Publication

August 19, 2008Client Alert

DC Circuit To EPA: Multi-Pollutant Strategy For Interstate Clean Air Fails To Meet Clean Air Act Requirements

In a decision described as "unexpected" by both proponents and opponents, the District of Columbia Circuit Court struck down the United States Environmental Protection Agency's (EPA) Clean Air Interstate Rule (CAIR) as "fundamentally flawed" and directed EPA to "redo its analysis from the ground up." Coupled with its earlier decision striking down EPA's Clean Air Mercury Rule (CAMR) as based on an invalid regulatory approach, the DC Circuit has now rejected EPA's multi-pollutant strategy to address the transport of pollution across state borders and - once again - left EPA, the states and regulated facilities with regulatory uncertainty.

EPA's Clean Air Rules of 2004

Heralding them as a "suite of actions" that "will make the next 15 years one of the most productive periods of air quality improvement in America's history," EPA promulgated five key rules referred to as the Clean Air Rules of 2004. EPA website http://www.epa.gov/cleanair2004/.

Two of these rules were designed to work together to address interstate transport of air pollution:

  • Clean Air Interstate Rule (CAIR): issued on March 10, 2005, CAIR was to permanently cap emissions of sulfur dioxide (SO2) and nitrogen oxides (NOx) and require significant emissions reductions in 28 states and the District of Columbia by 2015.
  • Clean Air Mercury Rule (CAMR): issued on March 15, 2005, CAMR was to permanently cap and reduce emissions of mercury from oil and coal-fired power plants by 70% by 2018.

In decisions issued in February and July of 2008, the DC Circuit found first CAMR and then CAIR failed to meet the requirements of the Clean Air Act (CAA) and remanded the rules to EPA to try again.

CAIR

On July 11, 2008, the DC Circuit vacated CAIR in North Carolina v. EPA, No. 05-1244 (D.C. Cir. July 11, 2008).

The multi-party challenge to CAIR was brought by the state of North Carolina, several electric utilities (SO2 Petitioners), specific electric utilities in Texas, Florida and Minnesota, one municipality, and the Florida Association of Electric Utilities (FAEU). The electric utilities in Texas, Florida and Minnesota challenged CAIR's applicability to them because of their location and emissions amounts. North Carolina, the SO2 Petitioners, and FAEU brought substantive challenges to the regulation, claiming that EPA did not have the discretion to act as it did, or it did so unreasonably.

The Court agreed with North Carolina and the SO2 Petitioners, holding that CAIR failed to meet the requirements of the CAA and finding "EPA's approach - regionwide caps with no state-specific quantitative contribution determinations or emissions requirements - is fundamentally flawed." See North Carolina, No. 05-1244, slip op. at 59.


To satisfy the requirements of the CAA, on remand EPA must:

  • connect each state's emissions reductions to its own contributions, as opposed to relying on regionwide caps;
  • distribute state budgets and allowances based in each state's actual contributions, as opposed to what EPA deems "fair" or "cost effective";
  • give independent meaning to the phrase "interfere with the maintenance of" attainment in downwind states, as opposed to treating it as a second phase of reductions;
  • as a result, reconsider the states included under CAIR;
  • decide by what date, 2015 or earlier, upwind states must comply with CAIR; and
  • not utilize Title IV SO2 acid rain allowances as CAIR offsets absent statutory authority.

EPA's Approach in CAIR

The CAA requires EPA to issue national ambient air quality standards (NAAQS) for each air pollutant that may endanger public health or welfare in the US. EPA does this by regulating NOx and SO2, amongst others. EPA divides the country into three types of air quality categories: attainment, nonattainment, or unclassifiable. Areas that are affected by upwind pollution to an unacceptable degree are included in the "nonattainment" classification.

The CAA is administered through state implementation plans (SIPs) created by each state and approved by EPA. States must develop a plan prohibiting any source of emissions activity within a state that "contributes significantly" to nonattainment or "interferes with the maintenance" of attainment in another. The relevant portion of the statute requires SIPs to:

Contain adequate provisions - (i) prohibiting, consistent with the provisions of this subchapter, any source or other type of emissions activity within the State from emitting any air pollutant in amounts which will - (I) contribute significantly to nonattainment in, or interfere with maintenance by, any other State with respect to any [NAAQS]...

42 U.S.C. § 7410(a)(2)(D)(i)(I) (emphasis added).

EPA developed CAIR to do so by reducing the impact of upwind pollution, both particulate matter (PM2.5) and eight-hour ozone (ozone), on downwind states. CAIR set up different air quality thresholds for both PM2.5 and ozone to determine whether a state "contributes significantly" enough for EPA to regulate its impact on other states. EPA required these upwind states to revise their SIPs to reduce their NOx and SO2 emissions as both were viewed as a precursor to PM2.5 and ozone. These reductions were to begin in 2009 for NOx and 2010 for SO2 with further reductions in 2015.

CAIR relied on a regionwide cap-and-trade program to accomplish these reductions. This program was intended to supplant the current NOx SIP Call trading program with the CAIR ozone-season NOx trading program, and made revisions to the current SO2 cap-and-trade program under the CAA. EPA set up a regional cap for these amounts which was allocated among the states. These requirements were more stringent than the CAA and required retiring SO2 acid rain allowances in excess of the amount CAIR allowed.

The Court's Rationale

The DC Circuit found CAIR fatally flawed for five main reasons:

  • CAIR's interstate regional pollutant trading program does not address an individual state's contributions;
  • budgets for allowances must be made on a state-by-state basis to meet the CAA requirements;
  • EPA failed to give independent effect to the phrase "interfere with maintenance of" attainment in another state;
  • reducing the amount of acid rain allowances permitted is not part of EPA's mandate; and
  • the deadlines for compliance mandated by EPA in CAIR are inconsistent.

Interstate pollution trading programs do not adequately address an individual state's "significant contributions" to downwind nonattainment.

The Court expressly rejected EPA's choice of regionwide caps and a regionwide trading program as inconsistent with the CAA's directive. The Court held the CAA requires a state-by-state, rather than regionwide, approach because emissions "within the State" must not contribute to nonattainment or interfere with attainment in "any other State". North Carolina, No. 05-1244, slip op. at 15. "CAIR only assures that the entire region's significant contribution will be eliminated" and would not necessarily accomplish the statutory mandate because, using CAIR's trading program, a state could theoretically pollute beyond its current level and not reduce emissions at all. Id. at 16.

CAIR's state budgets for emission allowances do not comport with the CAA.

The Court applied a similar rationale to find that CAIR's state budgets were inconsistent with the statute. EPA developed these budgets based upon "fairness" for NOx and cost effectiveness for SO2. Id. at 33, 37. Although cost may be an important factor in the decision making process, the Court held that EPA placed far too much emphasis on cost-reduction in lieu of fulfilling its statutory mandate. Id. at 35. EPA developed the NOx budgets by developing a regionwide cap which EPA then distributed equitably to states in that region. The Court rejected this approach as improper because it did not meet the CAA directive to address each state's "significant contribution." Id. at 40-42.

"Interfere with maintenance" is not synonymous with "contributes significantly" and requires independent effect under CAIR.

EPA's failure to give independent effect to the CAA's "interfere with the maintenance" provision was also unlawful. Id. at 21. EPA improperly interpreted this as essentially synonymous with "contributes significantly" and gave it meaning only in implementing the second phase of regulations in 2015, leaving some downwind states effectively unprotected. Id. at 20-21.

Reducing acid rain allowances is not a part of the EPA's statutory mandate.

The Court held that Title IV acid rain allowances for SO2 are "fixed currency" under the CAA and EPA has no authority to reduce, retire, or terminate a state's allowances by 50% in 2010 and 65% in 2015 under CAIR. Id. at 43. EPA did so, in part, to maintain the current market rates for allowances, but the Court did not find this persuasive. Id. at 42.

The 2015 deadline for upwind states is inconsistent with the statute and makes attainment by downwind states by 2010 impossible.

Under the CAA, the deadline for attainment in downwind states is 2010, but under CAIR upwind states would have until 2015 to become compliant. Id. at 23. Despite EPA's assertion that it had the ability to create this new deadline even under CAA, the Court held that CAIR must be consistent with the CAA's deadlines. Id. at 24. As the Court noted, downwind states would have to take drastic measures to meet attainment by 2010 because upwind states could continue to pollute until five years after their deadline. The Court held this to be inconsistent with the statute and therefore invalid. Id. at 24-25.


The Court's Choice of Remedy

Finding that the flaws in CAIR were fundamental to its overall structure, the Court invalidated all of CAIR, not just its flawed portions. "CAIR is a single regional program, as EPA has always maintained" and therefore "its components must stand or fall together." Id. at 58.

CAMR

On February 8, 2008, before it vacated CAIR, the DC Circuit struck down CAMR in New Jersey v. EPA, No. 05-1097 (D.C. Cir. Feb. 8, 2008). CAMR was the result of EPA's decision to remove oil and coal-fired electric utility steam generating units (EGUs) from the list of sources of hazardous air pollutants (HAPs) and instead regulate mercury emissions from these EGUs through a cap-and-trade program similar to CAIR.

In response, New Jersey, and several other states, municipal governments and environmental groups (Petitioners), challenged CAMR by bringing suit against EPA in the DC Circuit. The Petitioners claimed that EPA had no authority to delist the EGUs without providing a "specific finding" under section 112(c)(9) of the CAA. New Jersey, No. 05-1097, slip op. at 6. Because EPA did not make this specific finding, the Petitioners claimed that not only was the delisting invalid, but CAMR was also flawed because it was based upon this delisting decision. Id. at 14. The DC Circuit agreed with the Petitioners, vacating both the delisting rule and CAMR. Id. at 6.

EPA's Approach in CAMR

In 1970, Congress amended the CAA to require EPA to list HAPs which should be regulated because they could "cause, or contribute to, an increase in mortality or. . . serious irreversible. . . or incapacitating reversible. . . illness." Id. at 7 (quoting CAA § 112(a)(1)). After 18 years, EPA had only listed eight HAPs, and established standards for seven of the eight. Frustrated by EPA's slow pace, in 1990 Congress reduced EPA's discretion and required EPA to regulate over 100 HAPs, including mercury. Id. In doing so, Congress required EPA to conduct a study of public health risks from EGUs and to regulate them as HAP sources under § 112 if EPA found it to be "appropriate and necessary." Id. at 8-9.

In 2000, EPA added oil and coal-fired EGUs to the list of HAP sources regulated under the CAA, making the statutorily required finding that it was "appropriate and necessary" to do so because both emit concentrations of mercury. Id. at 9. This approach would have led EPA to develop maximum achievable control technology (MACT) standards for HAPs, including mercury, for these power plants.

In 2004, EPA solicited public comment on two alternatives: 1) regulation of EGUs via MACT standards under CAA § 112; or 2) removal of EGUs from the list of HAP sources and regulation via cap-and-trade system under CAA § 111. Id. at 10. Following receipt and evaluation of the public input and other factors, EPA selected the second alternative. It enacted the delisting rule to remove EGUs from regulation under § 112, and adopted CAMR to regulate mercury emissions from EGUs under § 111. Id. at 10-11. In so doing, EPA reasoned that because it had authority to list EGUs, it also had authority to delist them. Id. at 11.

The Court's Rationale and Remedy

Petitioners challenged the delisting rule as invalid and the DC Circuit agreed. The Court rejected EPA's position that the authority to list included the authority to delist, holding that once having made the decision that listing was "appropriate and necessary" after conducting the required study, EPA could only reverse that decision following additional study and another supported finding that "emissions from no source in the category. . . exceed a level which is adequate to protect public health. . . and no adverse environmental effect will result from emissions from any source." New Jersey, No. 05-1097, slip op. at 13-14 (quoting CAA § 112(c)(9)). EPA provided no finding; only that it had changed its mind. Id. at 11. The Court described EPA as "deploy[ing] the logic of the Queen of Hearts" by substituting EPA's desire for the plain text of the section and invalidated the delisting rule. Id. at 15.

Further, since EPA had created CAMR to fill the regulatory gap created when it delisted EGUs under § 112, CAMR also fell, because sources regulated under § 112 cannot also be regulated under § 111. Id. at 6.

EPA's Next Steps . . .

Since the Court held that the legal flaws of CAIR and CAMR were beyond repair, it is unclear how EPA will respond on remand. One over-riding theme that emerges from these decisions is that the DC Circuit and EPA read the CAA requirements quite differently. More particularly, the Court has now twice thwarted EPA's efforts to implement a workable cap-and-trade program. Whether EPA will try to overcome the DC Circuit's objections and fashion an approach the Court will find acceptable remains to be seen. At this writing, the EPA website advises that these decisions have been issued and that EPA is reviewing them and evaluating their impacts.

Wisconsin DNR's Next Steps . . .

While EPA figures out what to do next, the states will still need to decide how to meet CAA requirements in the absence of the CAIR/CAMR framework. In Wisconsin, the Wisconsin Department of Natural Resources (WDNR) is the regulatory agency with responsibility for CAA compliance under Wis. Stat. ch. 285. Before CAMR was vacated, WDNR had been developing a state mercury rule which set more aggressive targets than CAMR for coal-fired EGUs. That rule, Wis. Admin. Code ch. NR 446, received its final approval from WDNR in June 2008, and will now presumably fill the gap left by CAMR. Under NR 446, coal-fired EGUs with nameplate capacity of 150 megawatts (MW) and greater must achieve a 90% mercury reduction in either one step by 2015, or in three steps by 2021; coal-fired EGUs with nameplate capacity between 25 and 150 MW must address mercury reductions through Best Available Control Technology. WDNR is still considering how to respond to the gap left by the remand of CAIR and may seek to use other state regulatory authorities to assure the state reaches attainment goals as required.

About Deference and Uncertainty

The DC Circuit's rejection of CAIR and CAMR should not be viewed in isolation. For example, in June 2007, the DC Circuit vacated three EPA rules dealing with hazardous air emissions. See Natural Resources Defense Council v. EPA, 489 F.3d 1250 (D.C. Cir. 2007), Natural Resources Defense Council v. EPA, 489 F.3d 1364 (D.C. Cir. 2007). Those rules dealt with MACT requirements for commercial and industrial boilers and plywood and composite wood products. Again, the Court criticized EPA's reading of the CAA requirements and found the agency's approach so fundamentally flawed that the resulting rules could not be salvaged.

In general, agencies reasonably expect a degree of deference from a reviewing court when exercising statutory authority to develop regulations to implement Congressional directives. States and the entities that are subject to EPA's regulations look to the agency and the Courts to provide some degree of predictability and certainty in the application of the regulations. That deference is hard to find in the DC Circuit's review of several EPA regulations implementing the CAA, suggesting that in this arena, a state of uncertainty may be the one thing that is certain for states and regulated facilities for some time to come.

Rob Phansalker, Summer Associate, also contributed to this article.

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