October 09, 2019

Cost Consideration in Rulemaking

John Travers

On December 27, 2018, the Environmental Protection Agency (EPA) announced its proposal to revise its response to Michigan et al. v. Environmental Protection Agency et al. This case held that EPA erred when it did not consider cost in its determination of whether regulation of hazardous air pollutant (HAP) emissions from coal and oil-fired electric steam generating units (EGUs) is “appropriate and necessary” under the Clean Air Act (CAA) section 112(n)(1)(A). Under the revised action, EPA departs from its prior finding that Mercury and Air Toxics Standards (MATS) regulation of these EGUs is “appropriate and necessary.  Instead, EPA reached this apparently antithetical decision based on the immensity of compliance costs relative to the benefits achieved by the reduction of HAP emissions. EPA now believes that the “cost reasonableness” test utilized by the 2016 Supplemental Finding did not adequately meet the statute’s requirement to fully consider costs and is an unreasonable interpretation of CAA section 112(n)(1)(A) post-Michigan. The cost reasonableness test was developed by EPA in response to D.C. Circuit Court opinions, such as Lignite Energy Council v. EPA and Sierra Club v. Costle, which preclude adoption of standards with associated costs that are exorbitant, excessive, or unreasonable. In other words, EPA’s cost reasonableness test evaluated whether the cost of compliance could be absorbed by industry without compromising its ability to perform its primary function. Under this test, the benefits of MATS regulation of coal and oil-fired emissions from EGUs outweighs the cost of compliance because the industry would be able to absorb those costs.

EPA’s decision could have a significant effect on the future regulation of air pollution.

Cost Consideration in EPA Decision-Making

The extent to which EPA must consider cost in its rulemaking determinations has always been the subject of disagreement. Many federal statutes include specific provisions addressing cost consideration. However, even in those cases, disputes ignite over cost’s value relative to other factors. Whitman v. Am. Trucking Ass’ns and EPA v. EME Homer City Generation, L. P. illustrate how the Supreme Court has previously interpreted cost consideration provisions.

In Whitman v. Am. Trucking Ass’ns, industry groups challenged the ozone and particulate matter National Ambient Air Quality Standards (NAAQS) by asserting that EPA should have considered costs when deriving the standard. The Supreme Court held that section 109(b)(1) clearly precluded cost consideration. Justice Scalia noted that section 109(b)(1) sets air quality standards “‘requisite to protect the public health’ with ‘an adequate margin of safety.’” According to the Court, cost consideration is clearly not permitted as the statute contains explicit bright line factors of which cost is not one. Justice Scalia asserted that lack of express authority to include a consideration as fundamental as cost is a clear indication that Congress did not intend to make cost a relevant factor because Congress does not “hide elephants in mouseholes.”

As seen with Whitman, cost consideration is often dependent on textual analysis, but the mere absence of statutory language requiring consideration of cost is not necessarily a barrier. In EPA v. EME Homer City Generation, L. P., a cost-based formula apportioning liability for the generation of air pollution was at issue. The apportionment assigned a greater duty to control emissions to upwind states to prevent nonattainment of ozone and particulate matter NAAQS in downwind states. The provision was challenged with the argument that cost consideration was precluded by Whitman. The Court disagreed. According to Justice Ginsberg, because the relevant provision provides no express criteria addressing cost consideration, EPA was permitted to “fill the ‘gap left open’ by the [statutory] ambiguity,” provided that the interpretation was reasonable. Homer held cost consideration was a reasonable interpretation of the statute because a gap existed in defining how cost may be apportioned and EPA’s action to fill that gap was “efficient and equitable.”

The Supreme Court Makes Failure to Consider Cost Categorically Unreasonable

In Michigan et al. v. Environmental Protection Agency et al., the Court held that EPA’s interpretation of “appropriate and necessary” was unreasonable when it deemed cost irrelevant to its decision. Justice Scalia wrote, “Consideration of cost reflects the understanding that reasonable regulation ordinarily requires paying attention to the advantages and the disadvantages of agency decisions.” Justice Scalia distinguished Whitman emphasizing that the rule-making criterion in section 109(b)(1) unambiguously precludes cost consideration, while section 7412(n)(1)(a) requires what is appropriate and necessary. Appropriate and necessary are ambiguous terms that can encompass a great many criterion, unlike the “absolute” language of section 109(b)(1). To the majority, the statute’s use of “appropriate” reveals intent to require consideration of cost, as cost is logically an indication of appropriateness.

Reconsideration of What Is “Appropriate and Necessary”

In the aftermath of Michigan, EPA issued it’s 2016 Supplemental Finding which stated that the “appropriate and necessary” finding was “in no way undermined by the conclusion that the EPA must incorporate cost considerations.” EPA’s latest action is a proposed rule that would revise the conclusion reached in the 2016 Supplemental Finding (the comment period for the proposed rule ended August 8, 2019). The action rests on the argument that the 2016 Supplemental Finding (1) improperly responded to Michigan when it mistakenly relied on a cost reasonableness test and (2) failed to meet both “appropriate and necessary” prongs as it is neither appropriate nor necessary to regulate coal and oil-fired EGU’s under the CAA. Therefore, EPA believed itself obligated to reverse its 2016 Supplemental Finding.

EPA now believes the “cost reasonableness” test utilized by the 2016 Supplemental Finding did not adequately meet the statute’s requirement to fully consider costs and is an unreasonable interpretation of CAA section 112(n)(1)(A) post-Michigan. As noted above, the cost reasonableness test was developed by EPA in response to D.C. Circuit opinions, such as Lignite Energy Council v. EPA and Sierra Club v. Costle, which preclude adoption of standards with associated costs that are exorbitant, excessive, or unreasonable.

However, EPA’s revised action claims that this test does not give enough weight to cost as a factor in decision-making and rebukes the Supreme Court’s observation that cost is a “centrally relevant factor when deciding whether to regulate.” Under the revised action, HAP benefits do not outweigh the costs of compliance for industry as the cost of MATS implementation to industry is between 1,600 and 2,400 times greater than quantifiable benefits from HAP reduction. The revised action, therefore, partially rests on EPA’s current position that the cost reasonableness test improperly devaluing cost in its decision-making formulation is inconsistent with the Court’s Michigan mandate to meaningfully consider cost.

It also rests on a revised determination that MATS regulation of coal and oil-fired HAP emissions from EGUs is not “appropriate and necessary” consistent with section 7412(n)(1)(a) of the CAA because the costs of regulation grossly outweigh HAP reduction benefits. Armed with a new cost consideration formula referred to as the direct cost-benefit analysis, EPA reconsidered both prongs of section 7412(n)(1)(a). The Court’s opinion in Michigan states, “[n]o regulation is “appropriate” if it does more harm than good.” Under a direct cost-benefit analysis, the imbalance between HAP reduction benefits and the cost of compliance does more harm than good. According to EPA, a direct cost-benefit analysis demonstrates MATS compliance costs $7.4 to $9.6 billion annually while HAP reduction benefits amount to $4 to $6 million annually. These numbers have been challenged by environmentalists who claim that “unquantified benefits” including reduced health care costs, cleaner air, and cleaner water would alter these numbers significantly.

EPA also found that the regulation failed the necessary prong because the HAP benefits gained are not requisite to public health, contradicting earlier EPA findings. According to EPA, HAP reduction necessary to protect the public health is already protected by particulate matter NAAQS and thereby regulation is not only not necessary, but superfluous. As mentioned in the discussion on Whitman and EME Homer City Generation, section 109(b)(1) is designed to only consider what is requisite to protect public health. EPA believes that what is necessary is more suitably governed by particulate matter NAAQS. If regulation of coal and oil-fired EGUs must be regulated to protect the public health from HAP emissions, then it should be implemented consistent with, and pursuant to, the NAAQS program.

For these reasons, EPA has concluded it must remove coal and oil-fired EGU emissions from MATS. The introduction of cost as a “centrally relevant factor” represents EPA’s intent to place more significant emphasis on the cost of environmental compliance. Before Michigan, EPA considered cost a factor only when the statute expressly mandated cost consideration and typically inferred statutes without express language to preclude cost consideration. In the aftermath of Michigan, cost consideration is a more powerful, persuasive and broadly applied criterion in EPA determinations. While the Michigan case’s importance on EPA policy has yet to envelop their entire regulatory structure, its revised action on MATS regulation may be indicative of future practice.

    John Travers

    John Travers was born and raised in Brooklyn, New York. He is a recent graduate of the University of Maryland King Carey School of Law and leaves for Army JAG training in January 2020.