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D.C. Circuit Strikes Down EPA Cross-State Air Pollutions Rules (Again)

September 25, 2012

In a 2-1 split decision, the D.C. Circuit Court of Appeals has rejected EPA’s most recent attempt to regulate cross-state air pollution from the electric power, natural gas, and coal industries. EME Homer City Generation v. EPA, No. 11-1302, 2012 WL 3570721 (D.C. Cir. Aug. 21, 2012). EPA’s Cross-State Air Pollution Rule (CSAPR or Transport Rule) was drafted to fix deficiencies in a 2005 rule (the Clean Air Interstate Rule, or CAIR) that had been struck down by the same court in 2008. Both CAIR and the Transport Rule were designed, in different ways, to compel upwind States to restrict emissions from within their borders that adversely affect air quality in downwind States. The second time, however, was not the charm. Reviewing the Transport Rule, the DC Circuit sent EPA back to the drawing board for two independent reasons – one pertaining to EPA’s calculation of States’ “good neighbor” obligations, and one pertaining to EPA’s imposition of Federal Implementation Plans, or “FIPs.”

The court held that the Transport Rule was unlawful because it would require some upwind States to reduce their emissions by more than their own contribution to air quality exceedances in downwind States. The court also held that EPA impermissibly denied States the opportunity to implement the Transport Rule through their own state-level plans, as required by the Clean Air Act’s cooperative federalism structure. In doing so, the court offered a full-throated defense of the principles of federalism that underlie the Clean Air Act and other major federal environmental laws. The D.C. Circuit has recently deferred to EPA’s technical expertise in a number of controversial air quality cases, including the agency’s greenhouse gas Tailoring Rule, and new national standards for nitrous oxide (NO2) and sulfur dioxide (SO2).[1] But EME Homer makes clear that federal courts are reluctant to defer to EPA when there are concerns that the agency has exceeded its statutory authority. In such cases, courts will continue to take a very hard look at EPA’s actions.

I. Background

A. The Clean Air Act’s “Good Neighbor” Provisions

The Clean Air Act establishes a cooperative framework under which EPA and the States regulate air quality. At the federal level, EPA is required to establish limits on the concentrations of air pollutants allowable in various parts of the country. These limits are referred to as National Ambient Air Quality Standards, or NAAQS, and must be set at levels which, “allowing an adequate margin of safety, are requisite to protect the public health.”[2] EPA is also obligated to designate areas of the country as “attainment,” “nonattainment,” or “unclassifiable” for each air pollutant, depending on whether the areas are in compliance with NAAQS.[3]

States are primarily responsible for implementing NAAQS within their borders, and are required to develop plans (known as State Implementation Plans or SIPs) for achieving and maintaining compliance with NAAQS.[4] SIPs detail, among other things, which sources within the State must reduce emissions, and by how much. States must submit SIPs to EPA within three years of each new or revised NAAQS.[5] EPA must develop a Federal Implementation Plan (FIP) for states that are untimely in submitting a compliant state-level plan.[6]

The EME Homer decision focused on the Clean Air Act’s “good neighbor” provision, which requires “upwind” States to prohibit emissions from within their borders from “contribut[ing] significantly” to the nonattainment of, or interfering with the maintenance of, NAAQS in “downwind” States.[7] Each upwind State’s SIP must include provisions adequate to ensure compliance with its good neighbor obligation. As the court explained, “[b]y placing the good neighbor requirement in Section 110(a)(2), Congress established the upwind State’s SIP as the vehicle for implementing the upwind State’s good neighbor obligation.”[8] EPA gathers information concerning air quality in downwind States, and calculates each upwind State’s good neighbor obligation.

B. EPA’s Prior Efforts to Regulate Cross-State Emissions

EPA’s prior efforts to implement the good neighbor requirements have met with mixed success. In 1998, EPA published a rule, referred to as the NOx SIP Call, that established the good neighbor obligations for 22 states for the 1997 ozone NAAQS.[9] In the rule, EPA did not set good neighbor requirements exclusively based on air quality impacts in downwind states. Instead, EPA also considered the amount of nitrous oxides (NOx) that could be eliminated by sources in each State if those sources installed “highly cost effective” emissions controls. In Michigan v. EPA, the D.C. Circuit upheld the rule, holding that the Clean Air Act did not prohibit EPA from considering cost when calculating good neighbor obligations – so long as EPA used cost considerations to lower an upwind State’s good neighbor obligations.[10]

In 2005, EPA published CAIR, which calculated the good neighbor obligations of 28 States with respect to the 1997 ozone and PM2.5 NAAQS.[11] Because SO2 is a precursor to PM2.5 formation and NOx is a precursor to both ozone and PM2.5 formation, CAIR required upwind states to revise their SIPs to include control measures for both SO2 and NOx. EPA calculated each State’s good neighbor obligation using two different formulas – both of which included cost considerations. The rule provided States with two compliance options: (1) meet the State’s emission budget by requiring power plants to participate in an EPA-administered regional cap-and-trade system that capped emissions in two stages, or (2) meet an individual emissions budget through measures of the State’s choosing.

In North Carolina v. EPA, the D.C. Circuit rejected CAIR on a number of grounds.[12] The court held that CAIR was unlawful because it required certain States, based in part on cost considerations, to potentially reduce their emissions beyond their own “significant contribution” to downwind pollution. The court explained that the good neighbor provision “gives EPA no authority to force an upwind state to share the burden of reducing other upwind state’s emissions … [EPA] may not require some states to exceed the mark.” The court also explained that “EPA can’t just pick a cost for a region, and deem ‘significant’ any emissions that sources can eliminate more cheaply.” Thus, EPA may use costs, but only to lower an upwind State’s good neighbor obligation. The court remanded CAIR to EPA, but left it in place until the agency developed a new rule consistent with its opinion. For more information on CAIR or the North Carolina decision, please see EPA Finalizes New Interstate Air Pollution Rule for Power Plants, Marten Law Environmental News (Aug. 9, 2011).

C. Cross-State Air Pollution Rule

In August 2011, EPA finalized the Transport Rule in response to the court’s holdings in North Carolina.[13] The Transport Rule established good neighbor obligations for three NAAQS: 1997 annual PM2.5, 1997 ozone, and 2006 24-hour PM2.5. The rule defined upwind States’ good neighbor obligations, and prescribed Federal Implementation Plans (FIPs) to implement those obligations at the State level. EPA used a two-stage process for determining each State’s good neighbor obligations. In the first stage, EPA determined, based on modeling, whether a State emits “amounts which will … contribute significantly” to nonattainment of the relevant NAAQS in downwind states. In the second stage, EPA determined how much pollution each upwind State’s power plants could eliminate if the upwind State’s plants applied all controls available at or below a given cost-per-ton of pollution reduced. The cost-per-ton levels applied without regard to the “significant contribution” calculations in the first stage. Based on its cost modeling, EPA generated emission budgets for each upwind State, which established the maximum amount of pollution that a State’s power plants could emit in a year.

EPA simultaneously promulgated FIPs, which converted each States’ emission budgets into tradable allowances. The FIPs established, among other things, how emission allowances would be distributed to regulated sources within each State. The rule provided that States could modify or replace the FIPs. The FIPs, however, would remain in place in the first instance until a SIP was submitted to, and approved by, EPA.

II. Analysis – EME Homer

In a 2-1 split decision, the Court of Appeals rejected the Transport Rule on two independent bases – one pertaining to EPA’s calculation of States’ good neighbor obligations, and one pertaining to EPA’s imposition of FIPs.

A. Good Neighbor Obligations

The majority held that the good neighbor calculations of the Transport Rule exceeded EPA’s statutory authority. The court found three separate flaws. First, the court held that “the requirement that EPA imposed on upwind States was not based on the ‘amounts’ from upwind States that ‘contribute significantly to nonattainment’ in downwind States, as required by the statute and [the court’s] decision in North Carolina.”[14] The court noted that EPA first calculated each States’ “significant contribution” but then imposed restrictions based on regional air quality modeling projections and cost considerations. According to the court, EPA redefined each States’ “significant contribution” “in such a way that an upwind State’s required reductions could be more than its own significant contribution to a downwind State.”[15] By requiring some States to reduce emissions more than their “significant contribution,” the court concluded that the Transport Rule “does not adhere to [the] basic requirements of the statutory text and our precedents.”[16]

Second, in a similar vein, the court held that the rule ran “afoul of the statute’s proportionality requirements” because it required some upwind States to reduce more than their “significant contribution” to downwind pollution.[17] As the court explained:

But when EPA asks one upwind State to eliminate more than its statutory fair share, that State is necessarily being forced to clean up another upwind State’s share of the mess in the downwind State. Under the statute and North Carolina, that is impermissible.[18]

Third, the court held that EPA “failed to ensure that the collective obligations of the various upwind States, when aggregated, did not produce unnecessary over-control in the downwind States.”[19] Since Section 110(a)(2)(D)(i)(I) (i.e., the good neighbor provision) requires upwind States to only eliminate their own “significant contribution,” the Transport Rule was overly-burdensome when it required states to do more than that, and the court observed that EPA failed to “take steps to avoid such over-control.”[20]

B. Imposition of FIPs

Perhaps the most impactful aspects of EME Homer is the court’s affirmation of the bounds of EPA’s authority under the Clean Air Act. Under the statute’s cooperative federalism framework, EPA is obligated to set air quality standards, while the States (or “first implementers” in the court’s parlance) are obligated to develop, via SIPs, the mechanisms for achieving those standards. EPA is authorized to develop implementation plans (i.e. FIPs) only when a State fails to timely submit a compliant SIP.

The Transport Rule, however, did not place the States in the position of being the “first implementers.” Instead, EPA preemptively “made a finding of failure to submit and/or disapprove a SIP submission” for each State with respect to each NAAQS for which that State would be covered.[21] EPA issued FIPs for all affected States simultaneously with its issuance of the new good neighbor determinations. EPA made such a finding even though States were not given the time to develop compliant SIPs.

EPA justified its determination that existing SIPs lacked a “required submission” (i.e. a correct good neighbor provision), arguing that there was no difference between the States’ compliance obligations with respect to NAAQS and their compliance obligations with respect to the good neighbor provisions. The court, however, rejected that distinction, noting that there was a “glaring” difference between NAAQS and good neighbor obligations – NAAQS is a “clear numerical target” and a State “knows precisely what numerical goal its SIP must achieve,” while good neighbor obligations are “not clean numerical target[s]” and that there is “no way for an upwind State to know its obligation without knowing levels of air pollution in downwind States.”[22] The court explained that an “upwind State’s obligation remains impossible for the upwind State to determine until EPA defines it.”[23] Therefore, the court held that a “SIP logically cannot be deemed to lack a ‘required submission’ or deemed to be deficient for failure to meet the good neighbor obligation before EPA qualifies the good neighbor obligation.”[24]

According to the court, EPA’s reading of the statute took it “down the rabbit hole to a wonderland where EPA defines the target after the States’ chance to comply with the target has already passed.”[25] The court concluded that EPA’s approach was inconsistent with the basic principle that States, not the Federal Government, are the primary implementers of the requirements of the Clean Air Act once EPA completes its primary statutory role in setting NAAQS for the States to meet.

C. Dissent

Circuit Judge Rogers, who was the only judge on the EME Homer panel who also participated in the court’s decision on CAIR, penned a vigorous and lengthy dissent, writing that the majority’s holdings were:

[A]n unsettling of the consistent precedent of this court strictly enforcing jurisdictional limits, a redesign of Congress’s vision of cooperative federalism between the States and the federal government in implementing the CAA based on the court’s own notions of absurdity and logic that are unsupported by a factual record, and a trampling on this court’s precedent on which the [EPA] was entitled to rely in developing the Transport Rule rather than be blindsided by arguments raised for the first time in this court.[26]

Judge Rogers focused primarily on procedural issues, arguing that the petitioners were barred from challenging aspects of the Transport Rule in the Court of Appeals because they had failed raise similar challenges during EPA’s administrative proceedings. Judge Rogers specifically contended that the petitioners had not objected to EPA’s approach to calculating the good neighbor obligations during the agency’s Tailoring Rule administrative proceedings, and that their failure to state their objections with “reasonable specificity” barred arguments on appeal (that were ultimately accepted by the majority). Similarly, Judge Rogers argued that the petitioners had failed to raise arguments concerning the good neighbor provision’s “proportionality” requirements in their appellate briefs, and that the majority’s holdings on that issue were improper.

By addressing arguments not raised during EPA’s administrative hearings or in the petitioners briefs, Judge Rogers argued that the majority had ignored Congress’s limitations on the court’s jurisdiction and proceeded “to do violence to the plain text of the [Clean Air Act] and EPA’s permissible interpretations of [it].”[27] Judge Rogers concluded that:

The result is the endorsement of a “maximum delay” strategy for regulated entities, rewarding States and industry for cloaking their objections throughout years of administrative rulemaking procedures and blindsiding the agency with both a collateral attack on its interpretation of section 110(a) and an objection raised for the first time in this court, despite the court’s previous decisions declining to disturb the approach EPA adopted in the Transport Rule.

As of the date this article was published, EPA had not sought rehearing en banc, but if it does so, the procedural concerns raised by Judge Rogers may bear significant weight.

III. Conclusion

The D.C. Circuit is not alone in admonishing EPA to be more mindful of the line separating its role in carrying out federal environmental policy from that of the States. In Texas v. EPA, No. 10-60614 (5th Cir. Aug. 13, 2012), the Fifth Circuit recently repudiated EPA’s recent attempt to wrest control of the State of Texas’ new source review (NSR) permitting program. EPA disapproved the program sixteen years after it had been submitted to EPA as part of a proposed revision to the Texas SIP, “unraveling” (as the court put it) approximately 140 permits issued by Texas consistent with the proposed revision pursuant to state law. The administrative record reflected that EPA’s rejection of the program was based on the Agency’s preference for a different drafting style in developing the program, and not on standards as Congress provided for in the statute. According to the court, such action “disturbs the cooperative federalism” that the Clean Air Act envisions and as such, it clearly was arbitrary and capricious.

In both the EME Homer and Texas cases, EPA argued that the courts should defer to its decisions because of its special expertise in addressing complex technical issues under the federal environmental laws. That principle may be true, but both courts found it irrelevant. States have such expertise, too, and there is no reason to assume that EPA’s approach is necessarily superior, particularly where EPA has previously approved relevant state regulatory plans (as in EME Homer) or allowed such plans to be implemented over many years without acting to disapprove them (as in Texas). As the D.C. Circuit has previously stated, the model of federalism adopted in the Clean Air Act means that EPA cannot “force particular control measures on the states” in the first instance. See Virginia v. EPA, 108 F.3d 1297, 1410 (D.C. Cir. 1997). Where EPA acts inconsistent with this principal, its actions have been routinely rejected by the courts.

For more information on the EME Homer decision or recent Clean Air Act developments, please contact Kevin Haroff or any other member of Marten Law’s Air Quality practice group.

[1] See Coalition for Responsible Regulation v EPA, No. 09-1322 (D.C. Cir. June 26, 2012) (approving EPA’s “endangerment finding” and regulations limiting emissions of CO2 and other greenhouse gases); American Petroleum Institute v. EPA, No. 10-1079 (D.C. Cir. July 17, 2012) (approving EPA’s new one-hour NAAQS for NO2); and National Environmental Development Association v. EPA, No. 10-1252 (D.C. Cir. July 20, 2012) (approving EPA’s NAAQS for SO2).

[2] 42 U.S.C. § 7409(a)-(b).

[3] 42 U.S.C. § 7407(d).

[4] 42 U.S.C. § 7410(a).

[5] 42 U.S.C. § 7410(a)(1).

[6] 42 U.S.C. § 7410(c)(1).

[7] 42 U.S.C. § 7410(a)(2)(D). The good neighbor provision specifically provides, in relevant part, that each SIP must contain adequate provisions:

Prohibiting … any source or other type of emission activity within the State from emitting any air pollutant in amounts which will contribute significantly to nonattainment in, or interfere with maintenance by, any other State with respect to [NAAQS].

(emphasis added).

[8] Slip Op. at 11.

[9] 63 Fed. Reg. 57,356 (Oct. 27, 1997).

[10] Michigan v. EPA, 213 F.3d 663 (D.C. Cir. 2000).

[11] 70 Fed. Reg. 25,162 (May 12, 2005).

[12] 531 F.3d 896 (D.C. Cir. 2008).

[13] 76 Fed. Reg. 48,208 (Aug. 8, 2011).

[14] Slip Op. at 31.

[15] Slip Op. at 35.

[16] Slip Op. at 37.

[17] Slip Op. at 37.

[18] Slip Op. at 38 (emphasis in original).

[19] Slip Op. at 38.

[20] Slip Op. at 39.

[21] Slip Op. at 46.

[22] Slip Op. at 47.

[23] Slip Op. at 47 (emphasis in original).

[24] Slip Op. at 48.

[25] Slip Op. at 50.

[26] Slip Op. (Dissent) at 1.

[27] Slip Op. (Dissent) at 43.

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