The EPA Versus the Department of Transportation:
Three Puzzles in a Federal Court Ruling and the Pending Energy Bill

Last week, two developments in environmental regulation called into question a number of familiar chestnuts about how best to make decisions whether and how to regulate national industries. First, a federal district judge rejected an industry challenge to California's proposed carbon emissions standards for automobiles, finding that a recent Supreme Court decision authorizes such regulations notwithstanding the fact that they are stricter than the federal standards promulgated by the Department of Transportation (DOT).

Second, although oil and automobile industry lobbyists succeeded in killing some of the strictest regulations contained in the pending energy bill, they failed to strip the Environmental Protection Agency (EPA) of its authority to issue what are, in effect, gasoline mileage requirements. Congress is expected to pass, and President Bush is expected to sign, the bill later this week.

Collectively, these decisions by all three branches of the federal government raise at least three questions going to the heart of regulatory policy in the American system of government: (1) Is it sensible to give different agencies within the federal government overlapping regulatory authority over the same subject matter? (2) Is it sensible to give the state and federal governments overlapping regulatory authority over the same subject matter? And (3) Are gas mileage requirements a better or worse means of demanding fuel-efficient automobiles than a steeper gasoline tax? After explaining the decision in last week's case, I will tackle these questions in turn.

The California and Vermont Litigation

The federal Clean Air Act authorizes the federal EPA to promulgate regulations aimed at achieving healthy air quality standards. In most states, the EPA regulates directly, but Section 209 of the Clean Air Act gives California the authority to regulate emissions more stringently than the EPA itself requires, if the EPA grants a waiver.

Formally, the Act allows waivers to be granted to any state that regulated emissions before 1966, but because California is the only such state, it alone can qualify for the waiver. Another provision of the Clean Air Act, however, permits other states to opt out of the federal program if they themselves adopt EPA-approved California standards. Thus, as a practical matter, all states must meet either the federal air quality standards or, if they so choose, the stricter California standards.

In the face of increasing evidence of the effects of man-made global warming and relative inaction by the EPA, California proposed to regulate carbon emissions from motor vehicles. It developed emissions limits for new cars, to become effective in 2009. Vermont adopted the California standards as well. Before the EPA granted a formal waiver to California, industry players sued, in federal district courts in both Vermont and California.

Earlier this year, a federal district judge in Vermont rejected the challenge in Green Mountain Chrysler Plymouth Dodge Jeep v. Crombie. Last week, in Central Valley Chrysler-Jeep Inc. v. Goldstone, Federal District Judge Anthony W. Ishii reached the same conclusion in the California case, thus clearing the way for the imposition of a substantially more rapid timetable for the production of fuel-efficient vehicles than federal law requires.

As it stood last week, the new federal energy bill would require the average fuel efficiency of the U.S. automobile fleet to reach 35 miles per gallon by the year 2020. Although the California standard regulates emissions rather than miles per gallon as such, there is a very strong (negative) correlation between emissions and miles per gallon. And because the California standard requires steep and fast emissions reductions, to comply, automobile manufacturers will be required to achieve steeper and faster improvements in mileage than they need to achieve in order to comply with the federal mileage standards in the new energy bill.

Why the District Judge Upheld the California Standards

In both the Vermont and California cases, the automobile industry invoked a provision of the Energy Policy and Conservation Act (EPCA) that appears to confer exclusive authority on the DOT (through the National Highway Traffic Safety Administration, which is within the DOT), to set mileage standards. The EPCA states: "When an average fuel economy standard prescribed under this chapter is in effect, a State or a political subdivision of a State may not adopt or enforce a law or regulation related to fuel economy standards or average fuel economy standards for automobiles covered by an average fuel economy standard under this chapter."

Thus, the industry argued, DOT regulations are the exclusive means of setting mileage standards. California carbon emissions standards are, in the words of the EPCA, a forbidden "regulation related to fuel economy standards or average fuel economy standards."

Initially, Judge Ishii agreed with this argument, but last week he reversed course, citing last April's intervening decision by the Supreme Court in Massachusetts v. EPA. In that case, the Court upheld the standing of the state of Massachusetts to challenge EPA's inaction on global warming. Then, on the merits, the majority held that EPA had authority to regulate greenhouse gases as an "air pollutant" within the meaning of the Clean Air Act. The Court specifically considered and rejected the very argument that the industry plaintiffs advanced in the California and Vermont cases--namely, that the DOT alone can regulate automobile gasoline efficiency.

Not so, the Justices said. The DOT has authority to regulate fuel efficiency in the interest of highway safety, national energy independence and other factors, but the EPA has independent authority to regulate air pollution in the interest of human health--including health-related risks of global warming. If the result is some overlap in regulatory authority, there is no reason to treat EPA's authority as inferior to that of the DOT.

In light of Massachusetts v. EPA, Judge Ishii found no conflict between EPA-approved California carbon emissions standards and DOT-required mileage standards. He concluded: "State laws that are granted waiver of preemption under the Clean Air Act that have the effect of requiring even substantial increases in average fuel economy performance are not preempted where the required increase in fuel economy is incidental to the state law's purpose of assuring protection of public health and welfare under the Clean Air Act."

Likewise, in September, in the Vermont case, Federal District Judge William K. Sessions III reached the same conclusion, albeit based on a very slightly different rationale. Judge Sessions thought that the California standards, once approved by the EPA, effectively become federal law. And as in Massachusetts v. EPA, Judge Sessions concluded, so too with Vermont-adopted, federally-approved California emissions standards: There is no reason to prefer the DOT mileage standards to the carbon emissions standards.

Underlying the reasoning of the rulings by both Judge Sessions and Judge Ishii is the notion that there is no direct conflict between EPA-approved carbon emissions standards and DOT mileage standards. First, it is theoretically possible for an automobile manufacturer to comply with the emissions standards without increasing fuel efficiency, through, for example, a mechanism for capturing and containing carbon following combustion. Second, even without such technology, a California mandate that cars use gasoline more efficiently does not require automobile manufacturers to do anything that the DOT mileage standards forbid. If the de facto California mileage standards are higher than the DOT standards, then a car manufacturer complies with both by complying with the California standards.

Next Steps in the Courts, EPA and Congress

Although last week's ruling in the California case is dramatic, it may not have any short-term impact. For one thing, the industry plaintiffs will likely appeal to the Ninth Circuit.

Even if Judge Ishii's ruling is upheld on appeal, time will be lost during the appellate proceedings, and in the meantime, the Bush EPA has not granted California the necessary waiver to enforce its carbon emissions standards. To be sure, the language of Section 209 of the Clean Air Act seems to give EPA no discretion to deny such a waiver, where the state establishes its entitlement to one. But a recalcitrant EPA can hold up a waiver through extended hearings, study, and general foot-dragging, so the prospect that the current EPA actually would grant California (and thus also Vermont) its waiver before President Bush leaves office, seems remote.

The real question, then, is whether the next Administration will grant California its waiver, and the answer to that question turns in part on politics. One potentially fatal obstacle to the enforcement of California's carbon emissions standards was avoided last week when Congress rejected a proposed amendment to the energy bill that would have stripped EPA of the authority to regulate emissions through de facto mileage standards. Thus, should the statutory status quo remain as is--and should last week's judicial ruling stand up on appeal--the question for California's emissions standards will not be whether they go into effect, but when.

Does Overlapping Regulatory Authority Make Sense? The Unitary Executive Question

Given the overlapping authority conferred on the EPA and the DOT--as found by the Supreme Court in Massachusetts v. EPA--the results in the Vermont and California cases seem right as a technical legal matter. Nonetheless, one may legitimately wonder whether this is a sensible regulatory scheme.

Why should Congress want to confer on the DOT authority to promulgate mileage standards that are completely superseded by EPA-approved carbon emissions standards? Wouldn't it be more sensible to have a single federal agency decide these issues? Indeed, given that the Constitution confers Executive authority on a single President, rather than dividing it among various ministries, is it even consistent with the Constitution for Congress to slice and dice Executive power this way?

Proponents of the theory of the so-called "unitary Executive" pose legitimate questions of the foregoing sort, but there are at least two answers to them. First, the President retains authority, through the appointment and firing power, to supervise the heads of agencies with different mandates.

From the very earliest days of the Republic, Presidents have wisely used inter-agency competition to formulate policy. Most famously, President George Washington asked his Secretary of the Treasury, Alexander Hamilton, and his Secretary of State, Thomas Jefferson, each separately to prepare a memorandum on the constitutionality of a proposal to establish a Bank of the United States. Hamilton said the federal government had this power; Jefferson said it lacked the power; after careful consideration of these respective views, Washington agreed with Hamilton. Would the government be better off with the President's sources of policy guidance more narrowly constrained?

Second, as a policy matter, Congress may have good reason to avoid concentrating regulatory authority in a single agency. Political scientists have long been aware of the phenomenon of "agency capture," in which, through campaign contributions and other forms of influence-peddling, the very targets of an agency's regulatory mandate come to control the agency's agenda. By parceling out authority to regulate fuel efficiency to multiple agencies--and effectively making the higher standards prevail--Congress makes it that much harder for industry to frustrate regulations that serve the public interest.

What About Federalism?

One might also object to the current regulatory scheme on the ground that part of the purpose of the federal Constitution is to centralize regulation of the national economy in Washington. Businesses can operate more efficiently if they have to comply with one set of national regulations, rather than fifty sets of state regulations.

This might be a good objection to the Clean Air Act's waiver provision were it not for the fact that the provision entitles California, and California alone, to adopt regulatory standards more stringent than those of the federal government. And, as noted above, other states that wish to adopt more stringent standards can only adopt the California standards. We do not have fifty different regulatory regimes, but at most two.

Industry apologists sometimes object that because California makes up such a large portion of the national market, auto makers must manufacture all of their cars to meet California standards. But if so, then this is a further answer to the main objection: There are not fifty or even two sets of standards, but one national standard: the California standard.

Moore's Law of Fuel Efficiency?

Finally, one can raise legitimate objections to regulating mileage or emissions through numerical performance standards, rather than simply imposing a stiffer tax on gasoline and permitting market forces to operate. Anyone who has visited European cities in the last fifty years understands that high gasoline taxes lead the public to demand--and thus lead manufacturers to produce--small, fuel-efficient vehicles.

In a perfect world, a large increase in the gasoline tax probably would be the simplest way for American policymakers to reduce carbon emissions and dependence on foreign oil. In the real world, however, proposals for even modest gasoline tax increases are politically infeasible. Accordingly, policymakers must choose a second-best solution, and mileage standards and emissions standards are that solution.

Here, it is worth considering why the fuel efficiency of American automobiles has improved slowly. Surely low gasoline prices (by world standards) are a big part of the story. Even after recent oil price increases, the price of gasoline accounts for a relatively small portion of the cost of operating a car. Thus, without great consumer demand for increased fuel efficiency, automobile manufactures have sought to satisfy other aspects of consumer demand--such as demand for roomy vehicles and creature comforts.

By imposing a legal obligation of increased fuel efficiency, however, government regulation can substitute for consumer demand. Provided the political will to do so exists, such regulation could have dramatic effects.

Consider an analogy. Moore's Law states that computer processing speed doubles roughly every two years. This is not a law of nature, but a matter of economics. With robust competition in the chip-making industry and constant demand for ever-faster computer power, solid state engineers, chip designers and chip makers constantly set benchmarks for more efficient computing. To be sure, eventually physics will undo Moore's Law, but not for a very long time.

There are, of course, disanalogies between chips and cars. Miniaturization has been the great driver of increased computing speed, while automobiles cannot be made smaller than the humans they must transport--and it takes a certain minimum amount of power to move a human being a given distance at a given speed. But we are still far from that minimum. Advances in technology bring materials that are both lighter and stronger than their heavier predecessors, and alternative fuels can produce energy with substantially lower carbon emissions.

We do not know where the limit to improved automobile efficiency will be. We do know, however, that given the basic workings of the market, car makers will not come close to that limit without adequate incentives to do so. Last week's ruling in the California case is a small but important step towards getting those incentives right.