For the second time in five years, the United States Court of Appeals for the District of Columbia Circuit has thrown out EPA’s scheme to prevent upwind states’ emissions from interfering with their downwind neighbors’ efforts to comply with the National Ambient Air Quality Standards (“NAAQS”).  On August 21, 2012, the Court vacated EPA’s most recent effort, known as the Cross-State Air Pollution Rule (“CSPAR”).  It found that EPA exceeded its authority under Section 110 of the Clean Air Act (the “Act”) because: (i) CSPAR required some states to reduce their emissions more than Section 110 requires; and (ii) EPA’s preemptive imposition of a mandatory federal cap-and-trade program violates the Act’s system of federalism.  Until EPA can promulgate a new rule that is consistent with the Court’s opinion, the Bush Administration’s Clean Air Interstate Rule (“CAIR”) remains in effect.

To develop CSPAR, EPA used computer modeling to determine whether emissions of sulfur dioxide (“SO2”) and oxides of nitrogen (“NOx”) in one state will cause or contribute to violations of the NAAQS for particulate matter or ozone in another state.  In states where the model indicated that emissions contribute to a downwind exceedence (28 in all), CSPAR imposed a state-wide cap on SO2 and/or NOx emissions and required regulated sources (primarily coal and gas-fired power plants) to participate in a federally-operated cap-and-trade program.  To generate the state-by-state emissions caps, EPA predicted the reductions in SO2 and NOx that would occur at each regulated source if that source were required to install control technologies at a number of cost thresholds – for example, how much of an emission reduction would occur by requiring the installation of all controls that cost less than $500, $750 or $1000 per ton of eliminated emission.  EPA next used the predicted emissions reductions at each cost level to forecast their aggregate effect on ambient air quality in downwind states.  It then selected a cost threshold that – when applied throughout the 28-state area – would achieve compliance with the particulate matter and ozone NAAQS throughout all affected states. 

The Court took issue with EPA’s focus on reducing aggregate NOx and SO2 emissions throughout the 28-state region to achieve compliance with the NAAQS.  It explained that under Section 110 of the Act, EPA must determine the extent to which each individual upwind state contributes to a NAAQS exceedence in a downwind state, and the agency cannot require an upwind state to reduce its emissions by more than the amount the upwind state contributes to each downwind exceedence.  In other words, EPA could force North Carolina to reduce its NOx emissions based on the amount of NOx emitted in North Carolina that contributes to an ozone exceedence in Hampton Roads, Virginia, but the maximum reduction EPA can demand from North Carolina on that basis is the amount of NOx from North Carolina that actually reaches Hampton Roads.  By the same token, EPA cannot force West Virginia to reduce its NOx emissions to counter the effects (in Hampton Roads) of NOx emissions from North Carolina – only the emissions from West Virginia that reach and contribute to an exceedence in Hampton Roads are fair game.  

In addition, in order to make its cap-and-trade program effective immediately, EPA invoked its authority to promulgate a Federal Implementation Plan in the affected states, even though none of the states had an opportunity to develop its own State Implementation Plan (“SIP”) for CSPAR first.   States would only have been able to establish their own programs by submitting a revised SIP and obtaining EPA’s agreement to withdraw the federal trading program.  The Court found that EPA had turned the Act’s requirement for states to serve as the primary implementers of the stationary source program on its head and rejected the agency’s approach.

The Court’s decisions in this case and in North Carolina v. EPA suggest that a regional cap-and-trade program for interstate air pollution may be very difficult to implement without new legislation.  But, in light of the Court’s willingness to accept the notion that all sources within an upwind state may contribute equally to a specific NAAQS exceedence, state-wide cap-and-trade programs may be permissible.  While a state-wide credit trading system will not be able to draw on as broad of a range of sources for emission reductions, it is likely preferable to a command-and-control scenario. 

EME Homer City Generation, L.P. v. EPA, No. 11-1302, slip op. (D.C. Cir. Aug. 21, 2012) (Kavanaugh, J).