November 01, 2013

Legal uncertainty continues as Supreme Court takes up invalidation of EPA’s Transport Rule

Thomas A. Lorenzen

The Clean Air Act’s “good neighbor” provision requires states to address in-state emissions that “contribute significantly” to air pollution in downwind states. 42 U.S.C. § 7410(a)(2)(D)(i)(I). Transported pollution persists, though, in part because of the difficulty of determining the amount by which each state must reduce its emissions. The U.S. Court of Appeals for the District of Columbia Circuit has not helped here, issuing conflicting decisions that muddy application of the good neighbor provision.

The U.S. Supreme Court recently decided to review the D.C. Circuit’s invalidation of the Environmental Protection Agency’s (EPA’s) latest rule implementing the good neighbor provision—the Cross-State Air Pollution Rule (Transport Rule). See EME Homer City Generation, L.P. v. EPA, 696 F.3d 7 (D.C. Cir. 2012). The Transport Rule required 27 states and the District of Columbia to reduce emissions of sulfur dioxide and nitrogen oxides to assist downwind states in attaining fine particulate matter and ozone standards.

The Supreme Court’s resolution of EME Homer City’s thorny jurisdictional and statutory interpretation issues could provide much-needed clarity to the regulated community about whether and how the good neighbor provision can meaningfully be implemented. Alternatively, if the Court only addresses jurisdiction, its decision could leave the merits issues muddled for years to come.

The statute and EPA’s regulatory actions

Under the Clean Air Act, EPA sets national ambient air quality standards (NAAQS) for criteria pollutants, including ozone and particulate matter. Each state has three years to develop state implementation plans (SIPs) for attaining and maintaining these standards, which EPA then approves or disapproves. The good neighbor provision requires each SIP to contain measures addressing pollution that “contribute[s] significantly to nonattainment [of a NAAQS] in, or interfere with maintenance by, any other State.” If EPA finds that a state has failed to meet this requirement, EPA “shall” issue a federal implementation plan (FIP)—a replacement for the state’s missing or inadequate SIP—within two years. 42 U.S.C. § 7410(c)(1).

EPA issued an ozone and fine particulate matter NAAQS in 1997 and a separate fine particulate matter NAAQS in 2006, thus imposing on the states (in EPA’s view) an independent obligation to submit good neighbor SIPs to EPA. When compliant SIPs had not arrived after more than three years, EPA issued final orders finding that 29 states and territories had failed to submit SIPs containing measures implementing the good neighbor provision and that ten more had submitted SIPs that were inadequate to satisfy their good neighbor obligations.

EPA issued the Transport Rule based on these findings, asserting its FIP authority. In that rule, EPA adopted a two-step approach to address transported pollutants. In the first step (the “Screening Analysis”), EPA identified the states potentially subject to the rule by determining whether a state’s emissions increased ambient pollutant concentrations by more than a specified threshold amount in at least one downwind area with a NAAQS attainment or maintenance problem. In the second step (the “Control Analysis”), EPA determined the emission reductions that could be achieved in that state at a specific cost threshold and then ordered that state to achieve those reductions.

EPA believed this approach was the most sensible way to deal with the technical complexity of the interstate pollution problem. EPA also believed that the D.C. Circuit had previously endorsed this two-step approach in Michigan v. EPA, 213 F.3d 663 (D.C. Cir. 2000), which upheld EPA’s 1998 “NOx SIP Call,” and North Carolina v. EPA, 531 F.3d 896 (D.C. Cir. 2008), in which the court had invalidated EPA’s predecessor to the Transport Rule, but expressly declined to disturb the two-step approach to transported pollutants upheld in Michigan.

The D.C. Circuit’s decision

Many petitions were filed seeking review of the Transport Rule. No entity, however, challenged EPA’s findings of failure to submit SIPs. Additionally, only three petitions were filed challenging EPA’s findings of SIP inadequacy, and none of those was consolidated with the Transport Rule challenges. Thus, the only EPA action before the D.C. Circuit in EME Homer City was the Transport Rule.

On August 21, 2012, the court issued a divided decision invalidating the rule. Judges Kavanaugh and Griffith held that EPA had grossly overstepped its authority under the good neighbor provision. First, they held that the Transport Rule violated the good neighbor provision by requiring upwind states to reduce their emissions based on considerations of cost-effectiveness or regional emissions. EPA, they wrote, could only require reductions to the extent of a specific state’s “significant contribution” to a specific downwind state’s nonattainment. In other words, if EPA found in its Screening Analysis that an upwind state was responsible for 1 percent of a downwind state’s NAAQS violation, EPA could require a 1 percent reduction in emissions, and no more, even if further reductions could be achieved more cost-effectively and equitably within that upwind state than by requiring another state to reduce its emissions further. Moreover, in determining the correct reduction, the court cautioned, EPA would have to be careful to ensure that this did not result in overreduction in another downwind state. The court distinguished Michigan, which had upheld EPA’s cost-effectiveness approach to setting the level of control required under the good neighbor provision, by characterizing its holding as merely allowing EPA to “rely on cost-effectiveness factors in order to allow some upwind States to do less than their full fair share.” 696 F.3d at 27.

Judge Rogers dissented vigorously, maintaining that in Michigan the court had “expressly permitted the use of uniform cost thresholds to measure ‘significance,’” as well as “the ‘ineluctabl[e]’ result of small and large contributors being required to make the same amount of reductions.” Id. at 59. These findings, she stated, required “the conclusion that EPA’s choice of cost thresholds . . . was permissible.” Id.

The majority also held that the states have no obligation to adopt good neighbor SIPs unless and until EPA first adopts rules in which it specifies the states’ significant contributions. Thus, they concluded, EPA erred by failing to give the states three years to develop good neighbor SIPs after issuance of the Transport Rule, because that was where EPA first specified the states’ significant contributions. The court found that this requirement was inherent in the Clean Air Act’s “cooperative federalism” structure, under which “the Federal Government sets the end goals and the States choose the means to attain these goals.” Id. at 33. Judge Rogers, dissenting, pointed to the plain language of the good neighbor provision, which makes no mention of any requirement of a previous rulemaking by EPA.

The Supreme Court steps in

On June 24, 2013, the Supreme Court granted certiorari on three questions presented by EPA: whether (a) the D.C. Circuit lacked jurisdiction to rule as it did, (b) states are excused from adopting good neighbor SIPs until EPA first adopts rules quantifying each state’s good neighbor obligations, and (c) EPA permissibly interprets the term “contribute significantly” in defining each upwind state’s “significant” interstate air pollution contributions in light of the cost-effective emission reductions it can make to improve air quality in downwind areas. EPA Petition for Writ of Certiorari, at I.

Many in the regulated community hope the Supreme Court will provide direction on how EPA, the states, and the regulated community should address their respective obligations under the good neighbor provision. The Court’s order granting review suggests, however, that it might never get that far.

When the D.C. Circuit held that EPA could not disapprove SIPs without first developing a rule specifying the states’ good neighbor obligations and then providing the states three years to develop good neighbor SIPs, it effectively invalidated EPA’s various SIP disapprovals and findings of failure to submit. Those disapprovals and findings were not, however, before the D.C. Circuit. EPA argues that the court therefore had no basis to collaterally attack their validity. The majority also ruled based on arguments that had not been made to EPA during the Transport Rule rulemaking process, holding that these arguments had been raised in previous EPA rulemakings and thus that the agency should have been on notice of them. 696 F.3d at 24 n.18. This holding may violate a well-settled doctrine providing that issues not raised before an agency during the contested rulemaking may not be raised in subsequent litigation challenging that rule. That the Supreme Court granted review on EPA’s jurisdictional question suggests that the Court could dispose of EME Homer City without reaching the merits of the Transport Rule, simply by holding that the D.C. Circuit had no authority to make the findings that it made.

Should the Supreme Court find its way past these jurisdictional issues, the merits raise both difficult and not-so-difficult questions. On one, the statute seems relatively clear: the good neighbor provision nowhere says that EPA must issue a rule specifying the states’ significant contributions before the states develop their good neighbor SIPs. The Supreme Court will have to depart significantly from its strict statutory construction doctrines to uphold the D.C. Circuit on this point. Also, if the Court is guided by its Chevron doctrine—under which the courts defer to agencies’ reasonable interpretations of ambiguous statutory provisions, such as the undefined term “contribute significantly”—it will likely reverse and remand here.

The most likely outcome, however, appears to be the least desirable one: the Court will rule on the jurisdictional issues and send the Transport Rule back to the D.C. Circuit with instructions that will effectively require that court to uphold it because most of the arguments that Judges Kavanaugh and Griffith found persuasive were waived. This would leave open for future litigation the fundamental questions surrounding the Clean Air Act’s good neighbor provision: when must the states act to address their good neighbor obligations, and how may those obligations be apportioned among the states and sources responsible for downwind nonattainment problems?

Hopefully, the Supreme Court will avoid this outcome. Additional clarity from the Supreme Court would be a welcome development, given that EPA is already working on a new version of the Transport Rule and future litigation appears inevitable.

Thomas A. Lorenzen

Thomas A. Lorenzen is a partner at Dorsey & Whitney LLP, representing clients in environmental regulatory development and judicial review. From 2004 to May 2013, as an assistant chief at the U.S. Department of Justice, he oversaw the federal government’s legal defense of all EPA rulemakings.