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Clean Air Act: Supreme Court Defers To EPA on Cross-State Air Pollution, Putting More Pressure on Aging Coal-Fired Power Plants

May 15, 2014

Upholding EPA’s Cross-State Air Pollution Rule (commonly called the Transport Rule), the Supreme Court has handed a defeat to owners of power plants in 28 Eastern, Southern and Midwestern States.[1] The rule requires reductions in emissions of nitrogen oxides and sulfur dioxide from power plants in those States to improve air quality in downwind States. The Court’s ruling, which reversed a 2012 D.C. Circuit decision,[2] defers to EPA’s method for allocating emission reductions among the upwind States and finds it was within EPA’s discretion to impose a corrective plan without giving those States a chance to act first.

The Supreme Court’s reinstatement of the Transport Rule, comes two weeks after the D.C. Circuit upheld EPA’s Mercury and Air Toxics Standards (MATS),[3] which requires coal-and oil-fired power plants nationwide to reduce emissions of mercury, metals and acid gases.[4] These decisions translate into higher compliance costs for utilities operating coal-fired power plants, putting added pressure on the older plants that remain in service. Moreover, the Supreme Court’s willingness to extend a high degree of deference to EPA’s implementation of the Clean Air Act has broad significance for other regulated sources.

I. History of the Transport Rule, Prior Litigation

The Transport Rule is EPA’s latest attempt to address a long-standing problem: air pollution emitted in one State that causes harm in States that are downwind. The rule fits within a much broader scheme of air quality standards, and plans for achieving those standards, which provides the central core for the Clean Air Act.

A. Ambient Air Quality and the Clean Air Act’s “Good Neighbor” Provisions

EPA is charged by the Act with determining standards for air pollutants in the ambient air that are needed to protect public health.[5] EPA also must determine whether areas of the country are achieving the ambient standards for individual pollutants and must designate areas as “attainment,” “nonattainment,” or “unclassifiable” for each ambient standard.[6]

The Act then gives States primary responsibility for implementing ambient standards within their borders, requiring them to develop State Implementation Plans (SIPs) for achieving and maintaining those standards.[7] But the Act also requires EPA to oversee the development of State SIPs and gives it authority to approve, conditionally approve, or disapprove SIPs, in whole or in part.[8] If EPA finds that an existing SIP is substantially inadequate to attain or maintain an ambient standard, the agency must notify the State of the deficiency and require that the deficiency be corrected.[9] EPA may set a “reasonable” deadline for State corrective action, not more than 18 months after the notice of deficiency.[10] If EPA finds that a State has failed to make a required SIP submittal, finds that a State submittal is incomplete, or disapproves a State’s SIP submission, then the Act also directs EPA to develop a Federal Implementation Plan (FIP) to correct the problem in that State’s plan “at any time within 2 years” after making that finding.[11]

Among other things, SIPs must tackle the problem of emissions in one State that contribute to air quality problems in downwind States. Through what is referred to as the “good neighbor” provision, the Act requires that SIPs contain provisions adequate to prohibit sources within a State from emitting pollutants in amounts that will contribute significantly to nonattainment, or interfere with maintenance, of an ambient standard in another State.[12]

B. EPA’s Past Efforts to Address Cross-State Air Pollution

In 1998, EPA directed 22 States to revise their SIPs to reduce nitrogen oxide (NOx) emissions to meet “good neighbor” obligations in connection with the ambient standard for ozone, an action referred to as the NOx SIP Call.[13] In determining each State’s obligations, EPA took into account NOx contributions to downwind States, but also considered the amount of NOx emissions that could be eliminated by sources in each State if those sources installed “highly cost effective” emission controls. In Michigan v. EPA, the D.C. Circuit upheld the NOx SIP Call, holding that the Act did not prohibit EPA from considering cost when calculating good neighbor obligations, so long as the cost comparison was used to lower an upwind State’s good neighbor obligations.[14]

In 2005, EPA issued the Clean Air Interstate Rule (CAIR), requiring 27 States to revise their SIPs to reduce emissions of NOx and sulfur dioxide (SO2).[15] These pollutants are precursors to formation of very fine particulates (particulates smaller than 2.5 microns, called PM2.5), and NOx also is a precursor to formation of ozone. CAIR was intended to address upwind State contributions to exceedances of ozone and PM2.5 ambient standards in downwind States. CAIR allowed States two compliance options: (1) require power plants within the State to participate in an EPA-administered regional cap-and-trade system; or (2) meet an emissions budget set for the individual State, using measures of the State’s own choosing. The formulas EPA used in determining how much each State needed to reduce emissions included cost considerations.

In North Carolina v. EPA, the D.C. Circuit rejected CAIR’s reliance on cost considerations, holding that EPA could not use the cost of emission controls as a criterion for determining significance of contributions to downwind air quality impacts.[16] It held that EPA’s approach could result in a State being required to reduce its emissions beyond their own “significant contribution” to downwind nonattainment, which would go beyond the level of control authorized by the Clean Air Act’s “good neighbor” provision. However, the D.C. Circuit agreed to leave CAIR in effect while EPA developed a new rule consistent with its opinion, encouraging EPA to “act with dispatch.”[17]

C. The Transport Rule

The Transport Rule, issued in August 2011,[18] was EPA’s response to the D.C. Circuit’s North Carolina decision. In developing the Transport Rule, EPA followed a two-step process. First, EPA determined which States “contributed significantly” to downwind nonattainment of the ozone ambient standard and two PM2.5 ambient standards (annual and 24-hour). In this initial screening analysis, EPA excluded any States that contributed less than one percent to downwind pollutant concentrations.

For the 28 States that remained after the initial screening, EPA determined the quantity of emissions each upwind State’s power plants could eliminate by applying all controls available at or below a given cost-per-ton of emission reductions, repeating the exercise for several cost thresholds. EPA then modeled the combined effect of the projected emission reductions at each cost threshold, applying the same threshold across all upwind States. EPA then used the resulting cost-effectiveness curve to select cost thresholds for NOx and SO2, beyond which the modeling showed “minimal additional” emission reductions. EPA then applied the same cost threshold across all of the affected States for each pollutant and translated the results into emission reductions for each upwind State, expressed as an emission budget. The budget reflected the emission reductions that would be achieved if all regulated sources in a given State implemented all pollution controls available at the selected dollar-per-ton threshold.

EPA then issued a determination that the SIPs for the affected States were deficient because they did not meet “good neighbor” obligations to downwind States. EPA could have then given the states an opportunity to revise their SIPs to match EPA’s emission budget calculations, but instead EPA simultaneously issued FIPs that directly imposed the emission budgets on the covered sources in the affected States.[19]

D. D.C. Circuit’s Decision in EME Homer

In August 2012, the D.C. Circuit rejected the Transport Rule.[20] It found that the Transport Rule contained flaws similar to those in CAIR – namely, that the rule would, based on cost considerations, require certain upwind States to reduce in-state emissions by more than the amount of their actual contribution to air quality exceedances in downwind States. The court also rejected EPA’s decision to impose FIPS on the States without first providing the States with a reasonable opportunity to develop revisions to their own SIPs. For a more detailed discussion of the D.C. Circuit’s decision, see K. Haroff, D.C. Circuit Strikes Down EPA Cross-State Air Pollution Rules (Again), Marten Law Environmental News (Sept. 25, 2012).

The D.C. Circuit vacated the Transport Rule and remanded the matter back to EPA. In the meantime, the court instructed EPA to continue implementing the 2005 CAIR while the agency develops a replacement rule. EPA appealed to the Supreme Court.

II. Supreme Court’s Decision in EME Homer

On a 6-2 vote,[21] the Supreme Court reversed the D.C. Circuit’s holding and reinstated the Transport Rule. The Court’s majority first addressed the question of EPA’s ability to impose a FIP on the States, without first allowing the States an opportunity to amend their SIPs. The Court then turned to EPA’s interpretation of the Act’s good neighbor provision.

A. EPA’s Discretion to Issue FIPs Immediately

The opponents of the rule argued that after EPA quantified the States’ good neighbor obligations (by developing emission budgets), the agency was obligated to give the States a reasonable opportunity to make their own decisions about how to implement the emission reductions allocated to them by EPA, through SIP amendments, before EPA imposed a FIP.[22]

The Court’s majority rejected this argument, focusing on a provision of the Clean Air Act requiring EPA to issue a FIP that corrects any deficiencies it has identified in a SIP “at any time within 2 years” after the agency disapproves the SIP. It held that under this provision, EPA was not obligated to give the affected State(s) a chance to correct SIP deficiencies before doing so itself through a FIP, and that it could issue the FIP “at any time” after disapproving a SIP.[23] It found that the Act’s good neighbor provision did not create an exception to the agency’s discretion in this regard, and that in requiring EPA to allow a “reasonable opportunity” for State corrective action, the D.C. Circuit had imposed a requirement that does not appear in the Act.[24] It also held that the State obligation to meet their good neighbor obligations in their SIPs was not conditioned on EPA first quantifying those obligations for the States.

Justice Scalia, in a dissent joined by Justice Thomas, objected that in giving EPA discretion to unilaterally impose FIPs, the majority “makes a hash of the Clean Air Act, transforming it from a program based on cooperative federalism to one of centralized federal control.”[25] Scalia discussed the basic structure of the Act, under which EPA sets ambient standards and the States present their chosen means of achieving those air quality benchmarks through their SIPs.[26] Decisions regarding source-by-source emission reductions are left to the States, so long as the net result is compliance with the ambient standards. The dissent argued that this statutory structure “plainly demands that EPA afford States a meaningful opportunity” to act after EPA identifies the “significant contribution” that a State is making to downwind nonattainment.[27]

The dissent maintained that States should not be required to guess at their obligations to those downwind, only to be deprived of their opportunity to act when EPA later concludes that States have guessed incorrectly. It also pointed out that EPA had given the States the opportunity to act first when it issued the NOx SIP Call in 1998 and when it issued CAIR in 2005. Finally, the dissent argued that EPA’s failure to give the States an opportunity to amend their SIPs was a violation of the Administrative Procedures Act, as an abuse of agency discretion, because it did not “preserve the Clean Air Act’s core principle of state primacy.”[28]

B. The Transport Rule’s Resolution of Good Neighbor Obligations

The majority began its discussion of the substance of the Transport Rule by noting that “we routinely accord dispositive effect to an agency’s reasonable interpretation of ambiguous statutory language.”[29] The majority found that the Act’s direction to reduce upwind pollution in “amounts” that “contribute significantly to nonattainment” in downwind States is ambiguous because it does not specify how reductions are to be allocated among multiple States that contribute to downwind pollution.[30] The majority rejected the D.C. Circuits reading of the Act as unambiguously calling for reductions proportional to each State’s contribution as unworkable in practice.[31] It concluded that the Act’s good neighbor provision does not dictate a method for allocating emission reductions among multiple States.[32]

Having found the good neighbor provision to be ambiguous, the Court then turned to the reasonableness of EPA’s construction of the statute. Under EPA’s two-step approach, upwind emissions “contribute significantly to nonattainment” if they (1) make more than a one percent contribution to a relevant ambient standard in any downwind State’s nonattainment area and (2) can be eliminated under the cost threshold identified by the agency.[33] The opponents argued that EPA could not use cost as a criterion for significance because the cost of preventing emissions is unrelated to the actual amount of pollution an upwind State contributes. The majority responded that, in choosing which among multiple upwind contributions to eliminate, EPA reasonably selected the amounts “easier, i.e. less costly, to eradicate,” and held that nothing in the statute prohibited that choice.[34]

The Court also rejected the D.C. Circuit’s objection that the second, cost-based stage of EPA’s analysis could result in “over-control,” where a State is compelled to reduce its emissions beyond the point at which every affected downwind State is in attainment, or even to the point that the State no longer exceeds EPA’s “significant contribution” criterion – that it no longer contributes at least one percent of a relevant ambient standard in any downwind State’s nonattainment area.[35] The majority agreed with the D.C. Circuit that a State could not be required to reduce its emissions by more than is necessary to achieve attainment in every downwind State or beyond EPA’s one percent threshold.[36] But it concluded that these possible outcomes did not provide a basis for invalidating the Transport Rule, noting that even if the reduction required of an upwind State looked like over-control as to one downwind State, it still could be necessary to achieve required reductions in another downwind State.[37] The majority also noted that tackling interstate air pollution is necessarily imprecise, and that to avoid under-controlling interstate contributions, EPA must be given some leeway in fulfilling its statutory mandate.[38] Finally, the majority concluded that the administrative record contained few, if any, examples of the Transport Rule resulting in over-control of emissions in an upwind State, and that if a State had evidence of such over-control then it should bring a challenge to the Transport Rule as applied to that State, rather than a facial challenge to the rule in its entirety.[39]

Justice Scalia’s dissent took issue with the starting premise of the majority’s discussion of the merits of the Transport Rule, that the good neighbor provision is ambiguous.[40] The dissent argued that the term “contribute significantly” is ambiguous only as to how much of a downwind contribution is significant, but not at all ambiguous in specifying that a State’s contribution is judged by the amounts of pollutants it contributes.[41] Scalia maintained that to the extent there was any ambiguity in the statute, that ambiguity was not open to reliance on cost-benefit analysis to allocate emission reductions among upwind States. The dissent would have followed the D.C. Circuit in reading the Act as unambiguously requiring emission reductions proportional to an upwind State’s contributions, without consideration of the cost of reductions.[42] The dissent rejected the majority’s conclusion that the Act does not specify how EPA is to divide reductions among multiple contributing States.[43] It also argued that the majority’s discussion of possible bad outcomes from allocation based on emission contributions could apply equally to allocation based on the cost of emission reductions.

III. Implications of The Supreme Court’s Decision

Even though the Supreme Court’s decision reinstates the Transport Rule, EPA likely will need to take further administrative actions before the rule can be fully implemented. Among other things, the rule’s original 2012 implementation deadline is long passed. Also, there has been a wave of closures and announcements of future closures of coal-fired power plants since the modeling for the rule was conducted, which may mean changes are needed to the FIPs EPA developed to implement the rule.

Nevertheless, with reinstatement of the rule, the remaining coal-fired power plants in over half the States may be required to install new controls to reduce their emissions of NOx and SO2. These plants, as well as coal and oil-fired plants in the rest of the nation, also may also need new controls to reduce emissions of acid gases and metals, as well as mercury, to comply with the MATS rule recently upheld by the D.C. Circuit. Some of closures of coal-fired power plants announced in the last few years have been attributed to the possibility that the Transport Rule and MATS would survive legal challenges. Now that both rules have been upheld by the courts, there could be additional closure announcements before the rules’ compliance dates arrive.

The Supreme Court’s decision also could have implications for other EPA actions, particularly its efforts to use the Clean Air Act to regulate greenhouse gas (GHG) emissions. Earlier this year, the Supreme Court heard argument on whether EPA has correctly interpreted the Clean Air Act as requiring regulation of GHGs emitted by stationary sources, like coal-fired power plants.[44] Much of the argument in that case turned on whether EPA had correctly interpreted the phrase “any air pollutant” in the Act’s major source permitting provisions to include GHGs. The Court’s deference in EME Homer to EPA’s reading of what the majority of the Court concluded was ambiguous language in the Act suggests a similar outcome is possible in the GHG permitting litigation. Whether or not that will be the case, the answer should come fairly soon; the Court is expected to issue a decision in that case before the end of its current term.

EPA also has just finished taking comments on rules proposed under the Clean Air Act’s provisions regarding New Source Performance Standards (NSPS) that would limit GHG emissions from new power plants, and later this year is expected to issue draft regulations that would do the same for existing power plants. As with the EPA rules that extended stationary source permitting to GHG emissions, now pending before the Supreme Court, opponents of limiting GHG emissions from new and existing power plants question whether the Clean Air Act authorizes EPA’s planned NSPS standards. No doubt there will be echoes of the Court’s EME Homer analysis, including Justice Scalia’s dissent, in future legal challenges to those NSPS standards, assuming EPA completes them as planned.

Finally, EME Homer also may have implications for how EPA approaches other vexing challenges under the Clean Air Act in the future. EPA has quickly deployed FIPs at times in the past, for example to implement GHG permitting for stationary sources. On December 13, 2010, EPA published a finding that the SIPs for 13 States were inadequate because they did not apply stationary source permitting requirements to GHG emissions.[45] When seven States failed to submit SIP amendments by December 22, EPA adopted a FIP for those States on December 30, 2010.[46] This was an unusual case, where the pace of EPA action was driven by its earlier decision that GHGs would become “subject to regulation,” and so need to be addressed in stationary source permitting, on January 2, 2011. But we will have to wait and see whether EME Homer emboldens EPA to more frequently act unilaterally, imposing its will on the States through FIPs, rather than allowing States to decide how best to achieve air quality objectives within their boundaries.

For more information regarding EPA v. EME Homer City Generation or other regulatory developments under the Clean Air Act, contact any member of Marten Law’s Air Quality practice.

[1] EPA v. EME Homer City Generation, 572 U.S. ___ (2014).

[2] EME Homer City Generation v. EPA, 696 F.3d 7 (D.C. Cir. 2012).

[3] White Stallion Energy Center, LLC v. EPA, ___ F.3d ___, 2014 WL 1420294 (D.C. Cir. April 15, 2014).

[4] 77 Fed. Reg. 9304 (Feb. 16, 2012).

[5] 42 U.S.C. § 7409.

[6] 42 U.S.C. § 7407(d).

[7] 42 U.S.C. § 7410(a).

[8] 42 U.S.C. § 7410(k).

[9] 42 U.S.C. § 7410(k)(5).

[10] Id.

[11] 42 U.S.C. § 7410(c).

[12] 42 U.S.C. § 7410(a)(2)(D)(i).

[13] 63 Fed. Reg. 57,356 (Oct. 27, 1997).

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

[15] 70 Fed. Reg. 25,162 (May 12, 2005).

[16] North Carolina v. EPA, 531 F.3d 896 (D.C. Cir. 2008).

[17] North Carolina v. EPA, 550 F.3d 1176, 1178 (D.C. Cir. 2008) (order following request for rehearing).

[18] 76 Fed. Reg. 48,208 (Aug. 8, 2011).

[19] 76 Fed. Reg. at 48,271, 48,284-87.

[20] EME Homer, 696 F.3d 7.

[21] Justice Alito did not participate in consideration of the case.

[22] See EME Homer Slip Op. at 13.

[23] Slip Op. at 13-17.

[24] Id.

[25] Dissent Slip Op. at 14.

[26] Id. at 15.

[27] Id. at 15-16.

[28] Id. at 19.

[29] Slip Op. at 20 (citing Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984)).

[30] Slip Op. at 20-25.

[31] Id.

[32] Id. at 25.

[33] Id. at 25-26.

[34] Id. at 26.

[35] Slip Op. at 28-32.

[36] Id. at 29.

[37] Id. at 29-30.

[38] Id. at 30-31.

[39] Id. at 31-32.

[40] Dissent Slip Op. at 3-7.

[41] Id. at 4.

[42] Id. at 5-6.

[43] Id.

[44] See Justices Hear Challenge to EPA’s Authority to Regulate Greenhouse Gas Emissions, Marten Law Environmental News (March 3, 2014).

[45] 75 Fed. Reg. 77,698 (Dec. 13, 2010).

[46] 75 Fed. Reg. 82,246 (Dec. 30, 2010).

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