On June 23, 2014, the US Supreme Court issued a split decision in Utility Air Regulatory Group v. EPA, striking down part of an EPA rule requiring pre-construction permits for large sources of greenhouse gas (GHGs) emissions, while upholding EPA's authority to require inclusion of GHGs in pre-construction permits mandated for other pollutants. The mixed decision underscores the Court's view that EPA has authority to regulate GHG emissions under the Clean Air Act (CAA), including under other provisions, but it strongly warns EPA that it should not stray far from statutory limits on its authority when establishing broad-ranging programs to address climate change. By so doing, the Court's opinion has allowed EPA, its supporters and foes to all claim victory.

Background: A tangled web of regulation

In brief, following the Supreme Court's 2007 ruling in Massachusetts v. EPA that EPA could consider GHGs as pollutants under the CAA, EPA determined in 2009 that GHGs endangered public health and set GHG tailpipe standards for cars and light trucks in 2010. Under EPA's longstanding interpretation of the CAA, the Agency concluded such regulation automatically triggered regulation of GHGs from stationary sources under the CAA's Prevention of Significant Deterioration (PSD) pre-construction permit program and Title V's annual operating permit program. However, the statutory threshold levels for regulations under PSD and Title V were so low (100-250 tons depending on the pollutant and program) that EPA felt it had no other choice than to rewrite these threshold levels to avoid an "absurd result" wherein virtually any substantial source of GHGs would be regulated.

EPA "tailored" the thresholds under the 2010 "Tailoring Rule" so that PSD and Title V only applied to very large sources of GHGs emissions, namely those new sources emitting over 100,000 tons per year of carbon dioxide equivalent (CO2e). Also covered were sources that emitted over 75,000 tons of CO2e/yr and that were already subject to PSD for other "conventional" pollutants (e.g. carbon monoxide, nitrogen oxides, sulfur dioxide) -- known as "anyway" sources -- as well as major sources undergoing major modifications that resulted in GHG emissions above the 75,000 ton threshold. The Tailoring Rule went into effect in 2011. EPA eventually declined to regulate sources below those levels, at least until it developed better ways to do so.

The significance of PSD coverage in particular meant that covered sources, which included power plants, cement plants, refineries and other major manufacturing facilities, had to secure PSD permits for GHGs, which entailed a lengthy and expensive process, subject to third-party challenge, and had to propose best available control technology (BACT) for GHGs, subject to a case-by-case determination by the permitting authority.

States and industry challenged all of EPA's rules on GHGs described above, and lost in the DC Circuit in an unanimous decision. The Supreme Court only took up the issue of EPA's interpretation of the CAA; that regulation under the tailpipe standards automatically triggered mandatory inclusion of GHGs in the PSD program.

The majority's ruling: Splitting the baby

The Supreme Court ruled, 5-4, per Justice Scalia, that EPA's interpretation in this instance was wrong and that the CAA neither compelled nor allowed EPA to require sources to secure PSD and Title V permits solely due to their GHG emissions. Essentially, the Court held EPA had to consider the scope of the term "pollutant" on a program by program basis, and it should not include GHGs where it would be contrary to the statutory purpose and context to do so, as in PSD and Title V. Moreover, the Court held that EPA Agency had no authority to essentially re-write clear statutory terms to make the Agency's unlawful interpretation workable. By so doing, the Court upheld EPA's underlying authority to regulate GHGs under the CAA, underscoring Massachusetts v. EPA, but in practice limiting that ruling to the extent EPA has to reasonably justify why GHGs should be considered covered pollutants in specific sections of the Act where a more limited definition may be warranted. Notably, Justice Scalia stated that EPA's interpretation was unreasonable "because it would bring about an enormous and transformative expansion in EPA's regulatory authority without clear congressional authorization. When an agency claims to discover in a long-extant statue an unheralded power to regulate 'a significant portion of the American economy,' we typically greet its announcement with a measure of skepticism."

Having disposed of the Tailoring Rule, the Court then held by a different majority, 7-2, that EPA had discretion and could reasonably interpret the CAA to require "anyway" sources to consider BACT for GHGs in their PSD permits. Indeed, the Court noted that requiring major sources to employ BACT was "not so disastrously unworkable" and EPA's scope of acceptable technologies would necessarily be cabined by the control technology and plant-specific limitations of BACT. EPA could not, for example, require "every conceivable change that could result in minor improvements in energy efficiency" or grid-wide demand reduction The Court also did not endorse all aspects of EPA's current approach to BACT for GHGs nor how it might apply BACT in the future. In particular, it did not uphold EPA's 75,000 ton threshold, instead ruling that EPA needed to determine a true de minimis level if it were to apply BACT to GHG emissions from "anyway" sources. It is also noteworthy that the Court specifically observed that, according to EPA, BACT might include carbon capture and storage (CCS), though it did not express an opinion on whether or not CCS facilities would be appropriate.

Potential impacts and aftershocks

In the end, the Court appeared to forge a middle ground compromise. Justice Scalia noted that, by upholding BACT for "anyway" sources, the Court had largely given EPA mostly what it wanted (some 83% of stationary source emissions, leaving out only an additional 3%.) The Court did not revisit its earlier ruling in Massachusetts v. EPA, despite two dissenting justices who would have done so, and expressly noted that it was not addressing a prior ruling that EPA had authority to regulate GHGs under CAA section 111's New Source Performance Standards (NSPS), the basis for EPA's recent new and existing power plant proposals. More specifically, it continued to grant EPA significant discretion in determining "anyway" sources needed to consider BACT for GHGs, including mentioning CCS, a key part of the new unit proposal. Moreover, this discretion will be important as EPA tries to figure out how to apply PSD to "anyway" sources and what a de minimis level might be. EPA and its supporters consider all these elements major victories.

On the other hand, the Court's rejection of EPA's PSD interpretation and the Tailoring Rule means that many sources will no longer need to secure PSD permits if they were subject to PSD solely due to their GHG emissions. These include cleaner energy generators and smaller-scale manufacturing, commercial and agricultural facilities, which would only be regulated if and when EPA sets NSPS limits on their GHG emissions. The Court also somewhat limited the scope of Massachusetts v. EPA in that EPA has to justify inclusion of GHGs on a program-specific basis. Most significantly, however, the Court's majority opinion is replete with language essentially warning EPA to hew close to its statutory authority and not "lay[] claim to extravagant statutory power over the national economy" based on limited textual provisions.

Arguably, EPA's re-writing of the CAA's express thresholds is about as far as an agency would probably dare to go, and EPA's more recent NSPS proposals have closer ties to the Act's provisions and do not require statutory revisions. But critics of these recent proposals will no doubt cite the ruling for their claims that EPA went too far by requiring partial CCS for oil and coal plants before the technology was commercially available. Even more likely, those attacking the EPA's recent Clean Power Program will cite the Court's opinion as reining in EPA's authority to go "beyond the fence line" and establish performance standards that can be met at the state and regional grid level. Clearly, EPA will have to take the Court's language into account in its final rules.