a lawyer for the Natural Resources Defense Council.

The automakers, in particular, need to find ways to make more-efficient cars and trucks that emit less carbon dioxide, he argues. "We want them to innovate rather than litigate," Doniger says. "They should put their lawyers in a cage and let the engineers out."

That's what GE, Wal-Mart, DuPont and a slew of other companies are doing: They are finding ways to innovate, save energy, cut costs and reduce emissions. Smart companies can see which way the wind is blowing - and how fast the ice is melting.