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Related Practices
Related Practices

D.C. Circuit Vacates Fundamentally Flawed Clean Air Interstate Rule

Beveridge & Diamond, P.C., July 22, 2008

On July 11, 2008, the U.S. Court of Appeals for the District of Columbia Circuit vacated EPA’s Clean Air Interstate Rule (CAIR).  North Carolina v. Environmental Protection Agency, No. 05-1244 (D.C. Cir. 2008).  Based on “fatal flaws” in the rule, the Court vacated CAIR (and EPA’s Federal Implementation Plan) in its entirety and remanded it to EPA.  Id. at 4. 

Background.  Section 110 of the Clean Air Act (CAA) requires states to limit emissions from sources that “contribute significantly” to nonattainment of the National Ambient Air Quality Standards (NAAQS) for fine particulate matter (PM2.5) and eight-hour ozone in downwind states.  42 U.S.C. § 7410(a)(2)(D)(i)(I).  In 2004, EPA determined that 28 states and the District of Columbia contributed significantly to nonattainment of NAAQS for PM2.5 and eight-hour ozone in downwind states.  70 Fed. Reg. 25,162, 25,165 (May 12, 2005).  Accordingly, in 2005, EPA promulgated CAIR, which required these upwind states to control emissions of SO2 (a precursor to PM2.5) and NOx (a precursor to ozone and PM2.5).  The most remarkable component of CAIR was its market-based approach: to achieve the required reductions, CAIR authorized states to establish an optional regional “cap and trade” program for SO2 and NOx.  70 Fed. Reg. 25,162 (May 12, 2005) (state program); 71 Fed. Reg. 25,328 (Apr. 28, 2006) (FIP). 

DC Circuit Opinion.  Several state and industry groups (the “Petitioners”) challenged multiple aspects of CAIR, ranging from claims that it created a trading program inconsistent with Titles I and IV of the CAA to claims that EPA improperly included several states in the program.1  North Carolina at 11-12.  The D.C. Circuit granted most of Petitioners’ allegations, demonstrating the broad range of flaws in EPA’s program.  For illustrative purposes, we discuss two of those issues below.

Possibly the most critical aspect of the Court’s decision involved the Petitioners’ claim that the CAA requires a concrete, individual link between each upwind state’s contributions and each downwind state’s nonattainment.  The Petitioners argued that EPA’s Section 110 determination was invalid, because the Agency did not measure each upwind state’s contribution to nonattainment in downwind states in a state-by-state manner.  Id. at 14.  The Petitioners further argued that CAIR’s regional cap and trade approach would not ensure that each upwind state would adequately remedy its own actual contribution to nonattainment in a particular downwind state – in other words, that EPA’s apportionment of emissions allowances were not linked to the unlawful amount of pollution that the upwind state contributed to the downwind state’s nonattainment, nor were emissions reductions directly tied to addressing nonattainment in downwind states.  Id. at 14-18.  EPA argued that addressing each state’s contribution to nonattainment in downwind states would not achieve reductions in the most cost-effective manner.  Id. at 14-15.

The D.C. Circuit agreed with Petitioners.  The Court found that the emissions reductions in CAIR must reflect each state’s actual contribution to nonattainment in downwind states.  Id. at 14-18.  Therefore, while CAIR may achieve cost-effective reductions in NOx and SO2 emissions, CAIR is contrary to Section 110, because, “[a]ccording to Congress, individual state contributions to downwind nonattainment areas do matter.”  Id. at 16.   

Petitioners also claimed that CAIR interfered with the Acid Rain program.  The Acid Rain program (Title IV of the CAA) reduces acid rain deposition through a cap and trade program that controls SO2 emissions.  42 U.S.C. §§ 7651-7651o.  The program capped SO2 emissions and distributed SO2 allowances to electric generating units (EGUs) that permit one ton of SO2 emissions for each allowance.  Id. at § 7651a(3).  Unused allowances may be “banked” for future use or sold to another unit.  Id. at §§ 7651a(3), 7651b(b). 

While CAIR was not promulgated under Title IV of the CAA, it significantly affected the SO2 allowances that had been issued under the Acid Rain program.  Thus, for example, EPA set states’ SO2 budgets for CAIR Phases I and II at 50% and 35%, respectively, of the Acid Rain program budgets.  North Carolina at 42.  To implement these reductions, EPA required EGUs to trade two SO2 allowances (instead of only one) for each ton of SO2 emissions in Phase I and 2.68 allowances per ton in Phase II of CAIR.  Id.  Accordingly, Petitioners’ argued that EPA did not have authority under Titles I and IV of the CAA to devalue the SO2 allowances granted in the Acid Rain Program, and that the Agency unlawfully limited the number of Acid Rain program allowances when it established the CAIR SO2 budgets and trading limits.  Id.   

EPA justified its actions by arguing that Section 110 authorized the Agency to establish a trading program for SO2 emissions allowances, to require EGUs to use Title IV SO2 allowances as currency in the CAIR program, and then terminate the allowance (in both programs) if used in the CAIR market.  Id. at 43.  EPA also argued that the “logical[]” starting point for an SO2 trading program was the allowances in the Acid Rain program, and that the use of the Title IV SO2 allowances in the CAIR program was an effort to harmonize the programs.  Id. at 44.  Once again, however, the Court rejected EPA’s interpretation, holding that Section 110 did not authorize EPA to terminate Acid Rain program allowances in CAIR, because Title IV explicitly establishes that the value of one SO2 allowance is one ton of emissions.  Id.   

Based on the wide range of flaws in CAIR, the Court vacated the rule and remanded it to EPA.  At the same time, however, the DC Circuit strongly advised EPA not to attempt to salvage the rule through minor changes.  Characterizing the program as “fundamentally flawed,” the Court specifically instructed the Agency to “redo its analysis from the ground up.”  Id. at 59. 

Implications.  CAIR epitomized the current Administration’s policy of pursuing market-based approaches as the most cost-effective way to improve air quality.  The DC Circuit’s opinion, however, casts significant doubt on this approach.  While the Court did not hold that cap and trade programs are per se invalid, the opinion nevertheless marks the second time within the last year that the Court has struck down a cap and trade program.  See D.C. Circuit Vacates Two Rules Regulating Mercury Emissions from Power Plants by L. McAfee and H. Feichko, available at http://www.bdlaw.com/news-279.html (discussing the D.C. Circuit’s vacatur of CAIR’s companion Clean Air Mercury Rule).  It is therefore unclear whether EPA can craft a cap and trade program that will survive judicial scrutiny.  It further appears as though, if Congress wishes to encourage the market-based approached favored by the Administration, it will have to do so through legislation.    

For more information, please contact David Friedland by email at dfriedland@bdlaw.com or by phone at (202) 789-6047, or Holli Feichko by email at hfeichko@bdlaw.com or by phone at (202) 789-6077


1 Petitioners challenged CAIR’s market-based approach, EPA’s interpretation of various phrases in Title I (including the phrases “interfere with maintenance” and “will” in “will contribute significantly” in Section 110), the Phase I start date and the Phase II compliance deadline, the NOx “compliance supplement pool,” the PM2.5 threshold for determining which states contributed to nonattainment in downwind states, EPA’s authority under Titles I and IV of the CAA to limit the number of SO2 allowances initially granted under the Acid Rain program, EPA’s decision to reduce state SO2 budgets below budgets set in the Acid Rain program, CAIR’s application to units that are exempt from the Acid Rain program, EPA’s decision to base state NOx budgets on each CAIR unit’s fuel type, and EPA’s decision to include Texas, Florida, and Minnesota in CAIR.  North Carolina at 11-12.