On April 29, 2014, the United States Supreme Court upheld EPA’s Cross-State Air Pollution Rule (CSAPR) in the EPA v. EME Homer City Generation, L.P. case on appeal from the D.C. Circuit Court of Appeals. The majority1 held that (1) the Clean Air Act (CAA) does not command EPA to give states a second opportunity to submit a State Implementation Plan (SIP) after EPA quantifies the interstate pollution obligations of the states before implementing reductions through a federal implementation plan (FIP); and (2) the CAA Good Neighbor provision does not dictate proportional allocation of emissions reductions to satisfy interstate pollution obligations. The Court also found that while some over-control of upwind states is reasonable and acceptable, EPA exceeds its Good Neighbor authority to the extent that it requires a state to make emissions reductions beyond the level necessary to achieve attainment in any downwind state to which it is linked.

EPA promulgated CSAPR in 2011 to replace the Clean Air Interstate Rule (CAIR) that was invalidated and remanded to EPA by the D.C. Circuit in 2008. CSAPR regulated emissions from coal-fired utility units in 27 upwind states that EPA’s modeling determined contributed significantly to non-attainment of National Ambient Air Quality Standards (NAAQS) in downwind states. Having found that coal units in the upwind states contribute significantly to nonattainment in downwind states, CSAPR established a trading program under which allowances were allocated to states and coal units in each state based upon EPA’s determination of the most cost-effective emissions reductions.

The D.C. Circuit stayed CSAPR in 2011 and struck the rule in 2012 holding that (1) the CAA Good Neighbor provision  only  authorizes  EPA  to  apportion  emissions reductions from upwind state coal units in a proportional manner to ensure that only the amounts of pollutants that  contribute  significantly  to  downwind  nonattainment are addressed; and (2) because EPA implemented the CSAPR trading program and allowance allocations to states and state coal units simultaneously through the issuance of a FIP without providing upwind states the opportunity  to  implement  the  CSAPR  allocations  through the SIP process, CSAPR violated the federal structure of the CAA. The Supreme Court reversed the D.C. Circuit and remanded the case back to the D.C. Circuit.

Effect On CSAPR

The Court’s decision raises many questions with respect to the effectiveness of the CSAPR rule and the next steps for EPA. CSAPR established a two-  step  implementation  process  under  which  the  trading program with initial allocations began January 1, 2012, with a step down in allowance  allocations beginning January 1, 2014. Even if this decision were to clear the way for EPA to implement CSAPR this year, is it really possible to start the trading program mid-year?

The case, however, has been remanded back to the D.C. Circuit to resolve a number of remaining petitions appealing CSAPR that were not addressed by the prior decisions. Among these remaining petitions include appeals from Iowa, Missouri, Oklahoma, Wisconsin, and Kansas, as well as challenges to EPA’s use of a trading program, EPA’s methodology for calculating allowance allocations, and past EPA determinations that CSAPR or CAIR is equivalent to best available retrofit technology (BART) under CAA’s Regional Haze Program. Most if not all of these appeals will need to be resolved before the CSAPR program can become effective. The timeline for the resolution of the remaining appeals is uncertain.

EPA could potentially accelerate this process by asking the D.C. Circuit to remand the appeals back to the agency to be addressed in a new rule that would replace CSAPR and would incorporate revisions to the NAAQS that have occurred since CSAPR was promulgated. While CSAPR has been under appeal, EPA has begun work on a new transport rule. Obviously, if EPA proposes a new transport rule, there will be a delay for the regulatory process. If the D.C. Circuit takes up these appeals, a  fairly long delay should be expected. Most or all of this delay would also likely delay the implementation of CSAPR even if the D.C. Circuit lifts the current stay. It is not unrealistic under either scenario that CSAPR or a  new transport rule will not go into effect before 2016 and more likely in the 2018-2020 range.

Impact On Other EPA Rulemakings

From EPA’s perspective this decision will be viewed as decisive legal precedent for EPA’s recent FIP first approach to the implementation of rulemakings and regulatory determinations and the broad discretion that the agency has under the CAA to determining necessary emissions reductions and the methodology to accomplish these reductions. An excellent example of another regulatory program under Title I of the  CAA where EPA has employed a FIP-first approach is regulatory determinations of BART emissions limits under the Regional Haze program. The Regional Haze program was included in the CAA to protect visibility at National Parks, which are classified as Class I pristine areas. In fact, EPA provided notice of the EPA v. EME Homer City Generating, L.P. decision to courts in which appeals of Regional Haze determinations are pending the day after the Supreme Court’s decision.

The challenge for industry will be to limit the applicability of the Court’s decision to the facts unique to the CSAPR rule. EPA’s use of a FIP to both finalize the rule and implement it was driven (as the Court observed) by the fact that when the D.C. Circuit struck CAIR and remanded the rule to EPA, the Court “admonished EPA to act with dispatch in amending or replacing CAIR.” Further, EPA’s decision to allocate CSAPR allowances on a cost- effective basis rather than a manner designed to more precisely address upwind contribution to downwind nonattainment is an issue that can only arise in the context of the Good Neighbor provision of the CAA and is not an appropriate methodology or precedent for  other CAA rulemakings.

The big question then becomes whether (or how) EPA will use the decision in this Case as a basis for successfully defending the proposed CO2 New Source Performance Standards (NSPS) for new fossil-fired EGUs and the soon-to-be-proposed CO2 regulations for existing fossil-fired EGUs.