EME Homer City Generation, L.P., v. EPA, et al., No. 11-1302 (D.C. Cir. Aug. 21, 2012)
In a sure to be controversial 2-1 decision, complete with a blistering 44-page dissent, the D.C. Circuit vacated EPA's Cross-State Air Pollution Rule, alternately known as the Transport Rule ("CSAPR" or the "Rule"). CSAPR established a multi-state market-based NOx and SOx emissions reduction program for the power industry under the Clean Air Act's ("Act") "good neighbor" provision, and was intended to replace the similar NOx and SOx emissions reduction program established under the Clean Air Interstate Rule ("CAIR"). The Court's decision struck down the methodology EPA used in CSAPR to set state emissions budgets for NOx and SOx. In turn, the court provided its own detailed interpretation of how EPA must set emissions budgets under the Act's good neighbor provision, which, while strict, would be otherwise unremarkable if this were the first rule where EPA employed the now vacated budget setting methodology. The reason the decision was somewhat unexpected was because this is the third such rule to be reviewed by the court.
The primary impact of the decision will be delay. It will be several years before EPA produces and implements a new transport rule to replace CAIR (which the Court left in place). EPA will need to develop a new rule and new analyses using the budget methodology mandated here by the court. Based on another part of the Court's decision, EPA will also be obligated to provide states with an opportunity to adopt a program that satisfies the new transport rule's basic requirements before it can impose the new rule as matter of federal law, which by statute EPA cannot offer states that opportunity until after it has finalized the new transport rule.
Sum result, it is not at all clear one way or another whether any new transport rule established to comport to the Court's specified methodology would produce a rule that, at the end of the day, would be any less stringent in the aggregate than the now vacated CSAPR.
In August of 2011, the EPA promulgated the Transport Rule to implement a provision in the Act known as the "good neighbor requirement." The good neighbor requirement prohibits emissions of air pollutants by states that would "contribute significantly to nonattainment" of the National Ambient Air Quality Standards (NAAQS) in other states (i.e. interstate transport). 42 U.S.C. - 7410(a)(2)(D). To address transport that contributed to nonattainment of ozone and PM 2.5 NAAQS, CSAPR set emissions reductions for twenty-eight upwind states with respect to SOx and NOx and nitrogen oxide based on those states' "significant" contributions to downwind states nonattainment issues, then simultaneously issued Federal Implementation Plans (FIP) to implement the requirements for the specific states in question.
The EPA defined the required emissions reductions in a two-step process. First, EPA determined whether upwind states were emitting amounts of pollution that would contribute significantly to downwind state nonattainment based on emissions modeling. This assessment determined whether states were "in" the transport rule or "out," and for which air pollutants. Having determined which states "contribute significantly" to nonattainment in other states, EPA employed a completely different methodology to determine the extent of the emissions reductions that would be required of each of the states. That approach evaluated a series of reductions based on differing cost-per-ton levels and evaluated the downwind air quality impact of the varying levels of reductions. Using these costs and air quality data EPA settled on a uniform level of reduction for all states for each pollutant, and set state emission budgets based on that decision.
The Court's CSAPR Decision
The Court concluded that the CSAPR approach exceeded EPA's authority under the Act because the statute only authorized EPA to eliminate emissions equal to a state's "significant contribution" to downwind nonattainment. Since EPA's actual emissions reductions for each were not based at all on the amount of each state's "significant contribution" emissions (which EPA actually never quantified, so it is impossible to tell whether EPA's methodology required any given state to reduce more than its fair share (its portion of significant contribution)), and consequently the Rule exceeded EPA's authority. The Court's interpretation of the good neighbor provision is relatively unremarkable because the statute clearly limits EPA's authority to reduce emissions to the level of emissions that EPA determines comprise a state's "significant contribution." However, in comments on the rulemaking, no party asserted that EPA's methodology would or was even likely to require greater emission reductions than a state's significant contribution. To address that potential defect, the Court essentially established an affirmative duty on the part of EPA itself to ensure that required reductions did not exceed significant contribution levels.
In essence, the Court struck down the rule because EPA did not undertake the analysis to ensure that its own rule did not exceed its statutory authority,
Helpfully, however, the Court for the first time (in the third rule issued under the good neighbor provision) spelled out in detail, with examples, what analysis EPA must undertake to ensure that no state is charged with reducing emissions in beyond its own fair share of significant contribution. First, EPA can prohibit emissions from a state that "contribute significantly" and no more. Second, EPA must also ensure that reductions required among upwind states are proportionate to each state's contribution and no more. Third, EPA must ensure that that the required reductions take into account the amount of emissions contributed by the non-attaining downwind state itself so that the downwind state does not obtain more relief than is necessary for attainment less its own contribution.
As noted, the primary controversy over this aspect of the Court's decision stems from the twin facts that (1) EPA used a similar methodology in CAIR, and (2) no commentor raised with specificity the issue of whether EPA's basic methodology contravened the statute (i.e. what the Court's decision turned on). These issues form the primary objection of the dissent (it is interesting to note that the dissenting justice was the only current justice that also participated in the CAIR decision), which also notes that the notice issues are more than simply procedural since EPA never had any reason to evaluate whether its methodology was consistent with the statute.
The Court majority addressed this issue largely by arguing that if EPA had read the CAIR decision more closely it would have been on notice that the Court was going to require some linkage between emissions reductions and levels of significant contribution. Upon re-reading the decision in CAIR, we agree that the necessary linkage point was made in the decision, but highlight that it was not specifically made with respect to the core issues of that case - EPA's fundamental methodology for setting budgets: hence the confusion. EPA had employed a similar two-step methodology in CAIR, which was not overturned or specifically addressed because no party challenged it. However, the necessary linkage between significant contribution and the mandated emissions controls was the basis for the CAIR court striking down CAIR's emissions trading program (any transport rule must meaningfully ensure that it eliminates each state's "significant contribution"). That linkage was also the basis for the court striking down EPA's use of "fuel factors" to adjust each states emissions budgets to account for higher emitting coal sources versus lower emitting gas sources. Such an approach would require some states with greater gas generation to reduce beyond their level of significant contribution.
In retrospect, it is quite clear from a reading of the CAIR decision that if any party had directly challenged EPA's two-step methodology for calculating required emission reductions, the court would have struck it down at the time using the same reasoning as the CSAPR decision. But because the challenges to EPA's methodology were (1) indirect, and (2) addressed two key elements of EPA trading programs (emissions trading and equitable allowance allocations), and because no party (again) pressed home a direct challenge to EPA's two-step methodology in CSAPR, it is understandable that EPA's and others "take-away" from the CAIR decision was the needed focus on crafting an acceptable trading program and an acceptable allowance allocation methodology.
Within that context, there was great anticipation as to whether the court here would uphold two key issues: EPA's revised trading program and EPA's allowance allocation methodology. Because the court went in an unexpected direction, it did not reach a conclusion on either issue, so both issues remain unresolved until the fourth go-round.
The Court did hold that EPA could not require the submission of a "good neighbor" State Implementation Plan ("SIP") from each state upon promulgation of a new or revised NAAQS, and instead could only require such a submission after it had finalized a transport rule and developed each states emission reduction obligation. Although the Act clearly lists the submission of a good neighbor SIP as a requirement of each state upon promulgation of a NAAQS, the court reverts from the approach that EPA must adhere strictly to add specificity requirement to the obligation of a state to submit a good neighbor SIP, reasoning a state could not meaningfully know what its significant contribution could be until EPA defines it.
This effect of this decision will be to further delay the actual implementation of the next transport rule needed to replace CAIR since EPA must give states the time and opportunity to implement the requirements of that next transport rule before it can require compliance with it.
EPA will now have to decide whether to appeal the decision or go back to the drawing board. Given the vigorous dissent, and the emergence of cross-cutting issues such as when an issue has been sufficiently raised in comments for the court to pass upon it, there is certainly a possibility of EPA filing a petition to rehear the case en banc. That approach would seem to be more likely to produce a quicker replacement for CAIR than undertaking a new transport rulemaking under the new methodology, and providing states with time to adopt its requirements in SIPs. However, it may also be appropriate for EPA to reassess the entire transport rule requirements given the ongoing and expected changes in generation mix as power companies comply with other EPA rules. It may simply be the case that after implementation of EPA's utility mercury and air toxics standards ("MATs") rule (which will force large amounts of coal unit retirements and SOx controls an all those that remain), and going-forward far fewer states will trip the significant contribution threshold that CSAPR sought to address. Any future transport rule could end up a much scaled back effort, or limited primarily to NOx.