On April 29, 2014, in EPA v. EME Homer City Generation, the US Supreme Court provided the US Environmental Protection Agency ("EPA") a significant legal victory.1 The Court's opinion reversed the DC Circuit Court of Appeals August 2012 vacatur of the EPA's Cross-State Air Pollution Rule (otherwise known as the "Transport Rule") emissions trading program, on grounds that the rule was based on permissible interpretations of the Clean Air Act ("CAA").
As a result, fossil fuel-fired utilities in 28 eastern states will be subject to the more stringent sulfur dioxide ("SO2") and nitrogen oxides ("NOx") emissions allowance budgets in the Transport Rule, instead of the budgets established in the legacy Clean Air Interstate Rule ("CAIR"). The transition between the programs may be chaotic, given that the Transport Rule was originally to have taken effect in 2012.
In some ways, the resurrection of the Transport Rule may be less significant in the long term than the signal sent by the EME Homer City Generation opinion's reliance on and reinforcement of Chevron2 deference. In fact, the opinion can be read as an implied rebuke to the DC Circuit for not giving sufficient deference to the EPA and instead imposing its own statutory construction of the CAA.
Also notable, and likely to have far reaching implications, the Court concluded that the CAA does not require the EPA to give states a reasonable period of time to fix inadequate State Implementation Plans ("SIP") before promulgating a Federal Implementation Plan ("FIP"). Specifically, "EPA is not obliged to wait two years or postpone its action even a single day: The Act empowers the Agency to promulgate a FIP 'at any time' within the two-year limit." This may encourage the EPA to be even more aggressive on future SIP issues, including possible finalization of a SIP call regarding startup, shutdown, and malfunction ("SSM") provisions for 36 jurisdictions.3
As a general matter, the CAA provides that states must adopt and submit a SIP for EPA approval within three years after the promulgation of a National Ambient Air Quality Standard ("NAAQS").4 If the EPA finds that a state failed to make a required SIP submission, or finds that a submission is inadequate, the agency must promulgate a FIP "at any time within two years."5
The Transport Rule is the third in a line of EPA rules promulgated pursuant to the "Good Neighbor Provision" in the CAA. The Good Neighbor Provision states that SIPs must contain adequate provisions to prevent emissions sources within a state from emitting in amounts which will "contribute significantly" to nonattainment in another state.6 In the prior Good Neighbor rules, the NOx SIP Call (1998) and CAIR (2005), the EPA established emissions trading budgets, but then provided the states an opportunity to submit SIP revisions prior to the effective date of associated FIPs.
In 2008, the DC Circuit vacated CAIR as arbitrary and capricious, primarily because the unlimited allowance trading permitted by CAIR could result in some areas not achieving sufficient emissions reductions.7 However, the court then allowed CAIR to take effect while the EPA worked on a replacement. The replacement was the Transport Rule, which was promulgated in August 2011.
Unlike the prior rules, the Transport Rule did not provide an advance opportunity for the states to implement SIPs, and to thereby change the allocation of emissions allowances under the rule, on grounds that the DC Circuit's remand of the Transport Rule necessitated an expedited implementation schedule. Indeed, the Transport Rule was to take effect for calendar year 2012, only months after finalization. Also relevant, the EPA considered control costs when determining the amount of emissions reductions that each of the significant contribution states would need to meet.
The DC Circuit's opinion
The DC Circuit first stayed the Transport Rule, allowing CAIR to continue in effect, and then vacated the Transport Rule in its entirety. The court held that, although the EPA's FIP authority is generally triggered as soon as it disapproves a SIP, this is not so for the Good Neighbor Provision. According to the DC Circuit, the Good Neighbor obligation is "nebulous" and "unknown"; therefore, the EPA must establish the emissions reductions required and then provide a reasonable time for the states to implement a SIP.
The court also held that the EPA's use of cost in determining the emissions budgets for each of the affected states was not permissible because it could require some states to "over-control." In essence, the DC Circuit read the CAA to require that the EPA establish budgets based solely on the amount and effect of downwind emissions from each state. Factoring in control costs could shift reduction burdens to other states, based not on whether the emissions were a significant contribution to nonattainment, but on whether it would be cheaper on an overall basis.
The Supreme Court's opinion
The essential theme of the Supreme Court's opinion is that the DC Circuit should have afforded deference under Chevron to the interpretations utilized by the EPA in promulgating the Transport Rule. Regarding the lack of opportunity for states to pass and submit SIPs, the court noted that the DC Circuit had remanded CAIR and that the FIP requirement is a statutory duty with an explicit time component. The Court stated, perhaps sarcastically8, that the DC Circuit "found an unwritten exception to this strict time prescription." Regardless, the Court determined that nothing in the CAA differentiates the Good Neighbor Provision from other SIP obligations.
Moreover, "EPA is not obliged to wait two years or postpone its action even a single day: The Act empowers the agency to promulgate a FIP 'at any time' within the two-year limit." Neither was the Court persuaded by the fact that the EPA had provided a grace period in the NOx SIP Call and CAIR rules, but did not do so for the Transport Rule, noting that the "EPA retained discretion to alter its course provided it gave a reasonable explanation for doing so."
The Court also employed a Chevron deference argument on the last issue, the EPA's use of cost in setting state emissions budgets. Specifically, the Court found that the CAA did not prohibit consideration of cost and, lacking dispositive statutory instructions from Congress to guide EPA's decision in allocating emissions reductions, the EPA's decision was a reasonable and permissible exercise in statutory "gap filling."
Of note, the Court's opinion leaves some room for states to challenge the individual budgets set by the EPA. Specifically, the Court noted that EPA cannot require a state to reduce emissions by more than is necessary to achieve attainment in every downwind state. The Court acknowledged the possibility of over-control, but concluded that this possibility does not justify wholesale invalidation of the rule. States may, however, bring "particularized, as-applied" challenges. In other words, it appears that states may challenge the particular budget established on grounds of over-control, but are seemingly foreclosed from challenging the EPA's general Transport Rule methodology.
Comments and discussion
Because the CAIR rule was allowed to go into effect, despite a remand to the EPA, most utilities covered by the Transport Rule have already had to either decrease emissions or obtain emissions allowances. In effect, DC Circuit vacatur of the Transport Rule temporarily spared utilities from the incremental stringency in the Transport Rule, but did not impact the continued effectiveness of CAIR.
Nevertheless, the transition from CAIR to the Transport Rule will likely generate some chaos and confusion. The Transport Rule was originally intended to take effect in 2012, with additional cuts coming in later years. Now that the rule is again viable, it remains to be seen whether the EPA will argue that utilities should have planned for the Transport Rule lawsuit to fail and must adhere to the original schedule, or will instead implement a more gradual transition.
In addition, the renewed vitality of the Transport Rule may upset allowance prices and availability because CAIR allowances cannot be used to meet Transport Rule obligations. When the Transport Rule was promulgated, CAIR allowance prices plummeted. Then, when the Transport Rule was stayed and vacated, Transport Rule allowance prices dropped. Now that the Transport Rule is back and CAIR's days appear numbered, similar market turbulence appears likely.
Although only time will tell, the longer legacy of the Supreme Court's decision in EME Homer City Generation may be more important than the significant, but short-term, difficulties associated with re-implementation of the Transport Rule. In particular, the Court's seeming rebuke of the DC Circuit may influence that court and others to tread more cautiously before vacating the interpretations of regulatory agencies.
In the context of the CAA, the Court's opinion appears to give the EPA a green light to diverge from past practices and interpretations, so long as the new interpretation remains reasonable, and to implement FIPs with little or no warning, following a finding that a SIP is inadequate. This will provide the EPA with significant leverage in negotiations with states over SIP revision actions. For example, these aspects of the opinion may encourage the EPA to move ahead with its aggressive proposal to invalidate SSM provisions in 36 state SIPs and may encourage other SIP revision actions in the future.
2 See Chevron U.S.A. Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984).
4 42 U.S.C. § 7410(a)(1).
6 42 U.S.C. § 7410(a)(2)(D)(i).
7 North Carolina v. EPA, 531 F.3d 896 (D.C. Cir. 2008) (per curiam).
8 If the opinion had been by Justice Scalia, we doubtless would have omitted any expression of uncertainty. However, Justice Ginsburg delivered the opinion of the Court. (Justice Scalia wrote for the dissent and was joined by Justice Thomas).