The DC Circuit Court of Appeals vacated EPA's Clean Air Interstate Rule (CAIR) in a sweeping decision on July 11, 2008 that will significantly affect state and federal efforts to regulate air quality. Lawyers from Squire, Sanders & Dempsey L.L.P. briefed and argued critical portions of this case to favorable client resolution and can offer unique insight into the potential implications of this decision.

CAIR had established a regional cap-and-trade program designed to reduce utility nitrogen oxide (NOx) emissions by 2009 and sulfur dioxide (SO2) emissions by 2010, with additional reductions of both pollutants in 2015. CAIR would have been implemented in 28 Eastern states deemed to be contributing to downwind non-attainment problems in states that are having trouble meeting the National Ambient Air Quality Standards (NAAQS) for ozone or fine particulate matter (PM2.5). With CAIR vacated, the less stringent acid rain SO2 trading program and the more narrow NOx budget trading program are revived at least until EPA can promulgate a revised CAIR program that complies with the court's decision.

North Carolina and other states took issue with the regional trading approach in CAIR because it did not ensure that the utilities and industrial boilers affecting its air quality would reduce emissions. Under a trading program, sources may choose to buy emission allowances rather than install pollution controls to satisfy their CAIR obligations. The court determined that CAIR failed to meet EPA's statutory obligation to address the emissions adversely affecting air quality in each downwind state that petitioned EPA for assistance in controlling upwind sources.

While recognizing that CAIR would have had substantial environmental benefits, the unanimous three-judge panel held that CAIR had "several fatal flaws" in addition to North Carolina's concern including: (1) insufficient justification for the rule's 2015 secondary compliance deadline, which is too late to help states with prior non-attainment deadlines, (2) reliance on "highly cost-effective" controls without establishing whether they sufficiently address interstate pollution, (3) use of fuel factors to grant more allowances to coal-fired units and fewer allowances to oil- and gas-fired units in consideration of the relative costs of control and (4) impermissible interference with the existing acid rain trading program. As a result, the court took the unusual step of nullifying the entire rule "because very little will survive remand in anything approaching recognizable form."

This decision is expected to impact a host of other rulemakings and proposals that depended on the emissions reductions CAIR would have achieved. For example, many states relied on CAIR reductions when modeling attainment with fine particulate matter and NAAQS for ozone. Many utilities were excused from regulations – e.g., Regional Haze Best Available Retrofit Technology (BART) rules and Reasonably Available Control Technology (RACT) obligations – on the basis that they would be adequately controlled by the upcoming CAIR program. Some of these obligations will re-emerge automatically because the rule language excuses only those entities subject to CAIR, which no longer exists.

The court's decision also emphasizes the value of early, continued participation in the rulemaking process, by refusing to consider challenges that were either not raised in comments or belatedly presented. While the court's decision poses immediate regulatory challenges, it also creates a unique opportunity to engage regulators on critical issues including how EPA must regulate emissions with potential interstate impacts and whether, when and how states should regulate local sources in the absence of CAIR to achieve attainment. Corporate entities may also face the need to reassess their disclosures to aptly communicate the increased regulatory uncertainty resulting from the vacatur of CAIR.