The Environmental Protection Agency (“EPA”) is running the table in the courts on its key Clean Air Act initiatives: 

• On April 15, 2014, the D.C. Circuit upheld the 2012 Mercury and Air Toxics Standards (“MATS” Rule) in White Stallion Energy Center LLC v. U.S. Environmental Protection Agency, No. 12-1100;
• On April 29, 2014, the U.S. Supreme Court reinstated the Cross-State Air Pollution Rule (“Transport Rule”) in U.S. Environmental Protection Agency v. EME Homer City Generation, LP, No. 12-1182; and
• On May 9, 2014, the D.C. Circuit affirmed the EPA’s discretion to tighten standards on particulate matter from coal power plants, refineries, manufacturers, and vehicles (“Soot Rule”) in National Association of Manufacturers v. Environmental Protection Agency, No. 13-1069.

These EPA victories are the lead-in to curtain time for the main EPA show: the final rule for carbon emissions from new power plants coming next month, and the proposed rule for carbon emissions from existing power plants coming a few months later.  The bottom line is that courts are deferring to the EPA’s judgment and expertise under the Clean Air Act, and fans and foes of the carbon rules should take heed.

The MATS Rule

The D.C. Circuit, by majority decision, upheld MATS, which requires coal- and oil-fired power plants to reduce emissions of mercury, arsenic, chromium, and other air pollutants.  When the EPA adopted MATS in 2011, it did not consider costs anticipated to implement the rule when determining whether MATS was appropriate or necessary.  Instead, the EPA focused on public health factors.  The majority affords the EPA considerable deference, finding that the EPA had the authority under the Clean Air Act to act based on the public health hazards posed by power plants without taking costs into consideration. 

The Transport Rule

The “Good Neighbor Provision” of the Clean Air Act requires the EPA and individual states to prohibit upwind states from significantly contributing to the nonattainment of National Ambient Air Quality Standards (“NAAQS”) in downwind states.  42 U.S.C. § 7410(a)(2)(D)(i).  This is supposed to be accomplished through the states’ State Implementation Plans (“SIP”).  In 2011, the EPA finalized the Transport Rule, which regulates emissions of nitrous oxide (“NOx”) and sulfur dioxide (“SO2”) in 27 upwind states to achieve attainment of NAAQs for fine particulate matter and ozone in downwind states.  The Transport Rule employs a two-part analysis to determine when an upwind state significantly contributes to nonattainment in downwind states under the Good Neighbor Provision.  First, upwind states are screened and excluded as de minimis if the state contributes less than one percent toward the fine particulate matter and ozone NAAQS to any downwind state.  Second, states that are not excluded are subject to a “control” analysis in which the EPA utilizes cost factors to allocate emission reductions based on which emissions are least costly to eliminate.  After finalizing the Transport Rule, the EPA issued a Federal Implementation Plan (“FIP”) for each state regulated by the rule without providing the states an opportunity to amend their SIP to comply with the EPA’s Good Neighbor Provision interpretation. 

The D.C. Circuit, in a 2 to 1 decision with a vigorous dissent, vacated the Transport Rule for several reasons.  First, it held that the EPA’s implementation of FIPs was riding roughshod over the “cooperative federalism” requirement of the Clean Air Act.  The court also said that the EPA exceeded its authority under the Clean Air Act by taking costs into consideration when allocating emissions reductions to upwind states.  The U.S. Supreme Court disagreed and reversed the D.C. Circuit’s ruling. 

The majority opinion, written by Justice Ginsburg, gives a very wide berth to the EPA’s discretion and judgment calls in accord with the landmark Chevron U.S.A. Inc. v. NRDC decision.  The court plainly rebukes the two-judge majority of the D.C. Circuit for not doing so, to boot.  The court initially relied on the plain language of the Clean Air Act to hold that nothing in that statute’s plain text prohibited the EPA from issuing the FIPs without first providing the regulated states with the opportunity to amend their SIP to comply with emission reductions under the Transport Rule.  In fact, the court acknowledged that the Clean Air Act required the EPA to issue the FIPs under strict deadlines when a state’s SIP was deemed inadequate by the EPA.

The court also found that the EPA’s two-part emissions reduction allocation method is “a permissible, workable, and equitable interpretation of the Good Neighbor Provision.”  The court labeled as “impractical” the D.C. Circuit’s strict proportionality test for emission reductions given the complexities of the problem of interstate pollution, including the difficulty of differentiating between similar emissions contributions from multiple upwind states.  The court explained that nothing in the Good Neighbor Provision precludes the EPA from considering and using cost considerations.

Finally, the court rejected the argument that the EPA’s two-tiered approach could result in over-control of emissions, noting that over-control of emissions between an upwind state and some downwind states could be necessary in order to adequately control emission contributions between that upwind state and another downwind state.  The court observed that the EPA must have the discretion to balance its duty to avoid both over- and under-control.  

The Soot Rule

Last but not least, the D.C. Circuit also upheld the EPA’s decision to revise the annual standard for particulate matter in order to address what the EPA believes to be a public health threat.  In revising the standard for particulate matter, aka “soot,” the EPA eliminated a provision that allowed some areas to demonstrate compliance based upon an average result from multiple monitoring sites (known as “spatial averaging”).  The EPA further required the use of additional monitors near heavily trafficked roads in urban areas where more than one million people live.  NAM challenged the EPA’s rule as being unreasonable, arbitrary, and capricious.  After considering NAM’s arguments, the court ultimately again decided in the EPA’s favor, relying upon what it believes is owed to the EPA—that is, deference in its decision-making where science is involved and where the statute provides the agency with considerable deference.

What Does This Scorecard Mean?

The immediate practical implications of the three decisions are yet to be seen.  In fact, the Transport Rule decision became a moot point long before it was decided by the court.  Electricity load is down and natural gas plants, which have less emissions of what the Transport Rule dealt with, are contributing more to load.  Utilities and merchant generators have already adjusted.  The MATS Rule, which does not take effect until 2015, overlaps the Transport Rule anyway. 

The big deal of these cases is what they mean with respect to the oncoming EPA carbon emissions reduction regulations.  The new power plant greenhouse gas emissions reduction final rule is coming out next month.  There has been a lot of noise about that Rule resulting in barring any new coal plants from being built.  But, for economic reasons, there have not been any new coal plants built for years, nor are there large numbers of them in the planning stages.  In fact, coal plants have been closing because of competitive reasons.  The proposed existing power plant rule will be out next month too, and it will be unveiled by President Obama himself as the cornerstone of his Climate Action Plan.

There will surely be challenges to the two greenhouse gas rules and the reader can draw his or her own conclusions and prognostications.  But, as they say in the investment industry, “past performance is no indication of future results.”  In the legal business, we say the opposite.  The challengers are starting this series down three games to none—and arguably down by two goals in the first period of game four.  First, the Supreme Court and D.C. Circuits have sent clear messages that the EPA will be given wide deference when it comes to the Clean Air Act.  Second, the new greenhouse gas rules come with the backdrop of the Supreme Court having already ruled in Massachusetts v. EPA that greenhouse gases are “contaminants” under the Clean Air Act, along with the D.C. Circuit having already upheld the EPA endangerment finding (with that decision now pending for review in the very Supreme Court that decided the Transport Rule case)—thus compelling the EPA to act on greenhouse gases.  Odds, anyone?