On August 21, 2012, the DC Circuit by a 2-1 split decision struck down the US Environmental Protection Agency's (EPA) Cross-State Air Pollution Rule (CSAPR).  EME Homer City Generation v. EPA, No. 11-1302 (DC Cir. Aug. 21, 2012).  CSAPR represented EPA's latest attempt to address emissions of nitrogen oxides (NOx) and sulfur dioxide (SO2) from power plants in upwind states that cause downwind states to fail to attain (or maintain) National Ambient Air Quality Standards (NAAQS) for ozone and fine particulate matter.  An earlier attempt to address the issue, the Clean Air Interstate Rule (CAIR), had also been struck down by the Court, though it has been allowed to continue in effect pending EPA's development of CSAPR.  In this case, the Court vacated CSAPR in its entirety and remanded the rule to EPA, ordering the agency to continue to implement CAIR until a valid replacement could be formulated.

The Court, in a majority opinion written by Judge Brett Kavanaugh, found that EPA acted beyond its statutory authority under the Clean Air Act (CAA) by requiring upwind states to make emissions reductions greater than necessary to eliminate their "significant contribution" to downwind states' non-attainment of NAAQS.  The majority further found that EPA acted unlawfully by issuing federal implementation plans (FIPs) to implement CSAPR without allowing the regulated states an opportunity first to address EPA's "significant contribution" quantification through a state implementation plan (SIP) process.  Judge Janice Rogers wrote a lengthy dissent, taking issue with both the majority's determination that it had jurisdiction over these issues and its analysis of the merits.  The ruling will have some impact on other EPA actions that were premised on planned CSAPR reductions but should not affect other separate major EPA rules, including the Mercury and Air Toxic Standards (MATS) rule.  EPA has until October 5, 2012 to determine if it will seek a rehearing in the case and is not likely to take further significant regulatory action on CSPAR until after the presidential elections.

Background

EPA issued a final CSAPR rule in August 2011, three years after the DC Circuit had invalidated CAIR.  The DC Circuit, in North Carolina v. EPA, 531 F.3d 896 (DC Cir. 2008), vacated CAIR because, among other things, the Court found it was not likely to result in sufficient reductions within a sufficient timeframe to ensure upwind states reduced their significant contributions to downwind state non-attainment.  In other words, the Court held that EPA did not impose a stringent enough program to meet statutory requirements under the "Good Neighbor" provision of the CAA, section 110(a)(2)(D)(i)(I).

EPA then developed CSAPR, taking into account the Court's holding in North Carolina as well as the Court's prior upholding of the NOx SIP program in Michigan v. EPA, 213 F.3d 663 (DC Cir. 2000), a predecessor to CAIR, and other relevant factors.  Among other things, CSAPR developed a numerical threshold based on air-quality data to determine which states made significant contributions to downwind state non-attainment (1% of the relevant NAAQS) and so were covered by the regulation.  For those states, EPA  then calculated the states' levels of significant contribution using cost-based factors, used those calculations to assign budgets to those states and, at least for the first year of the program, allocated allowances to power plants within those states through a FIP.

A number of states, generators and industry groups challenged CSAPR on a broad array of arguments, while a number of states, generators and environmental groups intervened to support EPA and the rule.  Many of the petitioners further sought to stay the rule, which was to go into effect on January 1, 2012, pending review by the Court of the merits.  At the end of 2011, the Court stayed the rule and expedited briefing and oral argument.

The Opinion

Although petitioners raised a multitude of issues on appeal, the majority based its opinion on two specific issues on which discussions focused at oral argument, and which it found to be independent bases for vacating the rule.  The first issue was whether EPA had exceeded its authority under the CAA's Good Neighbor provision by potentiallyrequiring upwind states to reduce emissions by more than their own significant contributions to a downwind state's non-attainment.  The second issue was whether EPA exceeded its statutory authority by quantifying "significant contribution" while simultaneously issuing a FIP, rather than allowing states an opportunity first to issue SIPs that would meet the standard EPA had determined, as the agency had done in prior regulations.

Before reaching the merits of these arguments, the Court determined that it had jurisdiction and that petitioners had not waived these arguments by failing to raise them in the administrative record. Rather, the Court found that, on the first issue, EPA had been put on adequate notice that the two-step process was allegedly unlawful.  As to the second, the Court found that petitioners' challenges to EPA's FIP determination were timely filed.  Jurisdiction was a key focus in oral argument and in the dissent.

As to the merits of the first issue, whether EPA could establish a two-step process for quantifying "significant contribution," the majority found that the CAA "requires every upwind State to clean up at most its own share of the air pollution in a downwind State -- not other States' shares." The Court reasoned that in setting a numerical threshold for whether a state would be included in the program in the first place -- whether the state contributed 1% of the relevant NAAQS to the downwind state -- EPA established a "floor" for how much reductions it could require any upwind state to make. The Court then rejected as beyond statutory authority EPA's second step, whereby EPA used a cost-based standard to determine how much pollution an upwind state was required to reduce since that amount could be below the floor. The Court also held that EPA's methodology failed to take into account the relative contributions of other upwind states as well as that of the affected downwind states, leading to "over control" of the downwind states.

On the FIP issue, the Court viewed CSAPR as reversing the normal statutory order by which EPA issues standards and states try to meet those standards through SIPs.   According to the Court, EPA can take back-stop action only when the SIP or SIP revision issued by a state lacks a required element or EPA finds a SIP deficient.  The Court reiterated that this process was key to the "statutory federalism" established under the CAA.  Thus, the Court ruled, EPA could not justify its "'FIP-first'" approach by finding that SIPs did not meet obligations before EPA had quantified those obligations under CSAPR.  The Court further noted that EPA, in the NOx SIP Rule and in CAIR, had given states an opportunity to meet the requirements through SIPs, and so could and should have done so in CSAPR.

Having found CSAPR to be based on an "unsound foundation" and unlawfully implemented, the Court determined that the flaws were too fundamental to permit the preservation of any part of the rule.  It therefore vacated the rule in its entirety and remanded to EPA, ordering the agency to continue to administer CAIR pending its development of a "valid replacement."  The Court withheld issuance of its mandate until seven days after disposition of any timely petition for rehearing or rehearing en banc, as provided in local and federal rules.

Judge Rogers, who was on the North Carolina panel that struck down CAIR, wrote a strong and lengthy dissent, arguing that the majority improperly rewrote the statute and disregarded prior rulings of the Court both on the requirements of the Good Neighbor provision and jurisdictional issues.  In particular, Judge Rogers asserted that the Court clearly lacked jurisdiction to consider the issues upon which it based its ruling, arguing the FIP issue was a collateral attack on prior EPA actions no longer subject to review.  She further argued that no party had raised statutory issues with regard to EPA's two-step process in the administrative record.  On the merits, she found that EPA reasonably acted within its statutory authority to issue FIPs following a failure of the states to meet their Good Neighbor provision requirements and by using the two-step process, which had been allowed by past panel decisions.

Further Review and Potential Impacts of the Ruling

EPA now has 45 days from the date of judgment -- October 5, 2012 --  to decide whether to seek rehearing from the same panel or rehearing en banc before all active judges in the DC Circuit.  The decision to seek such review will ultimately be made by the Department of Justice, as would any decision to seek review from the Supreme Court, another avenue of review EPA could seek.

On the regulatory front, EPA will need to consider whether and how it might fashion a rule to meet the limits imposed by the Court's opinion.  This will not be easy, especially through EPA's preferred markets-based trading approach, as the Court essentially held that EPA must come up with a quantification of how much each upwind state "actually" contributes to downwind states' non-attainment, fully taking into account the proportionality of all other upwind states' contributions and the downwind states' own emissions -- and do all this  without requiring "over control" in any one downwind state.  At the same time, EPA must meet the mandates of the Court's prior ruling in North Carolina that it must develop a program that is not too lenient on states and sources but is one that results in real and immediate reductions.  Further, EPA will need to determine how to give states reasonable time to issue SIPs that would meet EPA's revised quantification of "significant contribution" without unduly delaying the regulations.  Allowing states to first address EPA's quantification through SIPs could delay implementation of a final rule until 2016, if not later.  EPA may also face pressure, in the form of CAA section 126 petitions from downwind states that face consequences for failure to meet NAAQS due to contributions from upwind sources.  Those petitions seek a determination by EPA to impose controls on such upwind sources directly, rather than through SIPs.

All these regulatory considerations will be undoubtedly affected by the upcoming presidential and congressional elections, as it is unlikely EPA will take any significant regulatory action addressing the ruling before then.  Critics of EPA in Congress have already begun calling for legislation to address cross-state pollution, given EPA's failure to do so in a valid rule.

Beyond CSAPR, EPA will need to reassess other regulatory decisions it has taken that were based on assumptions of reductions from CSPAR.  This includes its determination in May 2012 that compliance with CSAPR meets the requirements of its regional haze rule for states covered by CSPAR, as well as certain recent attainment re-designations for ozone and fine particulate matter.  It is unlikely, however, that the invalidating of CSAPR will have any impact on other current EPA regulations, such as MATS, or other proposed rules under the CAA that are not dependent on CSAPR.  CSAPR was based on a fairly unique part of the CAA and focused on implementing reductions to emissions, not on setting standards.  MATS and proposed NAAQS for fine particulate matter, on the other hand, are authorized under completely different sections of the Act, involve different considerations, and implicate EPA's standard setting authority, where courts have traditionally given EPA substantial discretion.  Those rules, equally controversial and subject to challenge, will rise or fall on their own merits.