On June 29, 2015, the Supreme Court reversed a D.C. Circuit decision upholding the Environmental Protection Agency’s (EPA) Mercury and Air Toxics Standards Rule (MATS), which established stringent emissions standards for mercury and other hazardous air pollutants emitted by power plants. In a 5–4 decision, the majority held that EPA impermissibly excluded consideration of costs when evaluating whether the regulation of hazardous air pollutants from power plants “is appropriate and necessary.” Hazardous air pollutants are regulated by EPA under Section 112 of the Clean Air Act. In 1990, Congress established a separate regulatory structure for hazardous air pollution from power plants, directing EPA to conduct a study of such emissions and to establish emissions limits if it determined that such regulation is appropriate and necessary.
After completing the required study, EPA determined that regulation was appropriate and necessary and, on February 16, 2012, published the MATS Rule. In making the determination that regulation was appropriate and necessary, EPA did not consider the costs of the proposed regulations. However, in a subsequent cost-benefit analysis, EPA concluded that the costs of the proposed rule substantially exceeded the benefits of reducing mercury emissions, although it asserted that additional benefits would be realized due to reductions in emissions of other nonhazardous pollutants. The emissions limits took effect earlier this year for the majority of power plants; approximately 170 facilities were granted an extension of one year to come into compliance with the emission limits by April 16, 2016.
Below are five key highlights from the Supreme Court’s decision.
- EPA’s Exclusion of Costs From Consideration was Unlawful. Writing for the majority, Justice Scalia held that it was unreasonable for EPA to refuse to consider costs when making its determination that regulation was appropriate and necessary. Citing prior precedent, the Court explained that to be lawful, an agency regulation must be based on a consideration of the relevant factors, and recognized that agencies frequently consider costs when determining whether to regulate. The Court went on to explain that the applicable “appropriate and necessary” standard at issue in the case is comprehensive in nature and necessarily encompasses a consideration of costs. The Court also found that EPA had only limited ability to consider costs at later stages of the rulemaking process because Section 112 requires EPA to establish minimum emissions standards based on the performance of the best-performing sources in each source category. While the Court questioned whether the rule was cost-effective based on EPA’s cost-benefit analysis, it made clear that EPA’s error was its refusal to even consider costs at the initial “appropriate and necessary” determination.
The Dissent agreed with the Majority that it would be unreasonable for EPA to ignore costs entirely in the Section 112 rulemaking process. However, the Dissent concluded that EPA’s decision to exclude costs when making its “appropriate and necessary” determination was reasonable because EPA intended to and did consider costs at each of the subsequent steps in the rulemaking process. The Dissent emphasized the deference that is owed to EPA when interpreting the requirements of the Clean Air Act and concluded that EPA’s interpretation of how to incorporate costs was reasonable.
- The Precedent for Cost Considerations in Rulemakings. It is notable that all nine Justices agreed that, in the absence of a congressional mandate to exclude costs, it is generally unreasonable for an agency to ignore costs when determining whether to issue regulations. In particular, the Majority noted that there is a strong presumption that Congress intended an agency to consider costs when implementing regulatory statutes, and that imposing regulations without the consideration of their costs may impede the ability of agencies and regulated entities to engage in other more cost-effective regulatory pursuits. According to the Court, “[a]gainst the backdrop of this established administrative practice, it is unreasonable to read an instruction to an administrative agency to determine whether ‘regulation is appropriate and necessary’ as an invitation to ignore cost.” In addition, the Majority opinion also suggests that the Court may be less willing in reviewing future rulemakings to defer to EPA’s judgment regarding when and how costs should be considered. Applying greater scrutiny to EPA’s assessment of costs in the rulemaking process would increase the burden on EPA to justify costly regulations, particularly for industries that have already made significant investments to reduce emissions.
- Potential Impact on EPA’s Clean Power Plan. EPA is likely to proceed to finalize the Clean Power Plan to regulate greenhouse gas emissions from power plants under Section 111(d) of the Clean Air Act in the wake of the Michigan decision. A primary argument made in comments and litigation to date challenging EPA’s proposal is that EPA cannot regulate power plants under Section 111(d) because they are already subject to regulation under Section 112 through MATS. Although the Supreme Court in Michigan found fault with the Section 112 MATS rule, the Court reversed and remanded the decision to the D.C. Circuit and stopped short of a full vacatur. Thus, the arguably preemptive effect of the MATS rule on the Clean Power Plan has not changed at this time. The continued vitality of this argument will rest with the D.C. Circuit as it decides on the specific remedy to implement the Supreme Court’s decision, which is likely to follow briefing on the remedy by the parties.
- Impact on National Ambient Air Quality Standards. The Supreme Court’s decision shows a heightened emphasis on costs in agency rulemakings. At the same time, its immediate legal impact on the role that costs play in establishing and revising National Ambient Air Quality Standards (NAAQS) is more limited. In Whitman v. American Trucking Associations, the Supreme Court held that EPA could not consider costs when revising NAAQS based on the exclusion of costs from consideration of the health-based standard under Section 109 of the Clean Air Act. In the Michigan decision, the Court contrasted the public health-based standard for revising NAAQS in Section 109 as excluding costs from consideration with the comprehensive “appropriate and necessary” standard applicable to power plants under Section 112. However, the Court did suggest that Section 109 is the exception rather than the rule and that agencies must consider costs unless Congress specifically directs them to regulate based on a narrow factor that explicitly excludes costs. In addition, beyond the pure legal holding of the Michiganopinion, the decision is the most recent in a line of Supreme Court cases examining EPA rulemakings with economy wide impacts; a scenario likely to be relevant when EPA revises the Ozone NAAQS standard this fall.
- Next Steps in the D.C. Circuit. After holding that EPA unreasonably failed to consider costs, the Court reversed the D.C. Circuit and remanded the case for further proceedings consistent with its opinion. We would anticipate the D.C. Circuit will issue an order in the next four to seven weeks to schedule further proceedings in that court regarding the appropriate remedy and next steps for EPA on remand.