The United States Supreme Court recently handed down two significant decisions under the Clean Air Act (CAA) with potentially far-reaching implications for the regulation of greenhouse gases and the permitting of stationary sources. In Massachusetts et al. v. U.S. EPA (No. 05-1120, April 2, 2007), the Court, in a 5-4 decision, affirmatively held that EPA has authority under the CAA to regulate carbon dioxide and other greenhouse gases emitted by new motor vehicles. In Environmental Defense v. Duke Energy (No. 05-848, April 2, 2007), the Court vacated and remanded a decision of the United States Court of Appeals for the Fourth Circuit, upholding EPA’s position regarding increased emissions associated with plant modifications that are sufficient to trigger permitting requirements for power plants and other major sources.

Massachusetts v. U.S. EPA

The Supreme Court’s decision reverses and remands a ruling by the United States Court of Appeals for the District of Columbia Circuit. The DC Circuit had concluded that EPA had not violated the Clean Air Act when it refused to regulate greenhouse gas emissions. The Supreme Court directed that on remand, EPA must state with specificity its reason “for action or inaction” when determining whether it would or would not regulate greenhouse gases.

By way of background, the case arises out of the 1999 petition by a group of environmental organizations, requesting that EPA regulate greenhouse gas emissions from new vehicles pursuant to its authority under Section 202(a)(1) of the CAA. On September 8, 2003, EPA denied the petition on the basis that: (1) the CAA does not authorize EPA to regulate carbon dioxide as an air pollutant; and (2) even if the agency had the authority to do so, it had the discretion to opt not to do so. EPA’s denial led to an appeal to the United States Court of Appeals for the District of Columbia Circuit in which several states, including California, Connecticut, Illinois, Maine, Massachusetts, New Jersey, New Mexico, New York, Oregon, Rhode Island, Vermont and Washington intervened. By a vote of 2-1, a three-judge panel concluded that EPA had properly exercised its discretion under Section 202(a)(1) in denying the petition for review.

“Air Pollution”

The Supreme Court, however, concludes that greenhouse gases are “air pollutants,” as defined by Section 302(g) of the CAA. Section 302(g) provides that an “air pollutant” is “any air pollution agent or combination of such agents, including any physical, chemical… substance or matter which is emitted into or otherwise enters the ambient air.” The Court holds that the statute is unambiguous and, therefore, EPA had authority to act under Section 202(a)(1) of the CAA. Section 202(a)(1) states that EPA “shall by regulation prescribe… standards applicable to the emission of any air pollutant from any class or classes of new motor vehicles or new motor vehicle engines, which in [its] judgment cause, or contribute to, air pollution which may reasonably be anticipated to endanger public health or welfare.” Indicative of the potential broad reach of this decision, Justice John Paul Stevens, writing for the majority, concludes that EPA acted arbitrarily and capriciously in its refusal to decide whether greenhouse gases cause climate change. The Court rejected EPA’s argument that, even if the agency had the authority to set greenhouse gas emissions, it would be unwise to do so. The Court explains that such reasoning was “divorced from the statutory text.” The Court does not read the word “judgment” in the statutory text as a “roving license” to ignore the statute’s language. According to the Court, EPA must exercise its discretion within defined statutory limits, that is, reach a conclusion whether greenhouse gases cause or contribute to climate change.

Implications

Clearly, this decision will impact lower court decisions which were stayed pending resolution by the Supreme Court ruling on the issue of climate change. Last week, a trial opened in a Vermont federal court over the issue of whether states can regulate greenhouse gas emissions from automobiles. Other states, including New Jersey, New York, Connecticut, Massachusetts, and Maine also have statutes regulating greenhouse gases, some of which are currently subject to challenge. Like the Vermont federal court trial, many of the lawsuits stayed involved challenges to state regulation of automobile greenhouse gas emissions, but some also involved challenges by states and environmental groups under federal and state nuisance laws to require that power plants reduce their carbon dioxide emissions.

Another impact will relate to the speed with which and the manner in which EPA elects to proceed in light of the Supreme Court’s decision. Following the remand, EPA announced that after a long delay, it will now seek public comments on whether it should approve California clean vehicle standards targeting four greenhouse gases: carbon dioxide; methane; nitrous oxide; and hydrofluorocarbons. In a related development, EPA, this week, published its annual greenhouse gas emissions inventory. The report indicates that overall greenhouse emissions have grown by sixteen percent from 1990 to 2005, while the U.S. economy has grown by 55 percent over the same period. The inventory tracks six greenhouse gases, carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons and sulfur hexafluoride. EPA concluded that despite U.S. economic growth, the administration’s current strategy for reducing greenhouse gases is on target.

The Supreme Court’s decision will also likely encourage congressional efforts to regulate greenhouse gas emissions. Although none has progressed beyond the committee stage, several bills are currently pending before Congress which address greenhouse gas emissions, including bills which would impose limitations on motor vehicle emissions as well as proposals that would establish a cap-and-trade system for such emissions.

Finally, the Supreme Court’s decision may foster more aggressive attempts by states to assert standing to pursue litigation. The Court, as part of its decision, held that “given Massachusetts’ stake in protecting quasi-sovereign interests, the Commonwealth [was] entitled to special solicitude in [its] standing analysis.” As a result, states may contend, armed with the decision, that they have a basis to bring actions against other states with less stringent pollution standards.

Environmental Defense v. Duke Energy Corp.

The Supreme Court unanimously vacated and remanded a decision of the United States Court of Appeals for the Fourth Circuit, ruling that the Fourth Circuit’s attempt to align a definition in EPA’s Prevention of Significant Deterioration (PSD) Clear Air Act regulatory scheme with that in EPA’s New Source Performance Standards (NSPS), effectively invalidated the PSD regulations. In Environmental Defense v. Duke Energy, Duke Energy, in its defense of an EPA enforcement action, maintained that because the PSD and NSPS statutory schemes shared the same statutory definition of “modification,” the definition of “modification” in the two regulatory schemes must be the same.

“Modification”

Although the CAA uses same statutory definition of “modification” in both programs, the regulatory definitions, elaborating on and implementing the statutory definitions differ. Under the NSPS regulations, a “modification” occurs only when there is an increase in the emissions rate measured on an hourly basis. In the PSD regulations, a “modification” occurs whenever emissions increase as measured on an annual basis.

Duke Energy’s plant modernization program expanded daily operations at each of the upgraded facilities, which resulted in an increase in total annual emissions, but not hourly emissions. Because Duke Energy did not obtain permits for these improvements, EPA brought an enforcement action in 2000 asserting that Duke Energy’s improvements increased annual emissions, thereby triggering the need for a permit. Duke Energy filed a motion for summary judgment on EPA’s PSD claims. The District Court ruled in favor of Duke Energy on the basis that an exception for operational changes exempted Duke Energy’s actions from the permitting requirement. The Fourth Circuit affirmed the District Court’s ruling, reasoning that the definition in both programs should be the same because of the shared statutory language. The Supreme Court disagreed, holding that the Fourth Circuit’s implicit invalidation of the PSD regulations was a form of judicial review, which implicated Section 307(b) of the CAA. Section 307(b) limits the right to challenge the validity of regulations during an enforcement action when such review “could have been obtained” within 60 days of EPA’s rulemaking. According to the Court, EPA had authority to define “modification” differently in each regulatory scheme, so long as its construction fell within the outer limits of what is reasonable.

Implications

To the extent plants are required to obtain a permit from EPA when “modifications” increase total annual emissions, there will be an increase in the length of time and expense to plants that are undergoing renovations or seeking to upgrade their facilities. Once subject to PSD regulations, facilities may be required to undertake significant otherwise unplanned upgrades to existing pollution control equipment. However, EPA, as of this writing, is still intending to proceed with rulemaking that would narrow the emissions increases that trigger emission control requirements under the New Source Review (NSR) regulations by replacing the NSR program’s current annual-based test with an hourly-based test similar to that in the NSPS currently in effect. EPA had proposed changes to this regulatory program in response to the Fourth Circuit’s earlier ruling.