Earlier today the US Supreme Court issued a 5 to 4 decision in Michigan v. EPA that struck down the U.S. Environmental Protection Agency’s (EPA) Mercury and Air Toxics Standard (MATS) rule. The MATS rule imposes stringent hazardous air pollutant (HAP) standards on coal-fired and oil-fired power plants. Estimates of the compliance cost for industry came in at nearly $10 billion per year. 21 U.S. states and a variety of impacted industries argued to the court that EPA had not appropriately accounted for cost in determining whether to regulate hazardous air pollutants from these power plants. Today, the Supreme Court agreed.

EPAs Regulatory Scheme for Power Plant Emissions

Our first context when considering today’s Supreme Court decision is that Congress established a different regulatory approach for power plants than for other industries. EPA regulates HAPs emitted from other industries by determining Maximum Achievable Control Technology (MACT) and requiring that it be implemented within a relatively short time frame (typically 3 years). After MACT is established, EPA is supposed to perform a residual risk determination and consider whether the risk after implementing MACT justifies additional requirements.  

Power plants were not subject to the same MACT process imposed on other sectors. As part of the same 1990 Clean Air Act Amendments that created the MACT program, Congress imposed extensive utility specific requirements such as the acid rain program. Congress treated these programs as equivalent to the MACT process for other industries. Congress then instructed EPA to perform a residual risk assessment on the HAP emissions that remained after the other Clean Air Act programs targeting power plants were fully implemented. The first step was to determine whether further regulation of coal and oil fired power plants was “appropriate and necessary.”  

Should EPA Take Economic Costs into Account in MACT Regulation?

Today’s Supreme Court decision considered whether in making that “appropriate and necessary” determination EPA should have considered the costs associated with power plant HAP standards. The states and industries challenging the rule argued that the annual cost of $9.6 billion/yr. (approximately $30 billion in additional capital costs) dwarfs the $4 to $6 million in direct economic benefits. Therefore, they argued, EPA was not justified in imposing the limits. EPA took the position that it was proper to not to consider economic costs when initially listing power plants for HAP regulation.   

In today’s opinion, written by Justice Scalia, the court held that EPA inappropriately failed to consider whether further regulation was “appropriate.” The court held that the term “appropriate” obviously had to include cost. By taking the position that cost played no part in the agency’s initial decision, EPA had to argue that a regulation was “appropriate” even if it resulted in net harm. The majority decision notes “The Government concedes that if the Agency were to find that emissions from power plants do damage to human health, but that the technologies needed to eliminate these emissions do even more damage to human health, it would still deem regulation appropriate.” The majority of justices ultimately held this position untenable.  

The majority criticized EPA for playing fast and loose with its justifications for rulemaking and for ignoring parts of the statute it didn’t like. At one point the majority held that “Chevron allows agencies to choose among competing reasonable interpretations of a statute; it does not license interpretive gerrymanders under which an agency keeps parts of statutory context it likes while throwing away parts it does not.” This argument harkens back to Justice Alito’s comment in the UARG oral arguments where he asked the government, “Now, in the entire history of Federal regulation what is the best example you can give us of an agency’s doing something like that, where it has taken a statute with numbers and crossed them out and written in the numbers that it likes?” Alito joined the majority in vacating EPA’s regulations in both the UARG and today’s decision.

The majority also criticized EPA for suggesting that because the agency would take into account costs at later stages that it was permissible to ignore cost when making the initial “appropriate and necessary” finding. As Justice Scalia acerbically pointed out, “By EPA’s logic, someone could decide whether it is ‘appropriate’ to buy a Ferrari without thinking about cost, because he plans to think about cost later when deciding whether to upgrade the sound system.” 

The dissenting opinion stresses how EPA took into account cost when establishing the actual standards themselves (i.e., after deeming regulation appropriate and necessary) and so there should not be a concern about whether cost was considered up front. However, as the majority points out, the standard setting process commences with setting a regulatory floor which is cost blind. Cost consideration came into play in deciding whether to go above the floor. Furthermore, EPA stood by the position it need not consider cost in making the “appropriate and necessary” finding. The majority focused on the actual finding while the dissent focused on what came later.

No Decision on Benefits Unrelated to Rulemaking

One interesting question was expressly not answered today. At oral arguments on the case an interesting exchange ensued where Chief Justice Roberts questioned EPA for defending its mercury standards, for which there was relatively little economic benefit, based on economic benefits gained on pollutants that are not hazardous (i.e., criteria pollutants). However, because the court focused exclusively on the listing stage, and EPA’s determined resistance to consider any type of cost when assessing whether further regulation was “appropriate,” the court expressly did not answer the question of whether EPA can legitimately rely on benefits unrelated to the rulemaking when assessing the benefits of the rule itself. Look for a decision on that point in some future case.

Key Takeaways, Short Term and Long Term

There are many interesting takeaways from today’s decision. First takeaway is the striking similarity between today’s decision is and last year’s Utility Air Regulatory Group v. EPA decision that struck down, in part, EPA’s regulation of greenhouse gases under the PSD program . The similarities go beyond the obvious impact of Justice Scalia having penned both opinions. Many pundits in 2014 (including us) theorized that the Utility Air Regulatory Group (UARG) decision was a shot across EPA’s bow about how the agency must approach rulemaking. Those pundits were proven correct today. These two decisions suggest that a majority of justices on the Supreme Court are not willing to give EPA the sort of unfettered authority that the agency has claimed in the past. This seems in marked contrast to the D.C. Circuit Court of Appeals which has of late appeared to push EPA towards more aggressive rulemaking.

Second, closely tied to the similarities between last year’s UARG decision and today’s MATS decision is the likely impact on the 111(d) rules due out later this summer and the inevitable litigation that will follow. This is the second decision in a row from the Supreme Court that criticizes EPA for failing to take a strict and practical reading of the Clean Air Act. In other words, EPA has hit significant roadblocks with its “the end justifies the means” justification for sweeping rulemakings. Today’s decision strongly suggests that the novel “outside the fence” approach expected to be the foundation of the final 111(d) rule package is exactly the sort of creative rulemaking that a majority of the Supreme Court opposes. It is likely too late for EPA to significantly change what it intends to promulgate. However, it is likely that EPA is feverishly reworking the 111(d) rule preamble to reflect today’s decision. That the 111(d) rules will be litigated seems beyond question. That the D.C. Circuit will uphold the 111(d) rules and the Supreme Court subsequently strike them down seems quite plausible.

The long term effects of today’s decision are more likely to be felt in other rulemakings than in changes at power plants. The MATS rules were promulgated on February 16, 2012. One of the effects of the slow pace of our legal system is that utilities had to begin installation of controls mandated by the MATS rules years ago. Therefore, even though the Supreme Court held today that the MATS rules were unlawfully issued, the impact to the economy has already been felt