In a 2-1 decision handed down this week, the D.C. Circuit in EME Homer City Generation, L.P. v. EPA vacated the Environmental Protection Agency’s (“EPA”) Cross State Air Pollution Rule, often referred to as the Transport Rule (“Transport Rule”), and EPA’s related Federal Implementation Plans. Click here for case filing. Making clear that the role of first-implementer of the CAA is reserved for the States, the Court found that EPA exceeded its statutory authority both in failing to give States the opportunity to implement the standards set by EPA and in requiring upwind States to eliminate more than their own significant contribution to a downwind State’s nonattainment area.

The decision represents another recent ruling by the Courts that emphasizes the cooperative federalism contemplated by the CAA and its implementing regulations. Click here for to view our Locke Lord Quickstudy, published on August 16, 2012.

Background – The Clean Air Act’s “Good Neighbor” Provision

The Clean Air Act contains a “good neighbor” provision (CAA § 110(a)(2)(D)(i)(I)), which requires upwind States to bear responsibility for their fair share of pollution in downwind States. EPA plays a key role in gathering air quality information in downwind States and calculating each upwind State’s obligation under the “good neighbor” provision.

EPA’s recent attempts to determine upwind States’ “good neighbor” obligations have faced legal challenges. In Michigan v. EPA, 213 F.3d 663 (D.C. Cir. 2000), the D.C. Circuit held that, when determining a State’s “good neighbor” obligations, EPA may consider how much Nitrogen Oxide (“NOx”) could be eliminated by sources in each State if those sources installed highly cost-effective emissions controls. However, in North Carolina v. EPA, 531 F.3d 896 (D.C. Cir. 2008), the same court ruled that the formulas used by EPA to quantify each State’s obligations for Sulfur Dioxide (“SO2”) and NOx, the pollutants covered by the Clean Air Act Interstate Rule (“CAIR”), exceeded the authorization set forth by the Court in Michigan. The North Carolina Court held that the “good neighbor” provision gives EPA no authority to force an upwind State to share the burden of reducing other upwind States’ emissions. The Court remanded CAIR, but did not vacate the rule, leaving CAIR in place until it was replaced by a rule consistent with the opinion.

What Was The Transport Rule?

Proposed in 2010 and finalized in August 2011, the Transport Rule was EPA’s attempt to develop a rule consistent with the D.C. Circuit’s opinion in North Carolina. Click here for Final Rule. The Transport Rule had two components. First, the Transport Rule defined each State’s emission reduction obligations under the “good neighbor” provision. If modeling showed that an upwind State would send more than set amounts of certain pollutants into a downwind State’s air, as measured at a receptor site in a downwind State, the upwind State was deemed a “significant contributor” to the downwind State’s air pollution problem. EPA then utilized a cost-based standard to determine how much pollution each upwind State could eliminate if the upwind State’s plants applied all controls available at or below a given cost per ton of pollution reduced. EPA used modeling data and a multi-factor assessment to choose final cost per ton levels and then generated 2012, 2013, and 2014 emissions budgets for each upwind State for each pollutant for which that State was covered.

Second, the Transport Rule prescribed Federal Implementation Plans to implement the emissions reduction obligations at the State level. The Federal Implementation Plans required power plants in covered upwind States to make the NOx and SO2 reductions necessary to comply with each upwind State’s emissions budget and created an interstate trading program to allow covered sources to comply as cost-effectively as possible. The Federal Implementation Plans, issued simultaneously by EPA along with the Transport Rule, remained effective until a State’s State Implementation Plan prohibiting the amount of NOx and SO2 emissions that EPA specified was submitted and approved by EPA to revise or replace a Federal Implementation Plan.

The Lawsuit Seeking to Vacate the Transport Rule: EME Homer City Generation, L.P. v. EPA

A select set of power and coal companies, States, local governments, and other stakeholders petitioned for review of EPA’s Transport Rule. On December 30, 2011, the D.C. Circuit stayed the Transport Rule pending a decision on the merits. The Court instructed EPA to continue implementing CAIR pending resolution of the matter.

The D.C. Circuit’s August 21, 2012, ruling invalidated the Transport Rule based on two primary rationales. First, the Court concluded that EPA exceeded its authority under the “good neighbor” provision because the Transport Rule required upwind States to eliminate more than their own significant contribution to a downwind State’s nonattainment area. Second, the Court determined that the CAA does not permit EPA to issue Federal Implementation Plans without giving the States an initial opportunity to implement the required reductions through State Implementation Plans or State Implementation Plan revisions.

The D.C. Circuit concluded that EPA exceeded its authority in several respects. First, the Court found that the Transport Rule failed to require EPA to impose limitations on upwind States based on the “amounts” from upwind States that “contribute significantly to nonattainment” in downwind States. Although EPA determined that a State was subject to the “good neighbor” provision based upon numerical air quality thresholds that established the level of significance of each State’s contribution, EPA imposed restrictions based on region-wide air quality modeling projections that could require upwind States to reduce emissions by more than the amount of that contribution. Second, the Court concluded that EPA’s Transport Rule made no attempt to calculate upwind States’ required reductions on proportional bases that took into account contributions from other upwind States or the downwind State’s own fair share of the amount by which it exceeded National Ambient Air Quality Standards. Third, the D.C. Circuit found that EPA failed to ensure that the collective obligations of the various upwind States did not produce unnecessary over-control in the downwind States.

The D.C. Circuit also overturned EPA’s decision to issue simultaneously Federal Implementation Plans to implement the obligations on sources within the upwind States. The Court held that by preemptively issuing Federal Implementation Plans, EPA denied the States the initial opportunity to implement the reductions required under the CAA.

What’s Next?

Power plants in covered States can continue to operate under the CAIR requirements for the near future. In the meantime, EPA must undertake its third attempt to promulgate rules establishing upwind “good neighbor” obligations, but it must be mindful of the D.C. Circuit’s clear message regarding the important role States play in implementing the CAA.