Introduction

On July 28 2015 the DC Circuit held that emissions limits imposed by the Environmental Protection Agency (EPA) on 13 states under its Cross-State Air Pollution Rule were unlawful. The EPA "overstepped its authority", the three-judge panel unanimously held, by requiring states to cut emissions more than necessary to ensure other states meet air-quality standards.

The Clean Air Act's 'good neighbour' provision (42 USC § 7410(a)(2)(D)(i)) limits states' emissions of pollutants that contribute to sub-standard air quality in other states. The act prohibits upwind emissions that cross state lines and "contribute significantly" to a downwind state's failure to attain or maintain national air quality standards.

Invoking this authority, in 2011 the EPA finalised the Cross-State Air Pollution Rule and imposed emission budgets on 27 upwind states whose emission of sulphur dioxide or nitrogen oxide significantly contributed, in the EPA's view, to particulate matter and ozone formation in downwind states. Affected states, utilities and labour groups appealed, contending that the EPA's proposed emissions reductions exceeded its authority.

The DC Circuit initially stayed the rule prior to its implementation. Then, in 2012, the court held in a two-to-one decision that Congress had authorised the EPA to regulate only in proportion to each upwind state's contribution to downwind air quality problems and vacated the rule in its entirety.

In 2013 the Supreme Court reversed this aspect of the DC Circuit's decision and held in a six-to-two decision that the EPA did not need to require reduction obligations in proportion to each upwind state's contribution to downwind non-attainment. However, it agreed with the DC Circuit that the EPA may not over-control upwind states and require reductions greater than necessary for downwind states to achieve air quality standards. The Supreme Court remanded for the DC Circuit to consider individual states' "as-applied" challenges to overcontrol imposed by the EPA's state-specific emission budgets.

On remand, the DC Circuit held that, with regard to 13 states, the EPA had in fact regulated emissions beyond the level authorised by the statute and justified by downwind air quality needs. The court rejected other arguments, directed at the air quality models that the EPA relied on and the procedures it used to impose state budgets, which would have invalidated the rule more broadly. Rather than vacating the rule, the court remanded to the EPA with instructions to promptly correct its errors.

Below are five key takeaways from the DC Circuit's decision.

Good neighbour authority strictly limited to state-specific emissions

Judge Kavanaugh's unanimous opinion soundly rejected the EPA's 'good neighbour' authority to regulate state emissions when not necessary to achieving adequate air quality elsewhere. Rather, the Clean Air Act requires the EPA's rulemaking to focus on specific upwind-state contributions to specific downwind-state non-attainment. The EPA contended that some degree of over-control was appropriate for regulated upwind states which otherwise could free ride on the positive effects of emissions reductions achieved by other states. This approach, the DC Circuit noted, contradicted the EPA's limited grant of authority under the Clean Air Act, which extended only to reductions necessary to achieve downwind attainment.

The court further held that the EPA cannot impose uniform reduction thresholds on states where such uniform reductions over-control some states. The Supreme Court's call for state-specific as-applied challenges, the DC Circuit held, "necessarily mean[t] a lack of uniformity" in the EPA's regulation of different states when some states would be over-controlled. Thus, the EPA may not, for example, require every Texas source to adopt emissions controls costing $500 per ton of pollutant when the EPA's own data shows that controls of only $100 per ton would eliminate any significant Texas contribution to downwind non-attainment.

EPA has limited authority to correct state implementation plans

Under the Clean Air Act's system of cooperative federal-state regulation, states have primary responsibility for ensuring adequate air quality. If the states fail to do so, the EPA may step in to ensure that federal standards are met. Here, the EPA invoked its authority to correct state implementation plans which it had previously approved under a predecessor rule without first providing further process to the states to revise their implementation plans to satisfy the good neighbour provision.

The DC Circuit held that this approach was acceptable in this context because the predecessor rule was struck down in a previous DC Circuit decision (North Carolina v EPA). Given "the unusual circumstances here, in which a federal court says that EPA lacked statutory authority at the time to approve a [state plan]", the EPA was justified in using its correction authority. But in general, the court clarified, the EPA must still give states the first opportunity to correct any inadequacies in their emission plans.

Deference for EPA's modelling

The court further afforded deference to the EPA's use of models. Arguments that the EPA had failed to account for real-world data that contradicted its model's air quality projections did not persuade the DC Circuit that the rule was inherently flawed. Neither did discrepancies identified by the rule's challengers between the model's predictions and actual results. The court observed that possible discrepancies between facts and projections are inherent in the use of predictive models. The DC Circuit reiterated that it will reject the EPA's projections when "the model bears no rational relationship to the characteristics of the data to which it is applied" - a standard which it did not find that petitioners met in this case.

Strict adherence to Supreme Court Direction required

The DC Circuit's opinion repeatedly concluded that the Supreme Court's interpretation of the good neighbour provision in this case precluded the EPA's defences of its rule in the DC Circuit. It even chided the EPA for resisting the availability of as-applied challenges by "saying something to this Court that is in tension with, if not in contravention of, what the Deputy Solicitor General told the Supreme Court". In mandating that the EPA adhere to the Supreme Court's "crystalline" holding in EME Homer, the DC Circuit's opinion echoed other recent Supreme Court decisions affording less deference to the EPA and other agencies on rulemakings of extraordinary economic and political significance. Such agency action may receive greater scrutiny in future judicial review before the DC Circuit.

Remand for prompt action

The court allowed the rule to remain in place while the EPA takes action to bring its budgets into compliance with this decision. Noting the prospect of significant disruption to emissions-trading markets if portions of the rule were immediately invalidated, the court remanded the rule without vacating it. However, it did so with instructions for the EPA not to drag its feet. The court observed that it "expect[s] and urge[s] EPA to move promptly on remand"; otherwise, petitioners "may promptly bring suit" for the EPA's failure to perform.

For further information on this topic please contact Roger Martella, Eric McArthur, Peter Keisler or C Frederick Beckner III at Sidley Austin LLP by telephone (+1 202 736 8000) or email (rmartella@sidley.com, emcarthur@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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