In EME Homer City Generation, L.P. v. EPA, two judges of a divided three-judge panel of the United States Court of Appeals for the D.C. Circuit vacated the Environmental Protection Agency’s (EPA) 2011 Cross-State Air Pollution Rule (Transport Rule), which implemented the so-called "good-neighbor" provision of § 110 of the four-decade-old Clean Air Act (CAA). Recognizing that upwind emissions pollute downwind regions, the good-neighbor provision requires CAA implementation plans (federal or state) to prohibit upwind sources of air emissions from contributing significantly to a downwind state’s inability to attain or maintain compliance with national ambient air quality standards (NAAQS). Had it not been stayed and later vacated, the Transport Rule would have put 28 upwind states on emission "budgets" for sulfur dioxides (SO2) and nitrogen oxide (NOx) — both NAAQS criteria pollutants — requiring emission reductions primarily from upwind coal-fired electric generating stations.

Coal-burning power companies, coal companies, labor unions, associated trade associations, states and local governments petitioned for review of EPA’s Transport Rule. On December 30, 2011, the court stayed the Transport Rule and instructed EPA, pending a decision on the merits, to continue administering the agency’s predecessor Clean Air Interstate Rule (CAIR). The Transport Rule was EPA’s attempt to develop a rule that cured problems with CAIR, which a different panel of the D.C. Circuit in 2008 found to violate the CAA in North Carolina v. EPA.

The majority's August 21, 2012 opinion ruled in favor of the petitioners and vacated EPA’s Transport Rule on the ground that the EPA exceeded its CAA authority in two respects. First, the majority held that, under the Transport Rule, upwind states may be required, in violation of the CAA good-neighbor requirement, to reduce emissions by more than their proportional share of significant upwind contributions to a downwind state’s inability to attain or maintain NAAQS compliance. Second, EPA simultaneously set a Federal Implementation Plan (FIP), according to the majority, that ran afoul of the federalism embedded in the CAA, which requires that states be given the first opportunity to devise a compliance strategy in the form of a State Implementation Plan (SIP).

The dissent opinion is excoriating. It accuses the majority of creating and deciding straw-man issues that the majority wanted to decide, but which were not raised before the agency and were therefore not properly before the court. With respect to EPA’s calculation of the emissions reductions that the Transport Rule would impose on upwind states, the dissent accuses the majority of intentionally misreading North Carolina as requiring the agency to use the same metrics to determine which upwind sources are subject to good-neighbor emissions reductions, on the one hand, and the emissions reductions budget for each such state, on the other hand. According to the dissent, North Carolina ruled to the contrary that EPA's measure of a state's “significant contribution” to downstream non-attainment or non-maintenance of NAAQS did not have to correlate directly with the state's air quality impact relative to other upwind states or with its emissions budget. Further, the majority’s conclusion that the use of a different measure “might” require over-compliance by some upwind states, was judicial speculation that could not provide a legitimate basis for overturning a complex decision of an expert agency.

As to the second basis for the majority’s vacatur — the concurrent imposition of a FIP without first affording affected states the opportunity to submit a plan — the dissent contends that the agency was required by the statute to impose a FIP. Within three years of a new or changed NAAQS, the dissent explained, states are required to submit to the EPA SIPs that satisfy NAAQS requirements, including the good-neighbor requirement. Here, the NAAQS in question were adopted in 1997 and 2006 and the affected states had not submitted compliant SIPs as of the date of the Transport Rule. Consequently, the statute required the EPA to impose its own  FIPs implementing the good-neighbor requirement.

Whether EPA will appeal the majority ruling is not yet known, but, given the tone of the dissent, an appeal seems likely. In the interim, CAIR will remain in effect even though the North Carolina panel ruled several of CAIR's central provisions unlawful, including its measure of "significant contribution" on a regional and not state-specific basis and its allowance trading program.