Less Than 40 Days to Prepare for ‘Protecting American Energy From State Overreach’ Executive Order

At a Glance

Should the U.S. government declare that the environmental and/or sustainable commodities that have been generated under a state law regime are illegal, lenders and borrowers using state-generated carbon credits or other environmental and/or sustainable commodities as collateral could experience serious adverse consequences. Although the risks are very real, both lenders and borrowers can take several proactive steps now to help insulate against potential federal government action. All solutions are on the table and should be discussed, as June 7 is right around the corner.

Overview of the Executive Order

On April 8, 2025, President Trump issued an executive order (EO), “Protecting American Energy From State Overreach,” directing Attorney General Pam Bondi to “identify all State and local laws, regulations, causes of action, policies, and practices (collectively, State laws) burdening the identification, development, siting, production, or use of domestic energy resources that are or may be unconstitutional, preempted by Federal law, or otherwise unenforceable.”

In his EO, the president asks the attorney general to “prioritize the identification of any such State laws purporting to address climate change or involving environmental, social, and governance initiatives, environmental justice, carbon or greenhouse gas emissions, and funds to collect carbon penalties or carbon taxes.” The attorney general is then asked to “take all appropriate action to stop the enforcement of State laws and continuation of civil actions identified” above “that the Attorney General determines to be illegal.”

This EO could have real-life, serious consequences for the environmental and sustainable commodity markets that have generated around state law regimes, such as those that have developed in California and other states.

Creating additional uncertainty, the president has required that the attorney general submit a report by June 7, 2025, on her recommendations and actions to take to “stop the enforcement” of any targeted state law. The EO includes: “The Attorney General shall also recommend any additional Presidential or legislative action necessary to stop the enforcement of State laws identified […] that the Attorney General determines to be illegal or otherwise fulfill the purpose of this order.” As an example, the EO specifically mentions California’s cap-and-trade program.

Lender Implications: Using State-Constructed Environmental and/or Sustainable Commodities as Collateral

Should the attorney general declare the environmental and/or sustainable commodities generated under a state law regime illegal, lenders with these commodities in their collateral stacks could suffer significant impact. Among other issues, these effects could include:

1. Regulatory Uncertainty: The EO’s directive to challenge state laws and policies related to climate change and carbon emissions could create regulatory uncertainty. This uncertainty may affect the valuation and stability of environmental and/or sustainable commodities (i.e., compliance-market carbon credits and allowances) used or planning to be used as collateral.
2. Collateral Value Fluctuation: If state-level climate policies and state compliance carbon markets are disrupted or invalidated, the value of the generated carbon credits and allowances could fluctuate, potentially reducing the value of the collateral backing loans.
3. Increased Risk: Lenders may also face increased risk if the legal and regulatory framework supporting such state-generated carbon credits or environmental/sustainable commodities becomes unstable. This could affect the perceived creditworthiness of borrowers relying on these assets.
4. Potential Loan Defaults: If the value of the collateral drops significantly, borrowers might struggle to meet loan covenants, potentially leading to loan defaults or the need to renegotiate loan terms.
5. Market Disruption: The EO could lead to disruptions in compliance carbon markets or state renewable-fuel markets, making it more difficult for lenders to assess the future value and liquidity of compliance carbon credits, allowances or renewable-fuel certificates.

Company and Borrower Implications: Using State-Constructed Environmental and/or Sustainable Commodities as Collateral

Companies investing in and borrowers pledging state-generated carbon credits, carbon allowances, or other state-generated environmental and/or sustainable commodities as collateral are also at significant risk if the attorney general determines these programs are illegal under federal law. These parties, among other items, should consider:

1. Collateral Devaluation: If state-level climate policies and regulations are challenged or invalidated as a result of this EO, the value of the state-generated carbon credits and allowances used as collateral could decrease significantly. This devaluation could affect the borrowing capacity and financial stability.
2. Increased Borrowing Costs: As the risk associated with the collateral increases, lenders may raise interest rates or require additional security to mitigate their risk exposure. This could lead to higher borrowing costs.
3. Stricter Loan Terms: Lenders might impose stricter loan terms or demand additional collateral to compensate for the increased risk and potential devaluation of the state-generated environmental commodities.
4. Liquidity Issues: Borrowers may face liquidity challenges if the market for carbon credits and allowances becomes unstable or less liquid due to regulatory uncertainty. This could make it more difficult for borrowers to sell their credits or allowances to meet financial obligations.
5. Potential Loan Defaults: If the value of the collateral drops significantly, borrowers might struggle to meet loan covenants, potentially leading to loan defaults or the need to renegotiate loan terms.
6. Increased Legal and Administrative Costs: Borrowers may incur additional legal and administrative costs to navigate the shifting regulatory landscape and ensure compliance with new federal directives. They may also need to engage in legal battles to defend the validity and value of their state-generated environmental commodities.
7. Business-Planning Uncertainty: The uncertainty introduced by the EO could complicate long-term business planning and investment strategies for borrowers heavily reliant on state-generated carbon credits and allowances.
8. Evaluation of Communications: Evaluate internal and external communications, advertising, disclosure, and other claims related to environmental and/or sustainable commodities. Borrowers who have used state-generated carbon credits or state-generated environmental commodities as collateral will need to ensure that their policies, procedures, advertising, and other similarly visible claims are evaluated and potentially revised consistent with findings from the larger legal, regulatory and risk-management processes noted above.

Steps Lenders and Borrowers Should Take BEFORE June 7, 2025, Deadline

With this fast-moving situation, proactivity may be a key to long-term sustainability in today’s regulatory climate. To help reduce the impact of the EO, companies, lenders and borrowers can take several proactive steps to help protect their investments, including diversifying collateral. Other creative solutions may exist depending on operations, business, and holdings of a particular entity including, for instance, examining whether a particular commodity held or pledged could be recharacterized to insulate the commodity from the EO’s potential impact.

All solutions are on the table and should be discussed, as June 7 is right around the corner.

For More Information

For further information, you may contact the authors.