On July 6, 2011, the U.S. Environmental Protection Agency (“EPA”) issued its final Cross-State Air Pollution Rule (“CSAPR” or “Final Rule”) pursuant to Section 110(a)(2)(D)(i)(I) of the Clean Air Act, 42 U.S.C. § 7410(a)(2)(D)(i)(I).1 The CSAPR requires significant reductions of emissions of sulfur dioxide (“SO2”) and nitrogen oxide (“NOx”) from power plants in 27 states in the eastern half of the U.S. that, according to the EPA, contribute to “downwind” ozone or fine particle pollution in other states. The EPA estimates that the CSAPR will achieve a 73% reduction in SO2 and a 54% reduction in NOx power plant emissions from 2005 levels in the covered states. The CSAPR is available on the EPA’s website, at http://www.epa.gov/airtransport/pdfs/TR_070611_WEB.pdf, but has not yet been published in the Federal Register.  

The CSAPR was initially proposed on July 6, 2010 and was generally referred to as the Transport Rule. The CSAPR replaces the EPA's 2005 Clean Air Interstate Rule (“CAIR”), which the U.S. Court of Appeals for the D.C. Circuit invalidated in North Carolina v. Environmental Protection Agency, 531 F. 3d 896 (D.C. Cir. 2008), modified on rehearing, 550 F. 3d 1176 (D.C. Cir. 2008) based on the court’s finding that the program had “fatal flaws.” More specifically, the D.C. Circuit ruled that:  

  • According to the Clean Air Act,2 the EPA must achieve “something measurable toward the goal of prohibiting sources ‘within the State’ from contributing to nonattainment or interfering with maintenance ‘in any other State.’”3 To do so, the EPA must measure each individual state’s significant contribution to a downwind state’s nonattainment.4
  • The EPA erred by quantifying “significant contribution” (and thus, state budgets) solely based on levels that could be achieved by implementing “highly costeffective controls.”5  
  • “[R]egionwide caps with no state-specific quantitative contribution determinations or emissions requirements . . . [are] fundamentally flawed.”6 The trading program is illegal in its failure to link emissions reductions for each state to any measure of that state’s significant contribution.7 Thus, both the SO2 and NOx trading programs are arbitrary.8  

The CSAPR requires the following states to reduce power plant SO2 and NOx emissions that cross state lines and contribute to ground-level ozone and fine particle pollution in other states: Alabama, Arkansas, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maryland, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Jersey, New York, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Texas, Virginia, West Virginia, and Wisconsin. In addition, the EPA issued a supplemental proposal that, if finalized as proposed, would require Iowa, Kansas, Michigan, Missouri, Oklahoma, and Wisconsin to make summer NOx reductions under the CSAPR ozone-season control program. The comment period on the supplemental proposal closes on August 22, 2011.

The CSAPR sets individual state emissions budgets at levels intended to ensure that upwind states reduce emissions that significantly contribute to downwind nonattainment and maintenance areas. The CSAPR also assigns each state a yearly variability limit, which extends above the state’s emissions budget, in order to take into account the inherent variability in baseline emissions from year to year.9 A state’s emissions budget plus the variability limit is referred to as the state’s assurance level.  

The EPA also finalized Federal Implementation Plans (“FIPs”) for each state that allocate the individual state’s emissions budget among the state’s electric generating units (“EGUs”) that are covered by the Final Rule.10 The EPA will allocate emissions allowances to each covered EGU based on its designated emissions budget. The Final Rule also provides for allowance set-asides for new sources that may be developed in the future. The CSAPR adopts the preferred interstate emissions allowance trading approach originally set forth in the proposed rule, as opposed to the two alternatives, which included intrastate trading and a direct control mechanism. The Final Rule provides for the trading of four distinct products: annual NOx allowances, ozone-season NOx allowances, and two separate SO2 allowances (Group 1 and Group 2 allowances, which cannot be used interchangeably for compliance). A covered source in a Group 1 state can only use Group 1 SO2 allowances for compliance and vice versa. Notably, the CSAPR does not allow for the carryover of any allowances from the Acid Rain Program, NOx SIP Call/NBP, or CAIR.  

The first phase of compliance for SO2 and annual NOx reductions begins January 1, 2012, and for ozone season NOx reductions, on May 1, 2012. The second phase of SO2 reductions begins January 1, 2014. Each covered source is required to have enough allowances in its account at the end of each compliance period to cover all of its emissions (one allowance per ton of emissions). If a covered source fails to have sufficient allowances, it may be subject to civil penalties under the Clean Air Act. A covered source may exceed its FIP-assigned emissions budget provided that it has enough allowances in its compliance account to cover its total emissions. However, if the state exceeds its cumulative budget, then any covered source within the state that has exceeded its individual budget (regardless of whether it has sufficient emissions allowances in its compliance account) may be subject to a two-allowance penalty per excess ton over the EGU’s budget. In other words, in addition to covered sources being required to hold allowances sufficient to cover their emissions, the cumulative emissions in a particular state cannot exceed the state’s assurance level. In making compliance decisions and determining to what extent to rely on purchased or banked allowances, owners and operators will have to take into account the risk of triggering the assurance provisions in the state involved and of incurring significant penalties.

The Final Rule contains a provision not included in the originally proposed rule, which may help to mitigate this compliance risk. Under the Final Rule, owners and operators of covered sources may group various EGUs under a designated common representative (“DR”). Under this provision, if a state exceeds its cumulative emissions budget, rather than penalize each individual EGU that has exceeded its emissions budget, the EPA will consider whether an EGU is grouped under a DR. If it is, then the EPA will consider whether the DR group as a whole has exceeded its cumulative emissions budget. In other words, if a DR is assigned to four units and two of those units exceeded their emissions budget by 20 tons each and two of the units fell short of their budget by 20 tons each, none of the DR’s four EGUs would be subject to a penalty. Covered sources should carefully review the Final Rule’s DR provisions and other applicable law, including competition laws, in developing DR structures for compliance purposes.  

Any party seeking judicial review of the CSAPR must file a petition for review in the U.S. Court of Appeals for the D.C. Circuit within 60 days of the date of publication of the CSAPR in the Federal Register. It appears likely that a major rule such as the CSAPR, which promises to have a significant impact on the covered states and the owners/operators of the affected EGU’s, will attract numerous challenges. For example, the chairman of the Texas Commission on Environmental Quality published an opinion piece in the Houston Chronicle on July 11, 2011 asserting that the CSAPR will hurt jobs, the economy and energy security in Texas. He also asserted that EPA violated the state’s due process rights by including Texas in the Final Rule, and that Texas power plant downwind emissions do not warrant the state’s inclusion in the CSAPR. This is just one example of the types of complaints likely to be directed at the CSAPR.

The following link provides additional state-specific information.