In Michigan vs. EPA, the Supreme Court continues to curtail EPA’s ability to regulate emissions from power plants by limiting the deference the Court will grant EPA on issues of statutory construction. In the 5 to 4 decision, authored by Justice Scalia and joined by Chief Justice Roberts and Justices Kennedy, Thomas, and Alito, the Court held that EPA’s air toxic standards for regulating mercury emissions from coal fired power plants were “unreasonable.” The Agency did not take into consideration the costs of regulation as a threshold matter before determining that regulation was “appropriate and necessary,” as required by the Clean Air Act. In reaching its conclusion, the Court cited to its recent decision in UARG to dramatically limit the Chevron deference traditionally afforded executive agencies. The court stated: “(e)ven under this deferential standard, ‘agencies must operate within the bounds of reasonable interpretation.’” 576 U.S. _, 6 (2015).

The EPA regulation in question is the Mercury Air Toxic Standard (MATS). Before the Agency could promulgate MATS, Congress required that EPA perform a study to determine if mercury and other toxics still presented a threat to human health after reductions in those pollutants were achieved from other CAA programs, like the acid rain program. Congress laid out in the Clean Air Act that EPA could only impose these additional regulations on power plants if the Agency performed a study of the hazards to public health reasonably anticipated to occur as a result of emissions by power plants of hazardous air pollutants after imposition of the requirements of this chapter.” 42 U.S.C. §7412(n)(1)(A). If the Agency “finds . . . regulation is appropriate and necessary after considering the results of the study,” it “shall regulate [power plants] under [§7412].” Ibid.

After concluding the studies required by Congress in 2000 (and affirming them in 2012), the Agency found that additional regulation of mercury and other toxic pollutants was “appropriate” because (1) power plants’ emissions of mercury and other hazardous air pollutants continued to pose risks to human health and the environment and (2) controls were available to reduce these emissions. 77 Fed. Reg. 9363.

The Court did not question that EPA had the right to regulate these emissions at power plants under the Clean Air Act, but, it concluded that EPA was unreasonable in its decision to regulate power plants here because it did not consider the cost of implementation of regulation. The Court based its decision on a “plain reading” of the applicable section of the CAA stating that if read “naturally and in the present context” that EPA would be required to consider the costs of implementing the proposed controls before determining that the regulation of mercury was “appropriate.”

EPA (and the dissent authored by Justice Kagan) countered that “costs should not be considered” when deciding whether power plants should be regulated under Section 7412 as threshold matter, but that once the study revealed health impacts of mercury, that costs were evaluated and considered in setting the appropriate emissions standards. The dissent states that “EPA’s final rule noted that steps taken during the regulatory process had focused on “flexibility and cost-effectiveness” and had succeeded in making “the rule less costly and compliance more readily manageable.” 77 Fed. Reg. 9306, 9376. Moreover, the regulation concluded that “the benefits of the rule” to public health and the environment “far outweigh the costs.” Id. at 9306.

In reaching its conclusion that EPA was unreasonable in its interpretation that it did not need to consider costs in its finding that the regulation of mercury and air toxics was “appropriate and necessary,” the Court dramatically limited the deference given to an executive agency under Chevron. Justice Scalia, cites to the Court’s recent decision in UARG and goes out of his way to distinguish the deference the Court afforded EPA in the American Trucking case (where the Court help that EPA did not have to consider costs as a factor in setting NAAQS) from the deference afforded the Agency in its promulgation of MATS.

In his concurring opinion, Justice Thomas, echoed the sentiment of the majority by saying:

These cases bring into bold relief the scope of the potentially unconstitutional delegations we have come to countenance in the name of Chevron deference. What EPA claims for itself here is not the power to make political judgments in implementing Congress’ policies, nor even the power to make tradeoffs between competing policy goals set by Congress, American Railroads, supra, at ___– ___ (opinion of THOMAS, J.) (slip op., at 20–21) (collecting cases involving statutes that delegated this legislative authority). It is the power to decide—without any particular fidelity to the text—which policy goals EPA wishes to pursue. Should EPA wield its vast powers over electric utilities to protect public health? A pristine environment? Economic security?

Justice Thomas further explained:

Although we hold today that EPA exceeded even the extremely permissive limits on agency power set by our precedents, we should be alarmed that it felt sufficiently emboldened by those precedents to make the bid for deference that it did here. [footnote omitted] As in other areas of our jurisprudence concerning administrative agencies, see, e.g., B&B Hardware, Inc. v. Hargis Industries, Inc., 575 U. S. ___, ___–___ (2015) (THOMAS, J., dissenting) (slip op., at 10–14), we seem to be straying further and further from the Constitution without so much as pausing to ask why. We should stop to consider that document before blithely giving the force of law to any other agency “interpretations” of federal statutes.

What this means for the future of MATS, the Clean Power Plan and other Agency initiatives is yet to be seen, but the Court’s attack on EPA’s use of discretion here and limitations on Chevron deference will likely be repeated in future challenges to EPA action. It is also interesting to consider how this ruling will impact the CASPR rule (once thought largely redundant because compliance with MATS, Regional Haze and the Clean Power Plan). It will also be interesting to see if the Agency uses this uncertainty with the MATS rule to accelerate the promulgation of the Clean Power Plan on the basis of the 111(d) authority instead of pushing the 112 standard. On a practical note, this decision may well have dramatic impacts on the coal-fired generation market, since units that were slated for shutdown under MATS, may now remain on-line.

Issues to consider after this decision:

What will Court of Appeals do on remand — vacate rule, allow EPA to correct based upon the record or require additional studies?

How will this decision impact on the coal/natural gas markets going forward?

What are the implications for NSPS for Carbon on Existing Power Plants — If MATS is vacated, that could eliminate the argument that EPA cannot proceed under 111(d)?

Justice Scalia, in responding to the dissent, teed up the issue of EPA’s reliance on ancillary benefits for calculating costs/benefits on MATS. Will EPA have to evaluate whether to rely upon ancillary benefits for deciding whether regulation is “appropriate?”