On July 28, the U.S. Court of Appeals for the D.C. Circuit ordered the U.S. Environmental Protection Agency (EPA) to revise emissions budgets for several states under the agency’s Cross-State Air Pollution Rule (CSAPR or the Transport Rule), which implements the “good neighbor” provisions of the Clean Air Act. While EPA’s authority to issue the rule has been upheld, the court ruled that the agency’s budgets over-controlled for the impact of emissions contributed by certain “upwind” states to the air quality of their “downwind” neighbors and remanded the budgets to EPA for reconsideration. This decision will cause some delay in the Transport Rule’s implementation, but is not likely to have a material impact on regulated entities.

The Transport Rule replaced the Clean Air Interstate Rule which the D.C. Circuit vacated in 2008. Under the rule, 28 states must adopt regulations to reduce emissions from power plants that adversely impact the air quality in other states. States are ultimately responsible for implementing the Transport Rule, but any state that fails to adopt approved regulations will be subject to an EPA-crafted federal implementation plan. Like its predecessor, the Transport Rule was challenged in the courts as soon as it was issued in 2011. It was primarily upheld by the U.S. Supreme Court in 2014.

The present legal challenge targeted EPA’s methodology for creating the applicable emissions budgets. In short, the petitioners claimed that EPA failed to consider the actual contributions of each state to downwind ozone and fine particulate pollution, but instead imposed uniform reduction requirements. The D.C. Circuit agreed. As a result, the court invalidated and remanded the 2014 SO2 emissions budgets for Texas, Alabama, Georgia and South Carolina, as well as the 2014 ozone-season NOx emissions budgets for Florida, Maryland, New Jersey, New York, North Carolina, Ohio, Pennsylvania, South Carolina, Texas, Virginia and West Virginia. Relying on the published rule and EPA’s own technical support documents, the court held that in each instance, the required reductions were clearly in excess of the amount necessary to achieve attainment in the downwind states.

The practical impact of this decision on regulated power plants and investors is unclear. As it stands, in 2014 the D.C. Circuit granted a request by EPA to lift the stay on the Transport Rule and toll the compliance deadlines by three years. EPA will now have to reconsider the invalidated budgets, but this does not guarantee that the budgets will be revised. The agency had argued before the D.C. Circuit that its technical support documents needed to be updated. However, the court noted that it was bound to rely on evidence in the record, which included EPA’s initial analysis. The revised initial technical support documents may ultimately align with the conclusions in the final rule as published. Even so, if EPA does reduce the overall compliance burden within a given state, the impact on individual sources likely will be marginal.