One of the long-running questions in the administration of the Clean Air Act is the extent to which EPA can implement the Act through market-based mechanisms, such as cap-and-trade programs. The Supreme Court affirmed EPA’s authority to do so in the context of the Act’s “good neighbor” provision governing interstate transport of air pollutants. See EPA v. EME Homer City Generation (Apr. 29, 2014). This decision will pave the way for EPA to begin implementing the Cross-State Air Pollution Rule (“CSAPR”), a cap-and-trade program limiting the emission of sulfur dioxide and nitrogen oxides in much of the United States.

In a 6-2 decision penned by Justice Ginsburg, the Supreme Court reversed the D.C. Circuit’s 2012 decision vacating CSAPR. Although the Court decided numerous specific questions regarding the Clean Air Act’s administration, it reached two fundamental holdings.

First, although the Clean Air Act provides that states have the primary obligation for controlling air pollution that leaves their borders and enters other states, it is difficult for states to make those determinations without advance guidance from EPA. CSAPR cut that process off at the pass by imposing a federal cap-and-trade plan on states that did not adduce in advance what emission reductions that EPA believed were necessary. The D.C. Circuit held that this action violated the Clean Air Act’s cooperative federalism framework. The Supreme Court disagreed, finding that EPA’s action was authorized by the text of the Clean Air Act even if it is difficult for states to fulfill their good neighbor obligations without advance guidance from EPA.

Second, the Supreme Court held that EPA’s method of allocating emission reductions among upwind states in the CSAPR program based on the relative cost of emission reductions, rather than on the total contribution that sources in the state make to downwind states’ exceedance of pollution limits, was lawful. The D.C. Circuit held that this aspect of the Rule would lead to unlawful “over-control” of emissions from certain states, but the Supreme Court held that the possibility of incidental “over-control” does not invalidate the Rule. The Supreme Court did, however, provide an “out” for states that could prove that they were actually subjected to over-control, or that emissions originating from the state did not significantly interfere with other states’ air quality, by leaving open the possibility of future “as applied” challenges to EPA’s actions.

In the aftermath of EME Homer, several lawsuits that were stayed pending the Supreme Court’s decision will likely be revived, and EPA now faces the challenge of updating and implementing CSAPR, which was designed to take effect several years ago. These important developments bear further attention, as they are likely to determine how CSAPR will apply to regulated entities in the near future.