The decision clears a path for President Biden’s climate priorities, striking down a Trump Administration rule that had repealed the Obama Administration’s power plant greenhouse gas regulations.

On January 19, 2021, on the eve of President Biden’s inauguration, in American Lung Association, et al. v. EPA, the US Court of Appeals for the District of Columbia Circuit overturned the Environmental Protection Agency’s (EPA’s) Affordable Clean Energy (ACE) Rule, which sought to replace the Obama Administration’s Clean Power Plan (CPP). Both rules would regulate carbon dioxide (CO2) emissions from existing electric generating units (EGUs) under Section 111(d) of the Clean Air Act (CAA).[1]

The ACE Rule (summarized in this Latham blog post), took three key actions:

  1. It formally repealed the Obama Administration’s CPP, finding that the CPP exceeded the EPA’s statutory authority by employing generation-shifting (shifting electric generation from higher to lower emitting sources) as a Best System of Emission Reduction (BSER). In the ACE Rule, the EPA concluded that the agency’s authority to define BSER is limited to measures that can be applied “to or at” an individual stationary source, that generation-shifting conflicts with the CAA’s unambiguous statutory requirement, and the ACE Rule interpretation is the only permissible reading of the statute.
  2. It established EGU heat rate improvements as the BSER for CO2 emissions, identifying much weaker targets for these existing sources.
  3. It updated the foundational implementing rules for existing source emissions guidelines under Section 111(d) by extending compliance timelines.

Many groups filed petitions challenging the ACE Rule in the DC Circuit. Some petitioners attacked the EPA’s recent interpretation that BSER is limited to emission reduction measures taken at the regulated source, rather than extending to generation-shifting. Other petitioners argued that the EPA lacked the authority to regulate CO2 emissions from EGUs in the first instance and opposed the ACE Rule on those grounds.

In a per curiam decision, the DC Circuit rejected the EPA’s interpretation in the ACE Rule, finding that the CAA does not unambiguously limit BSER to emission reduction measures taken at the regulated source. The court vacated all three of the EPA’s actions in the ACE Rule and remanded the matter to the EPA for action consistent with the opinion.

The Opinion

The panel majority explained that the central question before the court was whether the CAA is clear and unambiguous in limiting the agency’s discretion to define BSER to emission reduction measures at the source. The court was not evaluating whether the EPA’s identification of heat rate improvements was a permissible reading of the statute within the agency’s discretion, because the EPA took the position that the statute did not confer that discretion on the agency. Ultimately, the panel majority concluded that the CAA “does not, as the EPA claims, constrain the Agency to identifying a best system of emission reduction consisting only of controls ‘that can be applied at and to a stationary source.’”

In making this finding, the panel majority made several observations favorable to the CPP approach without weighing in on the legality of the CPP, which was not before the court in this litigation. For instance, the court noted that “the record before the EPA shows that generation shifting … is one of the most cost-effective means of reducing emissions that plants have already adopted and that have been demonstrated to work, and … is capable of achieving far more emission reduction than controls physically confined to the source.”

The panel majority also rejected the EPA’s position in the ACE Rule that compliance measures are limited to those that can be taken at the source, thus precluding averaging and trading or co-firing biomass. The court found that the CAA “says nothing about the measures that sources may use to comply with the standards … and the EPA cites no separate authority that would require compliance measures to be source-specific.” The court also rejected the EPA’s policy-based arguments against allowing averaging and trading or co-firing biomass as compliance measures.

In striking down the EPA’s revisions to the Section 111(d) implementing regulations, the panel majority found that the EPA ignored an important aspect of the regulatory issue it was addressing: the environmental and public health effects of extending the deadlines for achieving compliance with Section 111(d) standards.

Finally, the panel majority rejected the petitions filed by several coal companies challenging the EPA’s authority to regulate EGUs under Section 111(d), finding each of the petitioners’ arguments to lack merit.

The dissenting opinion stated that the EPA was correct to repeal the CPP. Although the CPP was not before the court, the dissenting opinion outlined arguments against the CPP under the major-rules judicial doctrine, which addresses limitations on agency authority in certain areas of extraordinary economic or political significance. The dissent also argued that the EPA lacked authority to promulgate a replacement rule under Section 111(d) to regulate CO2 from EGUs, largely adopting an argument advanced by the coal company petitioners.

Implications for the Biden Administration’s Climate Priorities

In 2017, when President Trump took office, legal challenges to the Obama Administration’s CPP were pending before the DC Circuit. The Trump Administration asked the DC Circuit to hold that litigation in abeyance while the EPA reconsidered the CPP, and then asked the DC Circuit to dismiss the litigation as moot when the EPA repealed the CPP.

Legal observers had expected that, if the ACE Rule litigation were still pending, the Biden Administration would likely follow a similar course, seeking to hold the litigation in abeyance while it took regulatory action to undo the ACE Rule. But the DC Circuit’s vacatur of the ACE Rule and remand of the actions to the EPA gives the Biden Administration a clear path to jump straight into rulemaking to promulgate a replacement rule. Given the time and effort of notice-and-comment rulemaking, this head-start could speed up what observers already anticipated to be an expeditious rulemaking to address CO2 emissions from existing EGUs.

The majority’s supportive observations about generation-shifting as well as averaging and trading as compliance measures may be useful for the Biden Administration as it crafts the replacement rule. The Biden Administration’s climate priorities will require aggressive greenhouse gas (GHG) reductions in the power sector. On January 20, 2021, President Biden signed a letter that signals the United States’ intent to rejoin the Paris Agreement, and domestic emissions reductions will be needed to achieve the goals of that agreement. Indeed, the President made a campaign pledge to achieve a zero-CO2-emissions power sector in the United States by 2035. The EPA is expected to adopt some form of generation-shifting to meet these aggressive targets.

Important Questions Remain

The panel majority opinion does not address the status of the CPP, so important questions remain. In February 2016, in the midst of the prior DC Circuit litigation over the CPP, the Supreme Court took the rare move of granting a stay of the CPP, pending the outcome of litigation in the DC Circuit. Thus, the CPP is in the unique position of never having been in effect. Much has changed since the EPA published the CPP in 2015, including the fact that many coal-fired power plants reflected in the baseline for that rule have since shut down. Whether the EPA will seek to revive the CPP or develop a distinct replacement is unclear.

The threat of future litigation also remains. Coal company petitioners or states that backed the ACE Rule may seek Supreme Court review. Although the Supreme Court does not often grant review of a case when the United States does not support review, predicting the outcome remains difficult. Moreover, any Biden Administration replacement rule could ultimately be taken up by the Supreme Court. The current make-up of the Court is likely to be more skeptical of the breadth of the EPA’s regulatory authority under this provision of the CAA. And opponents of the EPA’s GHG regulation may set their sights higher than simply overturning power plant GHG regulation — opponents may look for litigation to bring the overall question of CAA climate regulatory authority to the newly constituted Supreme Court.

Although this decision follows many years of rulemaking and litigation, it marks just the beginning of a significant shift in power and climate change policy and regulation.