Business Implications under U.S. Supreme Court’s Affirmance of EPA’s Transport Rule

by Reed Smith

The Supreme Court Decision

On April 29, 2014, the U.S. Supreme Court, in a 6-2 decision, upheld a U.S. Environmental Protection Agency's (EPA) regulation that seeks to lower cross-state air pollution. (EPA v. EME Homer City Generation, Case No 12-1182.) Known as the Transport Rule, EPA's regulation affects 27 upwind states that have sources of air pollution that drifts to downwind states in amounts that prevent or interfere with those states' efforts to meet national ambient air quality standards (NAAQS). The ruling means that the EPA's latest attempt to enforce the so-called Good Neighbor Provision ("GNP") of the Clean Air Act (CAA) are valid, and upwind states that fall under criteria in the Transport Rule will be subject to pollution control measures that are meant to lower nitrogen oxide, sulfur dioxide, and ozone and particulate matter. Note, however, that the Supreme Court's ruling remands the Transport Rule to the D.C. Circuit for further consideration consistent with its decision; what the D.C. Circuit will do with the Transport Rule is far from certain.

The Transport Rule

Under the CAA, each state must submit an implementation plan, known as a SIP, that includes, among other things, "adequate provisions" that prohibit "any source or other type of emissions activity within the State from emitting any air pollutant in amounts which will ... contribute significantly to nonattainment in, or interfere with maintenance by, any other State with respect to any such national primary or secondary ambient air quality standard[.]" 42 U.S.C. § 7410(a)(2)(D)(i). This is the GNP. To implement the GNP, the EPA has issued a series of regulations, the most recent of which is the Transport Rule. The Transport Rule, which replaced a prior regulation-the Clean Air Interstate Rule (CAIR)-was promulgated in response to a remand by the D.C. Circuit in 2008, which found CAIR to be invalid. The Transport Rule requires emission reductions in all states covered by the rule. It also sets emissions budgets for states and implements a trading program for pollution credits.

The Transport Rule utilized a two-step approach to determine which states were covered by the rule and how much each covered state would have to reduce its emissions. As the Supreme Court described the approach, "under the Transport Rule, an upwind State 'contribute[d] significantly' to downwind nonattainment to the extent its exported pollution both (1) produced one percent or more of a NAAQS in at least one downwind State (step one) and (2) could be eliminated cost-effectively, as determined by EPA (step two)." The Transport Rule requires upwind states to eliminate all emissions that satisfied the two-step approach. If a state was regulated by the Transport Rule, the EPA contemporaneously issued that state a federal implementation plan, known as a FIP, that set that state's emissions budget.

In 2012, the D.C. Circuit vacated the Transport Rule in its entirety. The court found that the EPA had exceeded its statutory authority by promulgating FIPs before giving states covered by the Transport Rule a meaningful opportunity to revise their SIPs or adopt new ones. In addition, that court found that the Transport Rule could force some upwind states to reduce emissions by more than their "fair share," and that there was a chance of "unnecessary over-control" of emissions.

Majority Opinion: No Second Chance for States and Cost-Benefit Emission Reduction Appropriate

In reversing the D.C. Circuit's ruling, the Supreme Court found that the GNP had delegated authority to the EPA to promulgate the Transport Rule. "The statute requires States to eliminate those 'amounts' of pollution that 'contribute significantly to nonattainment'" in downwind states," said the Court, citing 42 U.S.C. § 7410(a)(2)(D)(i). "Thus, EPA's task is to reduce upwind pollution, but only in 'amounts' that push a downwind State's pollution concentrations above the relevant NAAQS. As noted earlier, however, the nonattainment of downwind States results from the collective and interwoven contributions of multiple upwind States. The statute therefore calls upon the Agency to address a thorny causation problem: How should EPA allocate among multiple contributing upwind States responsibility for a downwind State's excess pollution?" Answering that question, the Court found that the Transport Rule was a reasonable interpretation of the GNP and the CAA's grant of authority to the EPA.

"In sum, we hold that the CAA does not command that States be given a second opportunity to file a SIP after EPA has quantified the State's interstate pollution obligations. We further conclude that the GNP does not require EPA to disregard costs and consider exclusively each upwind State's physically proportionate responsibility for each downwind air quality problem. EPA's cost-effective allocation of emission reductions among upwind States, we hold, is a permissible, workable, and equitable interpretation of the Good Neighbor Provision." Justice Ginsberg authored the Court's opinion. She was joined by Chief Justice Roberts, and Justices Kennedy, Breyer, Sotomayor, and Kagan. Dissenting were Justices Scalia and Thomas. Justice Alito took no part in the decision.

The Scalia Dissent: "Look Ma, no hands!"

In his dissenting opinion, Justice Scalia, joined by Justice Thomas, noted among other things, that "The majority's conception of administrative discretion is so sprawling that it would allow EPA to subvert state primacy not only with respect to the interstate-pollution concerns of the GNP, but with respect to the much broader concerns of the NAAQS program more generally." In fact, the Scalia/Thomas view reflects concern that the High Court is providing unjustifiable deference "to unelected agency officials" and approval of an "undemocratic revision of the Clean Air Act." By departing from the requirement of limiting agency rulemaking to what is provided by Congress, that is textual support, the majority now views it acceptable, according to Justice Scalia, to grant virtual legislative authority-the power to rewrite the CAA-to EPA.

Is Anything Much Reviewable Now?

A growing number of commenters voice similar concerns over the future scope of judicial review of environmental rulemakings (and rulemakings, generally). The majority states that it "routinely accords dispositive effect to an agency's reasonable interpretation of ambiguous statutory language." (Op., at 20.) Yet, this recognized delegation to the agency can be more in the nature of non-reviewable decision-making, if the parent legislation is not ambiguous. A new justification to support controversial rulemaking has apparently been given to federal agencies: the power to declare a statutory "gap" that needs legislative-type decision-making at the executive branch level. Some statutes are certainly badly written, perhaps in a way that makes them inoperative. In such circumstances, Justice Scalia, citing Roscoe Pound, would recognize that they fail in their purpose, presumably with Congress to provide necessary correction: "There are sometimes statutes which no rule or canon of interpretation can make effective or applicable to the situations of fact which they purport to govern. In such cases the statute must simply fail." (Dissent, at 7.)

Note, however, that while the majority opinion can be seen as broadening EPA authority and the scope of review by reading into the CAA words that are not there, the majority also confers a boon to compliance entities by allowing cost considerations to be accounted for in emission reductions under the GNP.

Possible Implications:

Effect on Power Plants? The Transport Rule is one of many pending environmental regulations affecting power plants. The combination of these regulations has led to concerns about potential impacts of costs and on reliability of the electricity grid. According to the Wall Street Journal, the Transport Rule "stands to affect about 1,000 power plants in the eastern half of the U.S. that may have to adopt new pollution controls or reduce operations." There are also concerns within the energy industry that the Court's ruling could encourage the EPA to push for stronger environmental regulations. But it is not clear by how much, if at all, the Court's ruling will hit industry pocket books. EPA published a brief statement last week noting that it was reviewing the Supreme Court's decision and that, "[a]t this time, CAIR remains in place and no immediate action from States of affected sources is expected."1 The Utility Mercury and Air Toxics Standard Rule (MATS) has significantly greater impact in terms of cost and complexity than the Transport Rule. EPA finalized MATS in November 2012. Many power plants are already implementing measures to come into compliance with MATS, which "requires much of the same equipment as the cross-state rule, and with that deadline looming as soon as next year, companies have already moved to install scrubbers or shutter dirty plants," according to Bloomberg Businessweek.

Ozone Transport policy? After the D.C. Circuit vacated the Transport Rule in its entirety, on December 9, 2013, eight downwind states petitioned the EPA under section 176A of the CAA to add nine upwind states to the Ozone Transport Region ("OTR"). Section 176A(a) of the CAA allows any downwind state to petition the EPA to add an upwind state to a transport region if the interstate transport of air pollutants from the upwind state contributes significantly to a violation of the NAAQS in the downwind state. Under section 176A, the EPA must act upon the petition within 18 months. The EPA's response to the petition will likely be driven by the Supreme Court's decision. In addition to the section 176A process, states and municipalities have been filing petitions under section 126 of the CAA. The latest round of section 126 and section 176A petitions, in addition to this recent Supreme Court opinion, could shape the next generation of the EPA's interstate transport policy.

Transport Rule revision and another bite at the apple for industry? While the EPA's appeal in EPA v. EME Homer City Generation was pending with the Supreme Court, EPA was developing a new interstate transport policy in case the Court affirmed the D.C. Circuit's opinion. Thus, the question is, even with the EPA win at the High Court, is it possible EPA could propose a new interstate transport rule? A complete recall of the Transport Rule is unlikely; it is likely that EPA will propose revisions to the Transport Rule. The EPA would likely revise the Transport Rule to adjust the compliance dates, as phase 2 of the rule would have begun January 1, 2014. The EPA could also use the opportunity to make revisions to the Transport Rule based on the current NAAQS. Businesses take note: any revisions to the Transport Rule would give industry and states an opportunity to highlight emissions reductions required by other rules, such as the MATS and the Regional Haze Rule, which will reduce interstate transport of air pollution.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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