Will Obama bypass Congress on climate rules?

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NEW YORK (Fortune) -- If Congress won't get the job done on climate change, President Obama has a way to do it himself. But is he strong-arming the legislative branch?

It certainly looks that way as a series of new environmental regulations, released over the past two weeks by the EPA, are putting legislators on notice and executives on edge.

The rules are the federal government's broadest swipe yet at regulating greenhouse gasses. According to EPA chief Lisa Jackson, "We've taken the historic step of proposing the nation's first-ever greenhouse-gas emissions standards for vehicles, and moved substantially closer to an efficient, clean energy future."

The Environmental Protection Agency, which reports to the White House, is a new player in this arena. Before 2007, greenhouse gases were considered outside the EPA's purview because regulating them would have required cracking down on specific industrial practices that other agencies had under their charge.

But a 2007 Supreme Court decision ruled them to be an air pollutant, giving the EPA wide authority to regulate any industries that emit them under the 1970 Clean Air Act.

The agency's first target as it moves towards that future? Detroit. Under the new guidelines, by 2016 automakers must reduce their fleet's average emissions-per-mile to 250 grams. This is in addition to the familiar fuel-mileage standards set by the National Highway Safety and Transportation Authority (NHTSA).

Since there are about 9,000 grams of CO2 produced by burning each gallon of gas, automakers will be able to hit the EPA's requirements in 2016 simply by raising fuel economy to the 35 miles per gallon levels NHTSA has already ordered for the same time period.

So meeting that 2016 deadline won't be too challenging. But after 2016 something interesting happens. With conventional gasoline technology, improvements in fuel economy move in lockstep with drops in emissions.

But conventional technology maxes out 35 mpg, which means getting lower CO2 emissions beyond that point will require new technologies like electrics, hydrogen fuel cells or biofuels.

With electrics and hydrogen, there are no "gallons" of fuel to measure, while biofuels producer fewer emissions than gasoline but also get fewer miles per gallon. So the EPA has come up with a solution to encourage carmakers to design for low emissions rather than miles per gallon.

Margo Oge, the EPA's air quality and transportation director, says carmakers can apply for fuel economy credits for flex-fuel vehicles that use biofuels. That means automakers will have an incentive to focus on low-emission vehicles. It's a small change, but it amounts to a substantial power grab by the EPA.

Environmentalists are celebrating the new rules, since the EPA has historically been stricter than NHTSA, which is overseen by Congress. But industry trade representatives whose jobs depend on lobbying Congress on behalf of business aren't thrilled by the developments.

"NHTSA has 35 years of experience with our technologies, for which the environmental agency doesn't have the knowledge. They ensure that fuel-economy increases are cost-effective and possible," says Charles Territo of the Automakers' Alliance. "If NHTSA started to lose its role, we would resist that."

While publicly White House officials say that both agencies are working in harmony, privately, they admit that it's the EPA that is taking the lead.

And by Spring 2010, the EPA is planning to expand its reach even further, issuing greenhouse-gas targets for all firms emitting more that 25,000 metric tons per year.

That might cover enough major emitters that a cap-and-trade scheme, where the government sells permits for emissions above a certain level that companies can trade, becomes unnecessary. Cap-and-trade legislation is currently awaiting consideration in Congress, somewhat stalled because of the focus on health-care legislation.

Not surprisingly, some legislators are calling this a classic case of executive branch overreach. Representative Peter Welch (D-Vermont), who helped draft the cap-and-trade bill, says, "I would prefer for this to be done legislatively, and my contacts in industry would prefer that, because when we write bills, we give them the opportunity to help us." Skeptics would argue that there are lucrative ties to lobbyists that Congress is loath to give up.

There are economic objections too. The Congressional bill has provisions to direct funds raised via cap-and-trade permits into green energy jobs, and takes into account the cost of emissions reductions.

Columbia Business School professor and noted energy economist Geoffrey Heal estimates that discretionary regulation will be twice as costly as cap-and-trade, up to 2% of GDP, since cap-and-trade allows reductions to be made wherever they are most efficient.

"That cost will get passed on to consumers, and it's not small change," he says.

The timing of the EPA's moves also hint at political motives. Congressman Welch believes the new policies are intended to tell Congress, "that if we don't pass legislation, the President will not wait and will just go ahead and regulate."

Columbia's Heal agrees: "The EPA announcements are designed to put pressure on the Senate and on industry representatives who are pushing senators, that if they don't act, [the EPA] will, in ways industry won't like."

The administration is also certainly thinking ahead to December's international climate change conference in Copenhagen. Twelve years after President Clinton signed the Kyoto Protocol, and with both Republican and Democratic senates having failed to ratify the agreement, the last thing Obama wants to do is show up empty handed.

If Congress doesn't pass a bill before December, the EPA's moves give him some cover. As Obama well knows, the credibility of America's commitments is key to extracting similar promises from other nations like India and China.

In other words, Obama seems to be offering Congress a choice: Pass a bill, or be bypassed altogether.