Background – The Tailoring Rule On May 13, 2010, the United States Environmental Protection Agency (“EPA”) issued a final rule requiring new or modified stationary sources of Greenhouse Gas (“GHG”) emissions located in areas of the country that are in attainment or are unclassifiable for any National Ambient Air Quality Standard to obtain pre-construction permits under section 165(a) (Prevention of Significant Deterioration) of the Clean Air Act (“Act”). This new GHG rule also defined when new and existing industrial sources of GHG emissions were required to obtain a Title V permit under section 502 of the Act.

In adopting the so-called “Tailoring Rule” for GHG emitting sources, EPA decided to ignore the statutory numerical thresholds that traditionally triggered the PSD and Title V requirements for “major emitting facilities” and “major sources.” The PSD rules require specified stationary sources of air pollutants that directly emit, or have the potential to emit, 100 tons per year or more of any air pollutant, or any other (non-specified) source with the potential to emit 250 tons per year or more of any air pollutant, to obtain a PSD permit. CAA §§ 165(a)(1) and 169(1). Title V permits are required for sources that directly emit or have the potential to emit 100 tons per year or more of any air pollutant. CAA §§ 302(j) and 502(a). EPA’s rationale for the Tailoring Rule was that while PSD and Title V triggering thresholds were appropriate for criteria pollutants, they were not “feasible” for GHGs because GHGs from even minor sources are emitted in much larger quantities. It perceived an administrative nightmare if all sources of GHG emitting 250 tons per year or more were subject to PSD and the need to obtain a Title V permit. Despite EPA’s purported largess, the new GHG rules still applied to some relatively small industrial sources.

EPA initially phased in the GHG permitting requirements in two steps, but promised to later consider adding smaller sources in a third step.

Step 1 required GHG sources emitting 75,000 tpy or more that were already subject to the PSD and Title V permitting programs (“anyway sources”) to determine the Best Available Control Technology (“BACT”) for their GHG emissions. In Step 2, new or modified sources emitting 100,000 tpy or more of GHGs were required to obtain PSD and Title V permits, even if they did not exceed the permitting threshold for any criteria pollutant (“GHG only sources”). Step 3, which might have drawn smaller GHG sources into the PSD and Title V programs, was considered by EPA, but it decided in June 2012 that it would not lower its threshold limits.

According to EPA, without the Tailoring Rule, and its compliance deadlines and triggering thresholds, PSD and Title V permitting at the 100 and 250 tons per-year level would have taken effect immediately and would have overwhelmed the clean air program’s ability to manage air quality.

The Court’s Decision and Analysis Petitions for Review challenging EPA’s Tailoring Rule were filed in the District of Columbia Circuit Court of Appeals. On June 26, 2012, the Court of Appeals held that EPA’s determination that anthropogenically induced climate change threatened both public health and public welfare was rational, and that EPA was, therefore, required to extend its PSD and Title V permitting programs to emitters of GHG. Coalition for Responsible Regulation v. EPA, 684 F.3d 102 (D.C. Cir. 2012).

Petitions for Certiorari were granted by the Supreme Court, and the Court decided to address two questions. First, whether EPA had permissibly determined that a source may be subject to the PSD and Title V permitting requirements on the sole basis of its potential to emit greenhouse gases. Second, the Court decided to consider whether EPA permissibly determined that “anyway sources” – sources that triggered PSD or Title V because they also exceeded threshold levels of criteria pollutants – might be required to limit their greenhouse gas emissions by employing BACT. A 5-to-4 majority1 of the Court held that EPA’s rewriting of the numerical statutory thresholds for classifying sources as “major,” and subjecting those sources to PSD and Title V permitting requirements, was not permissible. The majority also held that to require BACT for “anyway sources” of GHG emissions was permissible.

With regard to the first question, Justice Scalia, citing EPA’s own regulations and memoranda, reasoned that “any air pollutants” under the PSD and Title V provisions of the Act were limited to regulated air pollutants, 40 CFR § 52.21(b)(1)(2), which he characterized as a class much narrower than the Act-wide, all-encompassing definition of an “air pollutant” as interpreted in Massachusetts v. EPA, 549 U.S. 497. Consequently, he concluded that the Act was not using “air pollutant” in the PSD and Title V context in the broad sense to mean any airborne substance whatsoever.

Massachusetts does not foreclose the Agency’s use of statutory context to infer that certain of the Act’s provisions use “air pollutant” to denote not every conceivable air borne substance, but only those that may reasonably be encompassed within the particular regulatory program. (UARG, p. 14).

He reasoned from that perspective that regulating GHGs in the PSD and Title V programs was not, as the Court of Appeals had concluded, mandatory.

Also citing EPA’s own statements – this time concerning EPA’s conclusion that without its limiting of GHG sources, the results would be administratively “calamitous” and would severely undermine what Congress sought to accomplish – Justice Scalia also concluded that the PSD and Title V programs were not designed to extend beyond a relative handful of large sources capable of shouldering heavy substantive and procedural burdens.

Justice Scalia then concluded that EPA’s rewriting of the statutory thresholds to avoid the calamitous results it had itself predicted was not permissible because EPA did not have the power to “tailor” legislation to meet bureaucratic policy goals, and such a tailoring could not be justified as an exercise of EPA’s enforcement discretion, but represented an “enormous and transformative expansion” of EPA’s regulatory authority without clear congressional authorization. (UARG, p. 19)

As to “anyway sources,” despite some concerns about how BACT for GHGs might be determined, Justice Scalia rejected arguments that EPA may never require BACT for GHGs because BACT was fundamentally unsuited to GHG regulation, and applying it would be more about regulating energy use than source control.

For one BACT is based on “control technology . . . therefore, it has long been held that BACT cannot be used to order a fundamental redesign of the facility. (UARG, p. 26).

Justice Scalia also opined that BACT application to “every pollutant subject to regulation under the Act” was less an “open-ended” concept for regulation than the triggering definition of “any air pollutant” for the PSD and Title V programs, and could only be read to include GHGs because they were subject to regulation under Title II (Motor Vehicle Emissions) of the Act. He also concluded that applying BACT to GHGs was not “disastrously unworkable,” and did not result in a dramatic expansion of EPA authority. For Justice Scalia, there were presumed protections in the definition of BACT from EPA overreaching, but he clearly reserved that judgment to another day.

The net result of the Court’s holdings is that existing sources of GHGs, such as some cryogenic gas plants, pipeline compressor stations and other smaller sources that are “GHG only,” will no longer be part of the Title V program,2 and new or modified GHG only sources will not need to go through the PSD new source review permitting process.

Justice Breyer, joined by Justices Sotomayor and Kagan, concurred in part and dissented in part. Those justices agreed that “anyway sources” must meet BACT requirements for their GHG emissions, but also concluded that EPA could require GHG only sources that emitted 75,000 tons of GHGs per year to also employ BACT. Justice Alito, joined by Justice Thomas, also concurred in part and dissented in part. They agreed with Justice Scalia that EPA could not change the numerical threshold for a source to be “major.” However, they also concluded that the majority was wrong in deciding that “anyway sources” must install BACT, and chided the majority for being inconsistent by departing from a literal interpretation of the term “pollutant,” on the one hand, and then on the other hand exempting GHG only sources by adopting a literal interpretation to justify the requirement to utilize BACT.

Future GHG Regulation What can we take from the Supreme Court’s holding in UARG v. EPA? If you are one of the GHG only sources that have escaped permitting requirements, you can breathe a sigh of relief at your reduced administrative and substantive burden.3 However, it is generally conceded that the group of GHG only sources is small in number and EPA’s approach was largely validated by the Court’s decision. Apparently the GHG only sources amount to just 3 percent of the GHG sources that were covered by the Tailoring Rule. Judge Scalia acknowledged that fact when he announced the decision. However, it is also clear that the Court is watching EPA closely and will consider attempts to regulate GHGs in the future on a program-by-program basis, and will also closely examine whether GHGs are “pollutants” for the purpose of triggering the Act’s existing and new source programs. The decision does represent the successful continuation of the Obama administration’s efforts to proceed with attempts to mitigate climate change without help from the Congress, so it bodes well for EPA’s future creativity.

Is there something in the Court’s analysis that presages how the Court will deal with EPA’s New Sources Performance Standard for CO2 emissions from new coal and natural gas-fired power plants, or its Clean Power Plan that seeks to have states employ “beyond the fence” actions as part of a Best System of Emission Reduction?4 Justice Scalia writes in his opinion that “when an Agency claims to discover in a long-extant statute an unheralded power to regulate a “significant portion of the American economy . . . we typically greet its announcement with a measure of skepticism.” (UARG, p. 19) Will Justice Kennedy join the conservative gang in concluding that re-dispatching from coal to gas or demand reduction are beyond the scope of its power under section 111(d), or will the Court swing to the view of the Court’s liberal wing that flexibility in interpreting the Act keeps it from being obsolete? See proposed Clean Power Plan here. Will EPA try to “tailor” applicability under NSPS in the same way it attempted to do it for the PSD and Title V programs?

Justice Scalia opined that the power of executing the laws passed by Congress necessarily includes both authority and responsibility to resolve questions left open by Congress, but does not include a power to revise clear statutory terms that do not work in practice. For industry, its approach to dealing with and commenting on proposed NSPS rules for the electric generating sector and the Obama administration’s Clean Power Plan should recognize that infeasibility and Agency overreacting can still sway the Court, particularly since the definition of what constitutes a pollutant under various provisions of the Act remains unanswered. Thus, for example, an open question remains as to whether “establishing standards of performance for any existing source for any air pollutant” under section 111(d) may include standards of performance for the emission of GHGs.

Conclusion The conservative wing of the Court and apparently Justice Kennedy will continue to closely scrutinize EPA’s efforts to use the existing provisions of the Clean Air Act to address climate change. Whether EPA will be able to do so may depend on whether a majority of the Court views GHG as a “pollutant” that can fit within a clean air regulatory program without creating undue substantive and procedural burdens.

Section 111(d) of the Clean Air Act, which EPA cited as its basis for the Clean Power Plan, authorizes EPA to establish standards of performance for existing sources for air pollutants, but has only been used a handful of times.

In order to take full advantage of UARG and the unchartered territory in which EPA has ventured, sources potentially affected by EPA’s Clean Power Plan should consult with counsel to make sure they understand the implications of UARG before they file comments.