D.C. Circuit Court Strikes Down EPA’s Cross-State Air Pollution Rule

Summary: The states have another remedy for interstate pollution, through Section 126 of the Clean Air Act. It authorizes individual states to file petitions with the EPA to stop interstate air pollution.

Interstate air pollution has posed significant challenges for environmental regulators for decades. Although some air pollutants only affect air quality locally in the states where they are emitted, some emissions cross state lines and affect downwind states. The Environmental Protection Agency’s latest effort to address interstate air pollution is the Cross-State Air Pollution Rule (CSAPR, often pronounced “Casper,” like the friendly ghost). On August 21, 2012, this rule was invalidated by the U.S. Court of Appeals for the District of Columbia. The decision in EME Homer City Generation, L.P. v. E.P.A. raises important legal and practical questions regarding the EPA’s approach to this important public policy issue.

Under the Clean Air Act, Congress has tasked the EPA with addressing air pollution. Through cooperative federalism, the agency identifies criteria pollutants and sets national ambient air quality standards to protect public health and welfare. The states determine how to meet these standards by preparing State Implementation Plans (SIPs), which must be reviewed and approved by the EPA. If a SIP fails to provide for adequate implementation, maintenance, and enforcement of these standards, the EPA may impose and enforce a Federal Implementation Plan (FIP) against the state or it may impose a sanction on the state.

Interstate air pollution is addressed in the Good Neighbor provision of the Clean Air Act. It prohibits states from contributing significantly to nonattainment with these standards in other states or interfering with maintenance of attainment in other states. For nearly 15 years, the EPA has attempted to use emissions trading to address interstate pollution under the Good Neighbor provision. This allows facilities to trade allowances to pollute under the rationale that a market approach will efficiently lead to a decrease in overall emissions. In 1998, the EPA persuaded 22 states to adopt a trading program to address interstate nitrogen oxides. Generated by industrial facilities and automobiles, nitrogen oxides contribute to the formation of ground-level ozone, which damages human health.

But in 2005, the EPA made mandatory the use of emissions trading to address interstate pollution through the Clean Air Interstate Rule (CAIR). CAIR expanded the previous trading program to include 28 states and revised it to address sulfur dioxide as well. Generated largely by the electric utility industry, sulfur dioxide is also bad for human health. After several states challenged this rule in court, the D.C. Circuit Court invalidated it in North Carolina v. E.P.A in 2008. Under that rule, facilities could sell or purchase emissions credits from facilities in other states and therefore states could emit more or less pollution than their caps would permit. This did not satisfy the Good Neighbor provision because the EPA never measured each state’s “significant contribution” to nonattainment, and state budgets did not matter for “significant contribution” purposes. Therefore, the court remanded the rule to the EPA to cure the flaws. But it allowed the agency to continue administering the rule in the meantime because of the benefit of environmental protection it provided.

The EPA’s response was CSAPR, which it finalized in August 2011. To comply with the court decision, the agency employed modeling to determine each covered state’s specific contribution to downwind nonattainment, and established for each state an individual budget that would eliminate its “significant contribution” to nonattainment. But, ultimately, emissions reductions were based on cost-effectiveness rather than these contributions. In addition, the EPA imposed a FIP to implement obligations in upwind states to help downwind states come into attainment as quickly as possible.

In its August 21, 2012 decision, the D.C. Circuit Court held that CSAPR exceeded the EPA’s statutory authority in several respects. First, the emissions reduction requirements imposed on upwind states were not based on their contributions to downwind pollution. Second, the rule made no attempt to calculate reduction requirements based on the proportionate contributions of all upwind states. Third, the reduction requirements created unnecessary “over-control” in downwind states by imposing requirements more than necessary to meet standards. Fourth, the EPA prematurely imposed FIPs on states before they had a chance to submit SIPs that could comply with a Good Neighbor provision standard. Therefore, the court vacated CSAPR and remanded it to the EPA. But it allowed the agency to continue administering CAIR because of the continuing benefit of environmental protection that it provides.

This decision has important legal and practical implications. It is questionable whether the EPA can implement the Good Neighbor provision through an emissions trading program as it has been struck down twice in this effort. In focusing its attention on “cost-effective controls” as the basis for emission reductions, the EPA has failed to establish that its requirements are no more and no less than necessary to satisfy the Good Neighbor provision. In addition, states will not be able to rely upon the emissions reductions for ozone and particulate matter that were contemplated under CSAPR. The pollutants subject to CSAPR are precursors to ozone and particulate matter, which have been the primary focus of EPA’s air pollution control strategy during the last decade.

Going forward, the EPA has a number of options. The agency and environmental groups have petitioned the D.C. Circuit Court for a rehearing. In addition, some members of Congress have discussed amending the Clean Air Act to address the problem. Such action would remove some of the uncertainty created by the litigation. But some people are skeptical of Congressional efforts to amend the Clean Air Act, which might restrict the EPA’s authority.

The states have another remedy for interstate pollution, however, through Section 126 of the Clean Air Act. It authorizes individual states to file petitions with the EPA to stop interstate air pollution. The agency may prevent industrial facilities from operating if it finds they are violating the Good Neighbor provision. In fact, it was a series of Section 126 petitions by Northeastern states that led the EPA to develop CAIR and CSAPR in the first place. While the EPA has preferred the emissions trading approach to this injunctive approach, Section 126 may be the most effective legal tool available in the wake of the D.C. Circuit Court’s decision. The question is how aggressively the EPA would pursue it.