Introduction

On June 29 2015 the Supreme Court reversed a DC Circuit decision upholding the Environmental Protection Agency (EPA) Mercury and Air Toxics Standards Rule, which established stringent emission standards for mercury and other hazardous air pollutants emitted by power plants (Michigan v EPA). In a five-to-four decision, the majority held that the EPA had impermissibly excluded the consideration of costs when evaluating whether the regulation of hazardous air pollutants from power plants "is appropriate and necessary". Hazardous air pollutants are regulated by the EPA under Section 112 of the Clean Air Act. In 1990, Congress established a separate regulatory structure for hazardous air pollution from power plants, directing the EPA to conduct a study of such emissions and to establish emission limits if it determined that such regulation was appropriate and necessary.

After completing the required study, the EPA determined that regulation was appropriate and necessary and on February 16 2012 published the Mercury and Air Toxics Standards Rule. In making this determination, the EPA did not consider the costs of the proposed regulations. However, in a subsequent cost-benefit analysis, the EPA concluded that the costs of the proposed rule substantially exceeded the benefits of reducing mercury emissions, although it asserted that additional benefits would be realised due to reductions in emissions of other non-hazardous pollutants. The emissions limits took effect earlier this year for the majority of power plants; approximately 170 facilities were granted an extension of one year to come into compliance with the emission limits by April 16 2016.

Below are five key highlights from the Supreme Court's decision.

Exclusion of costs unlawful

Writing for the majority, Justice Scalia held that it was unreasonable for the EPA to refuse to consider costs when making its determination that regulation was appropriate and necessary. Citing prior precedent, the court explained that to be lawful, an agency regulation must be based on a consideration of the relevant factors and recognised that agencies frequently consider costs when determining whether to regulate. The court went on to explain that the applicable 'appropriate and necessary' standard at issue in the case was comprehensive in nature and necessarily encompassed a consideration of costs. The court also found that the EPA had only limited ability to consider costs at later stages of the rulemaking process, because Section 112 requires the EPA to establish minimum emission standards based on the performance of the best-performing sources in each source category. While the court questioned whether the rule was cost effective based on the EPA's cost-benefit analysis, it made clear that the EPA's error was its refusal even to consider costs at the initial 'appropriate and necessary' determination.

The dissent agreed with the majority that it would be unreasonable for the EPA to ignore costs entirely in the Section 112 rulemaking process. However, the dissent concluded that the EPA's decision to exclude costs when making its 'appropriate and necessary' determination was reasonable because the EPA intended to and had considered costs at each of the subsequent steps in the rulemaking process. The dissent emphasised the deference that is owed to the EPA when interpreting the requirements of the Clean Air Act and concluded that the EPA's interpretation of how to incorporate costs was reasonable.

Precedent for cost considerations

All nine justices agreed that in the absence of a congressional mandate to exclude costs, it is generally unreasonable for an agency to ignore them when determining whether to issue regulations. In particular, the majority noted that there was a strong presumption that Congress intended an agency to consider costs when implementing regulatory statutes, and that imposing regulations without consideration of their costs may impede the ability of agencies and regulated entities to engage in other more cost-effective regulatory pursuits. According to the court:

"[a]gainst the backdrop of this established administrative practice, it is unreasonable to read an instruction to an administrative agency to determine whether 'regulation is appropriate and necessary' as an invitation to ignore cost."

The majority opinion also suggests that the court may be less willing in reviewing future rulemakings to defer to the EPA's judgement regarding when and how costs should be considered. Applying greater scrutiny to the EPA's assessment of costs in the rulemaking process would increase the burden on it to justify costly regulations, particularly for industries that have already made significant investments to reduce emissions.

Potential impact on Clean Power Plan

The EPA is likely to proceed to finalise the Clean Power Plan to regulate greenhouse gas emissions from power plants under Section 111(d) of the Clean Air Act in the wake of Michigan. A primary argument made in comments and litigation to date that challenge the EPA's proposal is that it cannot regulate power plants under Section 111(d) because they are already subject to regulation under Section 112 through the Mercury and Air Toxics Standards Rule. Although the Supreme Court in Michigan found fault with Section 112 of the rule, the court reversed and remanded the decision to the DC Circuit and stopped short of a full vacatur. Thus, the rule's arguably pre-emptive effect on the Clean Power Plan has not changed. The continued vitality of this argument will rest with the DC Circuit as it decides on the specific remedy to implement the Supreme Court's decision, which is likely to follow briefing on the remedy by the parties.

Impact on NAAQS

The Supreme Court's decision illustrates a heightened emphasis on costs in agency rulemakings. At the same time, its immediate legal impact on the role that costs play in establishing and revising National Ambient Air Quality Standards (NAAQS) is more limited. In Whitman v American Trucking Associations, the Supreme Court held that the EPA could not consider costs when revising NAAQS based on the exclusion of costs from consideration of the health-based standard under Section 109 of the Clean Air Act. In Michigan, the court contrasted the public health-based standard for revising NAAQS in Section 109 as excluding costs from consideration with the comprehensive 'appropriate and necessary' standard applicable to power plants under Section 112. However, the court did suggest that Section 109 is the exception rather than the rule, and that agencies must consider costs unless Congress specifically directs them to regulate based on a narrow factor that explicitly excludes costs. Further, beyond the pure legal holding of Michigan, the decision is the most recent in a line of Supreme Court cases that examines EPA rulemakings with economy-wide impact – a scenario likely to be relevant when the EPA revises the ozone NAAQS standard this autumn.

Next steps in DC Circuit

After holding that the EPA unreasonably failed to consider costs, the court reversed the DC Circuit decision and remanded the case for further proceedings consistent with its opinion. It is anticipated that the DC Circuit will issue an order in the next four to seven weeks to schedule further proceedings in that court regarding the appropriate remedy and the next steps for the EPA on remand.

For further information on this topic please contact Roger Martella, Joel Visser, Peter Keisler or C Frederick Beckner III at Sidley Austin LLP by telephone (+1 202 736 8000) or email (rmartella@sidley.com, jvisser@sidley.com, pkeisler@sidley.com or rbeckner@sidley.com). The Sidley Austin LLP website can be accessed at www.sidley.com.

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