On June 29, the U.S. Supreme Court held that the Environmental Protection Agency (EPA) was wrong not to consider the cost of compliance when it decided to regulate mercury and other air toxic substances emitted from power plants. The Court held that EPA should have considered the compliance costs (almost $10 billion per year) when determining it was "necessary and appropriate" to promulgate the so-called MATS Rule as opposed to delaying cost considerations until the latter stage of crafting the regulations.

Background

In 2000, EPA found it was "necessary and appropriate" to regulate emissions from power plants; the finding was reversed in 2005 by the Bush administration, only to be reaffirmed in 2012 by the Obama administration. The reaffirmation found regulation was (1) "appropriate" because the emissions posed risks to health and the environment, and available controls could reduce the emissions; and (2) "necessary" because other requirements in the Clean Air Act did not eliminate the risks.

Along with its decision to regulate power plant emissions, EPA also issued a "Regulatory Impact Analysis," estimating that to comply with the MATS Rule power plants would need to pay approximately $9.6 billion per year. But that analysis was not part of the Rule; it responded to an Executive Order requiring rulemakings with a major impact to include a cost-benefit analysis. Indeed, EPA admitted that the Regulatory Impact Analysis "played no role" in its "appropriate and necessary" finding and that it was not required to consider costs.

Twenty three states appealed the MATS Rule, which the DC Circuit upheld. The Supreme Court reversed and remanded the lower court's decision.

Rationale

The Supreme Court noted that, unlike other pollution sources that were required to be regulated under the hazardous air pollutants program under specified circumstances, "Congress instructed EPA to add power plants to the program (but only if) the Agency finds regulation 'appropriate and necessary'." That determination, according to the Court, requires "at least some attention to cost." Thus, the Court rejected EPA's argument that it can postpone cost considerations from this initial decision about whether to regulate until later in the subsequent rulemaking when deciding how much to regulate.

Impact

EPA tested the boundaries of its discretion and power not only by arguing that it need not consider costs in determining to regulate MATS emissions of power plants, but also by issuing Regulatory Impact Analysis so that it could still claim that costs were considered. The Court essentially told EPA to put the analysis in the Rule. The difficulty for EPA will be that while the MATS Rule is expected to cost $9.6 billion per year, it yields only $4 million to $6 million per year in direct benefits, though EPA claimed the indirect benefits of the Rule would be between $37 billion and $80 billion.

Interestingly, the majority opinion focused on the $4 million to $6 million direct benefit and implied that would be insufficient to overcome the Rule’s high cost, while the minority opinion focused on the indirect benefits and found them more than adequate to warrant the Rule. How EPA balances between those two positions on remand will likely determine whether a new MATS Rule will survive a subsequent challenge. Because the Court remanded the Rule, rather than vacating it, EPA will have another chance to bolster the reasoning behind the currently-proposed regulations or perhaps to come up with a different rule and different reasoning.

In the meantime, Michigan v. EPA will impact the Clean Power Plan, which is expected shortly and will regulate greenhouse gas emissions from existing power plants under Section 111(d) of the Clean Air Act. A legal argument raised against the Clean Power Plan is that because power plants are already regulated under the MATS Rule, the statutory language and structure of the Clean Air Act precluded plants from being regulated by the Clean Power Plan. That argument may be called into question with the uncertain status of the MATS Rule after the Court’s decision.

From a substantive standpoint, the Court's decision may not be a harbinger of doom for the Clean Power Plan because it is promulgated under a different section of the Clean Air Act that does not require an “appropriate and necessary” initial finding. From a practical standpoint, the Court’s opinion may not have a substantial effect. Since the MATS rule was issued in 2012, many power plants have begun to add the necessary emission controls or decided to shut down generating units to comply with both it and the Cross State Air Pollution Rule, which the Supreme Court recently upheld. On this latter point, a question left open by the Court’s decision is whether the currently established compliance deadlines for the MATS Rule, which were not stayed pending appeal, remain in effect.