In a rebuke to the Bush administration, the U.S. Supreme Court has ruled that carbon dioxide and other greenhouse gases emitted by automobiles be classified as pollutants under the Clean Air Act, making them subject to regulation by the Environmental Protection Agency.
In a 5-4 decision, the justices sided with 12 states and environmental groups that sought to have the EPA regulate greenhouse gases, overturning the agency's 2003 policy, which did not include the global warming gases in the Clean Air Act.
But surprisingly, the decision is not expected to negatively affect the auto industry, at least in the near term, because it does not require the EPA or Congress to take any action. It only says the EPA has the authority to regulate greenhouse gases, including carbon dioxide, as pollutants. With two years left in the Bush administration, the EPA is not likely to issue new regulations surrounding auto emissions.
"This decision is not going to lead to some immediate imposition of tailpipe standards," says Kevin Healy," a partner with the law firm Bryan Cave and co-chairman of the New York State Bar Association's climate change group.
In fact, U.S. automakers seemed hardly rattled by the ruling. In trading Monday, stock prices for the Big Three U.S. automakers--General Motors (nyse: GM - news - people ), Ford Motor (nyse: F - news - people ) and DaimlerChrysler (nyse: DCX - news - people )--all closed higher than their opening, underscoring the scant effect the court's decision has on the industry.
More broadly, however, the Supreme Court's ruling will have three major effects, industry experts say. First, it is a blow against the auto industry's bid to keep states from limiting tailpipe emissions.
In December 2004, the Alliance of Automobile Manufacturers, the industry group that represents the Big Three and other automakers, including Toyota Motor (nyse: TM - news - people ) and Mazda, sued the state of California for trying to regulate tailpipe emissions. The auto industry said that only the National Highway Traffic Safety Administration has the right to set fuel economy standards, but environmental groups said that regulating emissions and setting standards were not the same thing.
But states have the right to set higher emissions standards than the federal government, according to Joan Claybrook, president of the watchdog group Public Citizen. "What this does is, it moots that case by the auto manufacturers, and it allows the states to set higher standards," she says.
In addition, last September, California sued major automakers, saying that greenhouse gases that cars and trucks emit are a "public nuisance." According to Healy, the Supreme Court's ruling is likely to benefit the state, giving it the right to take a case to court.
In response to the court's decision, Dave McCurdy, chief executive of the Alliance of Automobile Manufacturers, says his organization “believes that there needs to be a national, federal, economywide approach to addressing greenhouse gases. This decision says that the U.S. Environmental Protection Agency will be part of this process.”
Second, the decision will likely push automakers into making more fuel-efficient vehicles. Last week, the leaders of the Big Three met with Bush to discuss clean fuel alternatives as the president pushes his agenda to reduce gasoline consumption by 20% by 2017. Very little of the discussion was devoted to improving fuel economy standards, however. The only way to reduce carbon emissions in autos is to reduce their consumption of gasoline, however, meaning more fuel-efficient vehicles will have to be brought onto the market.
Finally, the decision puts the heat on Congress to develop some sort of national climate change policy. In response to the court's decision, the chairmen of the energy committees in both the House and the Senate urged greater action on the U.S. government's part to address climate change.
”The president no longer has a legal argument that the law prevents him from beginning to address the problem," says Sen. Jeff Bingaman, D-N.M. He has called on Bush to enact a mandatory policy to reduce greenhouse gas emissions.
The House’s energy policy captain, Rep. John Dingell, D-Mich., says the ruling "provides another compelling reason why Congress must enact, and the president must sign, comprehensive climate change legislation."
The question is whether either is possible or likely in the next two years.