United States: Cross-State Air Pollution Rule Vacated By The D.C. Circuit

On August 21, 2012, the D.C. Circuit issued a 2-1 opinion in EME Homer City v. EPA vacating the Cross-State Air Pollution Rule (CSAPR). CSAPR, adopted in 2011, represented EPA's latest effort to address the "good neighbor" provisions of the Clean Air Act, which prohibit emissions from one state from causing or contributing to violations of the national ambient air quality standards in downwind states. Extending on its predecessor, the Clean Air Interstate Rule (CAIR), CSAPR would have established a cap-and-trade program requiring significant reductions in emissions of sulfur dioxide, oxides of nitrogen, and particulate matter from power plants across the eastern two-thirds of the U.S. The court concluded that CSAPR exceeded EPA's statutory authority for two general reasons summarized below, and vacated those rules. However, the Court reaffirmed the decision it made following its finding of legal error in the CAIR rules (in the North Carolina v. EPA case¹) to continue to leave CAIR in place without vacatur pending the promulgation of a lawful replacement.²

Among the many errors urged by the many petitioners who challenged the rules, the opinion resolved two. Its pronouncements on those two issues not only have the immediate effect of invalidating the CSAPR program, but also may have implications for other EPA initiatives and pending cases. First, the court held that the Act does not allow EPA to compel reductions from any state beyond those reductions needed to prevent that state's significant contribution to nonattainment in downwind states. The court's narrow interpretation of the "good neighbor provision" may make it difficult for EPA to promulgate future cap-and-trade programs without specific statutory authorization. Second, the court struck down EPA's decision to impose its program by Federal Implementation Plan (FIP) at the same time as it identified the reductions expected from within each affected state. The court held that "[t]he Clean Air Act ordinarily gives States the initial opportunity to implement a new air quality standard on sources within their borders; States do so by submitting SIPs. . . . Here, by preemptively issuing FIPs, EPA denied the States that first opportunity to implement the reductions required under their good neighbor obligations." The general tone of the opinion is one of greater respect for Clean Air Act federalism than has been accorded in other recent Court of Appeals cases, which may support efforts to push such arguments in rehearing or on U.S. Supreme Court review.

The CSAPR Scheme. The "good neighbor provision" requires that a SIP contain "adequate provisions" to prohibit emissions of air pollutants "in amounts which will . . . contribute significantly to nonattainment in, or interfere with maintenance by, any other State" with respect to a National Ambient Air Quality Standard (NAAQS).³ In CSAPR, EPA defined 1 percent of the NAAQS as the significance threshold and identified states making "significant contributions" to downwind states for each of the ozone,⁴ annual PM_2.5⁵  and 24-hour PM_2.5 NAAQS. Based on that threshold, EPA identified each state from which emissions yielded a modeled impact at or above that threshold, and declared each such state to be subject to the CSAPR program. But then, for each covered state, EPA set aside those significance thresholds and developed emissions budgets for each relevant pollutant based on a cost per ton of emission reduction, imposing reductions on states that bore no direct relationship to their identified contributions to downwind nonattainment. EPA then immediately imposed FIPs in which it allocated the emissions budget within each state to particular facilities and established a near-nationwide emissions trading program for emission reduction credits required to meet the EPA budgets. It did so without waiting for the states to propose or fail to propose SIPs to meet the established emissions budgets.

CSAPR Exceeded the Scope of Authority Granted by Section 110(a)(2)(D). Although the court recognized that EPA has "significant discretion to implement the good neighbor provision," it held that CSAPR exceeded the constraints on that authority established by the Act and previous judicial decisions regarding this same provision. The court explained:

"[I]n order to prevent exorbitant costs from being imposed on certain upwind States, EPA may lower the obligations imposed on those States,"⁷ but it may not use cost to increase a state's obligations beyond its "fair share" of the overall cross-border contribution to nonattainment.⁸ Further, EPA cannot require more emissions controls in upwind states than "necessary" for downwind states to attain the NAAQS.⁹ The court wrote that Congress does not "hide elephants in mouseholes," and so the "good neighbor" provision is not "an open-ended authorization for EPA to effectively force every power plant in upwind States to install every emissions control technology EPA deems 'cost-effective.'"¹⁰

EPA Must Provide the States Reasonable Notice of their SIP-Based Obligations before Imposing FIPs. In addition, the court held that "[w]hen EPA defines States' good neighbor obligations, it must give the States the first opportunity to implement the new requirements." SIPs could not be deemed deficient for failing to address the good neighbor obligation prior to EPA's quantification of that obligation.¹² The court explained that "determining the level of reductions required . . . is analogous to setting a NAAQS."¹³

Judge Rogers Dissents. The dissent argued that the majority should not have reached these grounds because petitioners did not challenge the disapprovals of the SIPs, which properly triggered the FIPs, and failed to preserve both a challenge to the two-step threshold and reduction approach and the argument for required proportionality of the mandated emissions reductions.¹⁴ In addition, the dissent argued that the plain language of the Act required states to include adequate good neighbor provisions in their SIPs; EPA did not have an obligation to quantify the significant contributions to trigger the States' obligations and so was within its statutory authority to promulgate the FIPs.¹⁵

Implications of the Majority Holding. The majority's opinion is notable for the zest with which it harkens back to the Act's structure of cooperative federalism, emphasizing that while EPA must set standards determining each state's significant contribution, implementation of measures necessary to meet those standards rests with the states in the first instance. A similar emphasis on the Act's cooperative-federalism structure recently guided the Fifth Circuit Court of Appeals to overturn EPA's disapproval of Texas' standard permit for pollution control projects¹⁶  and EPA's disapproval of Texas' flexible permit program proposed for its SIP.¹⁷ This structural aspect of the Act implicates other ongoing litigation, including the challenges to EPA's imposition of FIPs for its greenhouse gas initiatives.

The other significant result of this case may be its ultimate effect on efforts by EPA to create a regional cap-and-trade program for upwind states. Fundamentally, CSAPR was based on regional air transport models, and it is possible that these models will not be able to deliver the type of precision that the Court demands for EPA to set individual emission limits for upwind states based on their significant contributions, when multiple upwind states contribute to nonattainment. The court's concern about proportionality of the burden rather than cost of emissions control affects the system of allocating required reductions in a manner that may not align with complex transport modeling. In light of the court's opinion, it appears that all EPA may do is determine each State's significant contribution and assign those reductions to the State. Once obligations are allocated, there might be opportunities for emission trading (because cheaper reductions may be available in a different state) that could ameliorate the overall costs of compliance, but the court's opinion leaves unclear how States might take advantage of these cost differentials to reduce compliance costs and whether any federal involvement in establishing a cap-and-trade program would be within the limits of EPA's statutory authority under the "good neighbor" provisions.

Footnotes

^{1 See North Carolina v. EPA, 531 F.3d 896 (D.C. Cir. 2008) (remanding CAIR, without vacatur).}

^{2 Homer City, No. 11-1302, slip op. at 60 (D.C. Cir. Aug. 21, 2012).}

^{3 42 U.S.C. § 7410(a)(2)(D).}

^{4 Ozone formation is regulated through limits on ozone-season NOx emissions.}

^{5 PM2.5 is regulated through limits on SO2 and NOx.}

^{6 Homer City, slip op. at 24.}

^{7 Id. at 27 (emphasis added).}

^{8 Id. at 25, 37-38.}

^{9 Id. at 28.}

^{10 Id. at 40.}

^{11 Id. at 41.}

^{12 Id. at 45, 48.}

^{13 Id. at 51.}

^{14 Homer City, slip op. at 1-4, 14-15, 27, 40 (Rogers, J., dissenting).}

^{15 Id. at 16-20 (Rogers, J., dissenting).}

^{16 Luminant Generation Co. v. EPA, No. 10-60891, slip op. (5th Cir. March 26, 2012).}

^{17 Texas v. EPA, No. 10-60614, slip op. (5th Cir. Aug. 13, 2012).}

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