The U.S. Supreme Court issued its opinion in Michigan v. EPA, reversing a ruling by the U.S. Court of Appeals for the District of Columbia Circuit and holding that the U.S. Environmental Protection Agency (EPA) must consider costs of compliance before deciding whether to regulate hazardous air pollutants (HAPs) emitted from power plants. The Court’s June 29, 2015, decision remanded the case to the D.C. Circuit, but left in place EPA’s 2012 Mercury and Air Toxics Standards (MATS), which regulate, for the first time, HAPs emitted from coal- and oil-fired power plants.

Before EPA may regulate toxic pollutants for “electric utility steam generating units,” i.e., power plants, the Clean Air Act required EPA to make a determination that such regulation is “appropriate and necessary” after conducting a study of “the hazards to public health reasonably anticipated to occur” as a result of power plant HAP emissions. EPA made that determination in 2000, and reaffirmed it based on new information in 2011-2012 when the Agency developed the actual emission standards. In accordance with an executive order, EPA issued a “Regulatory Impact Analysis” with its regulation, which estimated that the regulation would cost power plants $9.6 billion per year. It also estimated that quantifiable direct benefits of reducing power plants’ HAP emissions would be $4 million to $6 million per year, and that taking ancillary benefits into account would increase the estimate of quantifiable benefits of its regulation to $37 billion to $90 billion per year.

In MATS, EPA stated that “it is reasonable to make the... appropriate determination, without considering costs” of compliance. EPA reasoned that the Clean Air Act would have included an express statutory requirement that the Agency consider costs in making the appropriate determination if Congress wanted to require EPA to do so. EPA also stated that its interpretation is reasonable in the absence of an express statutory requirement to consider costs because the legislative history overwhelmingly demonstrates that Congress, in enacting the statutory provision at issue, was principally concerned with mitigating hazards to public health and the environment from HAP emissions.

Many electric generating companies and states appealed MATS to the D.C. Circuit. A number of states and cities, environmental groups, and electric generating companies with clean generation fleets intervened to support EPA. The petitioners challenged EPA’s interpretation and application of the statute’s “appropriate and necessary” requirement, as well as many aspects of how EPA developed the numeric emissions standards. In White Stallion Energy Center, LLC, et al. v. EPA, 748 F.3d 1222 (D.C. Cir. 2014), the D.C. Circuit upheld MATS in all respects.  The D.C. Circuit found that “[e]ven if the word ‘appropriate’ might require cost consideration in some contexts, such a reading of ‘appropriate’ is unwarranted here.”

Supreme Court Decision

The Supreme Court has now ruled it was unreasonable for EPA to not consider costs in determining whether it is “appropriate” to regulate HAPs emitted by power plants. In a 5-4 vote with Justice Scalia writing for the majority, the Court found that even affording EPA the most deference in its interpretation of the statute, EPA interpreted the Clean Air Act unreasonably when it deemed cost to be irrelevant in the decision to regulate HAPs emitted from power plants.  The Court reasoned that it is not rational to impose billions of dollars in economic costs in return for, as the Court characterizes it, “a few dollars” in health or environmental benefits.

The Court also reasoned that the possibility of considering cost at a later stage, when deciding how much to regulate power plants, does not establish its irrelevance at the initial stage of the appropriate and necessary finding.  EPA had made the argument, relying largely on Justice Scalia’s unanimous opinion in Whitman v. American Trucking Assns., Inc., 531 U.S. 457 (2001), that the Court does not find implicit in ambiguous sections of the Clean Air Act an authorization to consider costs that has elsewhere been expressly granted. The Supreme Court distinguished American Trucking, finding that that principle has no application to the MATS case. Chief Justice Roberts and Justices Kennedy, Thomas and Alito joined in the majority.

Dissenting and Concurring Opinions

Justice Kagan filed a dissenting opinion, joined by Justices Ginsburg, Breyer, and Sotomayor.  Justice Kagan wrote that EPA took costs into account at multiple stages in the rulemaking process through multiple means. Further, the dissent stated that when making its initial appropriate and necessary finding, EPA knew it would consider the cost-effectiveness of emissions standards at a later stage, and also noted that EPA could not have measured costs at the finding stage with any accuracy. The majority’s response is that this line of reasoning contradicts the principle of SEC v. Chenery Corp., 318 U.S. 80 (1943) that a court may uphold agency action only on the grounds that the agency invoked when it took the action, and that the dissent overstates the influence of cost at later stages in the regulatory process.

Justice Thomas filed a concurring opinion to express concern with the Supreme Court’s jurisprudence on Chevron deference to administrative agency interpretations, arguing that it raises serious separation-of-powers questions because it precludes judges from exercising independent judgment in interpreting and expounding upon the laws.

Next Steps

Although the Court held that EPA must consider costs before deciding whether regulation is appropriate and necessary, it left it to the agency to decide how to account for costs. Whether a formal cost-benefit analysis is required and whether EPA may consider ancillary benefits in deciding whether regulation is appropriate and necessary will surely be hot topics in the proceedings on remand to the D.C. Circuit and on a remand to the Agency. In the meantime, MATS remains in place. One of the issues the Court of Appeals will be asked to address is whether MATS should remain in effect while EPA reconsiders its appropriate and necessary finding in light of the Supreme Court’s opinion.

Compliance with MATS was required by April 2015, though several hundred power plants received a one-year compliance extension.

The Ballard Spahr legal team of Brendan K. Collins, Robert B. McKinstry, Ronald M. Varnum, and Lorene L. Boudreau represents several parties in the litigation.