In its landmark 2007 decision in Massachusetts v. EPA, the U.S. Supreme Court for the first time indicated that the U.S. Environmental Protection Agency (“EPA”) has the power to regulate CO2 under the Clean Air Act (“CAA”). In that case, the Supreme Court held that CO2 falls within the broad definition of “air pollutant” under the CAA. Accordingly, the Court determined that EPA has the power to regulate CO2 emissions from automobile tailpipes under section 202(a)(1) of the CAA, provided that EPA first makes a judgment that such emissions “may reasonably be anticipated to endanger public health or welfare.” On November 13, 2008, EPA’s Environmental Appeals Board (the “Board”) issued a similarly significant decision in the context of stationary sources – specifically, electric generating units – holding that EPA must consider whether to require strict controls on CO2 emissions in new air permits issued to power plants under the prevention of significant deterioration (“PSD”) program under sections 165 and 169 of the CAA.

Lay of the Land – Background of the Case

In its decision in In re Deseret Power Electric Cooperative, PSD Appeal No. 07-03 (E.A.B. Nov. 13, 2008) (“Deseret”), the Board struck down a CAA PSD permit issued by EPA Region 8 (the “Region”) that authorized Deseret Power Electric Cooperative (“DPEC”) to construct a new waste coal-fired electric generating unit at DPEC’s Bonanza Power Plant near Bonanza, Utah. The Sierra Club sought review of DPEC’s PSD permit on two bases: (1) that EPA failed to fully consider alternatives during the public participation process, and (2) that EPA violated the CAA by failing to apply best available control technology (“BACT”) to limit CO2 emissions from the new generating unit. The Board denied review of EPA’s alleged failure to consider alternatives, but remanded the permit to the Region “to reconsider whether or not to impose a CO2 BACT limit and to develop an adequate record for its decision.”

The CAA requires facilities to obtain a PSD permit before making “major modifications,” such as the addition of an entirely new generating unit, to existing, permitted emissions sources such as DPEC’s Bonanza Power Plant. PSD permits may only be issued if they require BACT to control emissions of “each pollutant subject to regulation” under the CAA. The question that the Sierra Club’s challenge presented to the Board was whether CO2 is a pollutant “subject to regulation” under the CAA. Although CO2 emissions are not subject to actual controls under the CAA, the Sierra Club argued that the “plain and unambiguous” meaning of “regulation” is broader than the actual control of emissions and covers CO2 because CO2 has been subject to monitoring and reporting requirements under EPA’s own CAA regulations since 1993. The Region, on the other hand, argued that the phrase “subject to regulation under this Act” is sufficiently ambiguous to be subject to EPA interpretation, and further, that the Region was bound by EPA’s historic interpretation of that phrase to mean “subject to a statutory or regulatory provision that requires actual control of emissions of that pollutant.” Accordingly, the Region argued that it lacked the authority to impose a CO2 BACT limit in the permit.

Clearing the Air – The Board’s Decision

The Board rejected the Sierra Club’s position that the meaning of “subject to regulation” is clear and unambiguous, and thus concluded that the statutory phrasing does not compel an interpretation that necessarily requires EPA to impose a BACT limit for CO2 in PSD permits. However, the Board went on to conclude that the administrative record of the Region’s permitting decision did not support the Region’s contention that its interpretation of the phrase is constrained by an historical EPA interpretation. After a detailed review of the administrative record and two historical authorities cited by the Region - the preamble to a 1978 Federal Register document in which the EPA first established an interpretation of the phrase “subject to regulation under this

Act”, and a 2002 rulemaking that codified the defined term “regulated NSR pollutant” to replace regulatory language that had previously been functionally equivalent to the statutory phrase – the Board concluded that neither of the cited authorities could be construed to have spoken directly to the issue in question and established a binding historical interpretation. As a result, the Board remanded the DPEC permit to the Region for reconsideration of whether to impose a CO2 BACT limit on the new generating unit and to develop an adequate record for its decision on that point.

Effect on the Regulatory Climate – What the Decision Means

The effect of the Board’s remand is significant. It is a clear instruction to EPA that the issue of whether CO2 is a “pollutant subject to regulation” under the PSD provisions of the CAA is an open one. Massachusetts v. EPA clearly established that CO2 is a “pollutant” within the meaning of the CAA. Notwithstanding EPA’s refusal to date to make the endangerment finding necessary to trigger regulation of CO2 emissions from mobile sources, Deseret makes clear that the CAA’s existing monitoring and reporting requirements for CO2 emissions from stationary sources may be sufficient to render CO2 “subject to regulation” under the PSD program even in the absence of actual emissions limitations. It is now incumbent upon EPA to take a fresh look at this issue, and the Board has clearly indicated that EPA’s final decision should not be guided by its previous interpretations.

Notably, the Board explicitly recognized that “this is an issue of national scope that has implications far beyond this individual permitting proceeding.” Accordingly, the Board suggested that the public interest might be better served if EPA addressed the proper interpretation of the PSD program’s “subject to regulation” trigger for BACT limits in PSD permits through a nationwide rulemaking, rather than through this specific permit proceeding. This is sage advice from the Board. There are as many as 100 pending permits for new coal-fired electric generating units that may be affected by this decision. BACT requirements can substantially increase the cost of new plant construction or existing plant modification, with attendant implications for the price and availability of electricity. Thus, EPA’s ultimate interpretation of the phrase could have enormous implications for the electric generation industry, U.S. climate change policy, and the economy as a whole.

Under the Bush administration, EPA has declined to make an endangerment finding that would require it to begin regulating CO2 emissions from mobile sources. It is a virtual certainty that it will likewise refrain from a final interpretation on this issue in the waning days of the current administration. However, President-Elect Obama has signaled that he will likely direct EPA to make an endangerment finding and clear the path for federal regulation of CO2 emissions from mobile sources under the CAA. Yet even many environmental advocates view the CAA as a blunt instrument for addressing global climate change issues, and many observers view the anticipated endangerment finding primarily as a means of inducing Congress to implement a new, nationwide capand- trade program to limit domestic CO2 emissions. The new mandate in Deseret for EPA to determine the applicability of BACT for CO2 emissions to permits for new power plants adds considerable weight to that threat. It also adds considerable urgency, given the number of pending PSD permits that may be delayed or subject to similar challenges until this issue is resolved.