In a recent, much-anticipated decision in State of North Carolina v. Environmental Protection Agency, No. 05-1244 (July 11, 2008), the District of Columbia Circuit Court vacated the Environmental Protection Industry’s Clean Air Interstate Rule (“CAIR”) in its entirety.

The immediate impact of the decision will be upon electric generators (“EGUs”), in that sulfur dioxide (“SO2”) allowances under Title IV of the Clean Air Act will no longer be subject to expedited retirement. The new trading scheme for nitrogen oxide (“NOx”) allowances was also vacated by the decision.

The Clean Air Act imposes a duty on each state to have a State Implementation Plan which, inter alia, contains adequate provisions prohibiting in-state sources of air pollution from emitting any air pollutant in amounts that will contribute significantly to nonattainment in, or interfere with maintenance by, any other state with respect to any National Ambient Air Quality Standard (“NAAQS”).

Pursuant to its statutory authority to ensure that states have plans in place that implement the foregoing requirement, the EPA promulgated CAIR in 2005. The stated purpose of CAIR was to reduce or eliminate the impact of upwind sources on out-of-state nonattainment of NAAQS for fine particulate matter (pm2.5) and ozone. In accordance with CAIR, a number of states such as Pennsylvania revised their State Implementation Plans (“SIPs”) by promulgating regulations that incorporated all or most of CAIR by reference. As of the date of the Circuit Court’s decision, none of the revised SIPs had been approved by EPA.

The chemical species actually regulated under CAIR were sulfur dioxide (a chemical precursor of fine particulate matter) and nitrogen oxides (a precursor of both fine particulate matter and ozone). Under CAIR, each of the upwind states would be allocated an emission budget for SO2 and NOx, and would be required to achieve certain emission targets in two phases with deadlines in 2010 and 2015. CAIR afforded the states the option of participating in cap-and-trade schemes for both pollutants. The SO2 scheme would have required elimination of 65 percent of allowances from the already-existing Title IV (acid rain) cap-andtrade program; the NOx scheme supplanted an existing scheme under the previous NOx SIP call. 

The court identified the following flaws in CAIR’s regulatory scheme: 

  • The trading scheme was on a regional basis. While the court agreed that a trading program was a permissible approach to compliance, there was no link between the upwind sources and downwind nonattainment. Thus, for instance, it would be possible for all of the upwind sources of a particular downwind nonattainment area to purchase sufficient allowances to cover all of their current emissions, so that the nonattainment area would receive no relief at all.
  • In promulgating CAIR, EPA ignored the statutory requirement that upwind sources may not interfere with downwind maintenance of NAAQS compliance. EPA had focused solely on downwind areas that were in nonattainment, but had provided no relief to downwind areas that were in attainment, but were struggling to maintain that status as a result of pollution from upwind sources.
  • The 2015 compliance date was invalid because it was not coordinated with the provision in Title I of the Clean Air Act, which mandates 2010 as the compliance deadline for downwind states.
  • The SO2 budget was unlawful because it interfered with the Title IV program, which was statutorily mandated.
  • Basing the NOx budget on a percentage of heat input was an invalid approach because it discriminated in favor of states more reliant on coal-fired utilities against states with oil- or gas-fired electrical generating units on the basis of “fairness,” a factor not permitted by the statute.

Although it appears that none of the petitioners had requested that CAIR be vacated in toto, the court found that CAIR—especially the trading scheme that lay at its heart—was so fundamentally flawed that the entire rule had to be vacated. Accordingly, the court did so.

The EPA may petition the entire D.C. Circuit Court for reconsideration en banc, or it may take an appeal to the U.S. Supreme Court. The case is of sufficient importance that it may choose to do so, but both of those courts may decline to hear the merits of the appeal.

If there is no successful appeal, for the CAIR program to survive, either Congress must respond with revisions to the Clean Air Act or else the EPA must promulgate a new rule that takes into account the court’s holding.

There are a number of implications resulting from the decision. Any new rule will have to regulate upwind sources of pollution for areas that significantly contribute to areas that are only marginally in attainment of NAAQS, in addition to nonattainment areas. This may mean that more states will be subject to regulation. Any cap-and-trade scheme, if that is the approach taken, cannot be on a regional basis. An intrastate trading scheme combined with other features, such as source specific limits, may have to be the approach. Currently, however, it should be noted that the NOx trading scheme under the earlier NOx SIP call was expressly revived in the decision, so that will remain in force until a new regulation is in force. Finally, while coal-fired electrical generating units have won a temporary reprieve from the effects of CAIR, the eventual form of regulation of EGUs can be expected to mandate specific emission limitations, given the EPA’s inability to impose a regional cap-and-trade scheme.

The effect on state regulations that incorporate CAIR by reference was not the subject of the Circuit Court decision. It is likely that a regulatory scheme such as Pennsylvania’s, the foundation of which was the existence of CAIR’s cap-and-trade scheme, will be found to be unworkable in the absence of CAIR and thus effectively invalidated by the court’s decision in North Carolina.

Finally, a significant concern is the effect of the decision on the impending NAAQS compliance date. The Clean Air Act establishes a compliance date of 2010 for meeting the ozone NAAQS, and in the absence of CAIR or a replacement, it is hard to see how downwind states will be able to attain their targets by that time. Since one possible implication of North Carolina is that the EPA lacks the power to alter deadlines established by Congress, any relief for downwind states will have to come from that body.