The Supreme Court recently handed EPA a significant victory in its long battle with states and industry groups over regulations aimed at combatting interstate air pollution from power plants. By a vote of 6-2 inEPA v. EME Homer City Generation, the Court reversed the D.C. Circuit Court of Appeals’ vacatur of the Cross-State Air Pollution Rule (CSAPR), a rule promulgated under the “Good Neighbor Provision” of the Clean Air Act (CAA) that sets limits on nitrogen oxide (NOx) and sulfur dioxide (SO2) emissions in 27 upwind states to achieve downwind attainment of National Ambient Air Quality Standards (NAAQS). As a result, CSAPR will once again replace its predecessor, the Clean Air Interstate Rule (CAIR), which was struck down by the D.C. Circuit in 2008 but allowed to remain in effect until EPA adopted a valid replacement. The decision illustrates the Court’s increasing willingness to defer to EPA’s interpretation of ambiguous provisions of the CAA, as well as its reluctance to rule against EPA, even when the agency’s actions go against the will of many states.

EPA’s Authority to Regulate Interstate Air Pollution

Section 109 of the CAA directs EPA to establish NAAQS for pollutants considered harmful to public health and the environment. Once EPA sets a new or revised NAAQS, states have three years to develop State Implementation Plans (SIPs) for achieving compliance with the standard. Among other requirements, a SIP must satisfy the Good Neighbor Provision, which “prohibit[s] … any source or other type of emissions activity within the State from emitting any air pollutant in amounts which will … contribute significantly to nonattainment in, or interfere with maintenance by, any other State with respect to any … [NAAQS].” A state’s failure to adequately address the Good Neighbor Provision, like any other inadequacy in a SIP, triggers EPA’s obligation to adopt a Federal Implementation Plan (FIP) for that state within two years of the inadequacy determination.

CSAPR and Its Predecessor

EPA has been attempting to regulate interstate air pollution from power plants for nearly a decade. In 2005 it adopted CAIR, which set limits on NOx and SO2 emissions from 27 upwind states to achieve downwind attainment of NAAQS. On July 11, 2008, the D.C. Circuit vacated CAIR, finding the rule so “fundamentally flawed” that “[n]o amount of tinkering … or revising … will transform [it] into an acceptable rule.” The court nevertheless left CAIR in place until EPA could promulgate a valid replacement.

EPA’s response to that decision was CSAPR, under which an upwind state “contribute[s] significantly” to downwind nonattainment to the extent its exported pollution both produces 1 percent or more of a NAAQS in at least one downwind state, and could be eliminated cost-effectively, as determined by EPA. For each upwind state that met those criteria, EPA created an annual emissions budget representing the total quantity of pollution the state could produce in a given year under CSAPR. Having earlier determined each regulated state’s SIP to be inadequate, EPA, contemporaneous with CSAPR, promulgated FIPs allocating each state’s emissions budget among its in-state sources.

Homer City

On August 21, 2012, the D.C. Circuit vacated CSAPR, finding that the rule exceeded EPA’s authority under the CAA in two respects. First, EPA was required to give states a reasonable opportunity to allocate their emission budgets before issuing FIPs. While acknowledging that EPA’s FIP authority is generally triggered when the agency disapproves a SIP, the court was nevertheless concerned that states would be incapable of fulfilling the Good Neighbor Provision without prior EPA guidance. Second, the court found EPA’s two-part interpretation of the Good Neighbor Provision unreasonable, concluding that EPA must disregard costs and consider exclusively each upwind state’s physically proportionate responsibility for downwind air quality problems.

In its April 29, 2014 decision in Homer City, the Supreme Court reversed the D.C. Circuit’s decision, finding that the CAA does not mandate that states be given a second opportunity to file a SIP after EPA has quantified the state’s interstate pollution obligations. Rather, EPA need only disapprove a SIP to trigger the agency’s authority to issue a FIP. The fact that EPA had previously accorded upwind states a chance to allocate emission budgets among their in-state sources did not, according to the Court, show that the agency acted arbitrarily by refraining to do so, as the agency was simply acting in accordance with the D.C. Circuit’s mandate to “act with dispatch” in amending or replacing CAIR.

In addition, the Court found that EPA’s cost-effective allocation of emission reductions among upwind states was a “permissible, workable, and equitable interpretation of the Good Neighbor Provision,” explaining that “[t]his Court routinely accords dispositive effect to an agency’s reasonable interpretation of ambiguous statutory language.”

Future Implications

Although the Homer City decision constitutes a victory for EPA, it also creates new hurdles that will have to be crossed before CSAPR can be fully implemented. First, CSAPR was set to take effect on January 1, 2012. Because that date has long since passed, EPA will have to issue new regulations with new implementation dates to replace those that have already lapsed. In addition, the NOemission limits in CSAPR will likely have to be recalculated because they are based on 1997 NAAQS rather than the stricter standards that were established in 2008. Further, the D.C. Circuit and other courts will have to resolve numerous lawsuits over EPA rules related to CSAPR that were put on hold pending the Court’s decision in Homer City and are now expected to resume.

From a broader perspective, given the Court’s willingness to defer to EPA, even in the face of ambiguous statutory provisions and significant opposition from several states, the Homer City decision bodes well for EPA as it girds for battle over its pending greenhouse gas New Source Performance Standards for new and existing power plants. Stay tuned.

The full text of the opinion can be found on EPA’s website.