Clean Air Interstate Rule (CAIR) Vacated and Remanded by D.C. Circuit

On July 11, 2008 the U.S. Court of Appeals for the District of Columbia (D.C.) Circuit struck down the Clean Air Interstate Rule (CAIR) and the CAIR Federal Implementation Plan (FIP).  This ruling comes on the heels of this same court’s decision to vacate another United States Environmental Protection Agency (U.S. EPA) regulatory action, that of the mercury delisting rule and Clean Air Mercury Rule.  The court in that ruling found that U.S. EPA’s approach had violated the plain language of the Federal Clean Air Act.  In the CAIR ruling, the court found “more than several” fatal flaws and stated that “[n]o amount of tinkering with the rule or revising of the explanations will transform CAIR, as written, into an acceptable rule.”  As such, CAIR was vacated in its entirety and remanded back to U.S. EPA with direction to promulgate a rule consistent with the opinion of the court.

None of the petitioners in the CAIR lawsuit had asked the court to vacate the rule in its entirety.  Even the court acknowledged its responsibilities to consider the disruptive environmental consequences of its actions and the risk of interfering with environmental protection.  However, in its final ruling, the court found that it “must vacate CAIR because very little will survive remand in anything approaching recognizable form….[U.S.] EPA’s approach—regionwide caps with no state-specific quantitative contribution determinations or emissions requirements—is fundamentally flawed. Moreover, [U.S.] EPA must redo its analysis from the ground up.”  The court cited that U.S. EPA itself had strongly argued before the court, in its support of CAIR, that all of the components of CAIR must stand or fall together.

Read on as ALL4’s Corey Brandt and John Slade analyze the impact of the court’s decision and explain why the court decided that:

• The CAIR trading programs are unlawful.
• U.S. EPA must reconsider which states are included in CAIR.
• U.S. EPA must decide what date is as “”expeditious as practicable”” for states to eliminate their significant contributions to downwind nonattainment.
• The SO2 regionwide caps are entirely arbitrary.
• The allocation of state budgets from the NOX caps is arbitrary.
• U.S. EPA does not have the authority to terminate or limit Acid Rain Program allowances.

CAIR Background

U.S. EPA promulgated CAIR under the authority of section 110(a)(2)(D)(i)(I) of Title I of the Clean Air Act (CAA Title I or Title I).  Title I requires U.S. EPA to set National Ambient Air Quality Standards (NAAQS) for criteria pollutants in order to protect public health and the environment.  Based on monitoring data, U.S. EPA designates areas of the country as being in “attainment,” ”nonattainment,” or “unclassifiable” with respect to each NAAQS.  Each state is required to develop, and submit to U.S. EPA for approval, revisions to their State Implementation Plan (SIP) which contain the specific control measures and strategies to allow the state to attain and maintain the NAAQS for each pollutant.

The SIP revisions are developed through a public process, formally adopted by the state, and submitted by the Governor’s designee to U.S. EPA.  The SIP, once approved by U.S. EPA, is federally-enforceable and failure by the state to implement the SIP as approved can result in Federal sanctions, including loss of Federal highway funding.  Section 110(a)(2)(D)(i)(I) of Title I requires each state’s SIP to:

“contain adequate provisions—(i) prohibiting, consistent with the provisions of this subchapter, any source or other type of emissions activity within the state from emitting any air pollutant in amounts which will—(I) contribute significantly to nonattainment in, or interfere with maintenance by, any other state with respect to any [NAAQS]…”

In the CAIR rulemaking, U.S. EPA found that 28 states and the District of Columbia contributed significantly to nonattainment of the PM2.5 NAAQS and/or ozone NAAQS in downwind states.  In order to meet the section 110(a)(2)(D)(i)(I) requirement to eliminate the significant contribution of these upwind states’ emissions to the attainment status of downwind states, CAIR required the upwind states to revise their SIPs to include control measures to reduce emissions of PM2.5 and ozone precursors.  States that were found to contribute significantly to nonattainment of the PM2.5 NAAQS in downwind states were required to reduce emissions of the PM2.5 precursors SO2 and NOX.  States that were found to contribute significantly to nonattainment of the ozone NAAQS in downwind states were required to reduce emissions of the ozone precursor NOX.

In order to assure the necessary emission reductions, CAIR established SO2 and NOX emissions budgets for each upwind state.  The emission budgets were based on making reductions in two (2) phases: Phase One was to begin in 2009 for NOX and 2010 for SO2; and Phase Two was to begin in 2015 for both pollutants.  In lieu of developing new emission control programs, states were given the option of participating in U.S. EPA-administered interstate SO2 and NOX trading programs in order to meet their emission budgets.

D.C. Circuit Court Petitions

A number of petitions for judicial review of CAIR were filed in the D.C. Circuit.  The petitions were consolidated for review and argued before the court on March 25, 2008.  In vacating and remanding CAIR, the court found that U.S. EPA’s approach was “fundamentally flawed” and that U.S. EPA must “redo its analysis from the ground up.”  The specific findings of the court regarding the major petitions that were granted are discussed in detail below.

The CAIR Trading Programs are Unlawful

The D.C. Circuit Court determined that the CAIR trading programs are unlawful because they do not connect upwind states’ emission reductions to any measure of their contribution to nonattainment in other (downwind) states.  CAA section 110(a)(2)(D)(i)(I) requires that each state’s SIP includes provisions to prohibit sources “within the state” from emitting pollutants that contribute significantly to nonattainment with, or interfere with maintenance by, “any other state” with respect to the NAAQS.  However, U.S. EPA did not consider the “significant contribution” of each upwind state to nonattainment in each downwind state when setting the state emission budgets.

Instead, in order to obtain the most cost-effective emission reductions through CAIR, U.S. EPA set the SO2 and NOX emissions budgets on a regionwide level assuming that interstate trading of emissions would occur.  The total regional budgets were then apportioned to each state based on the amount of coal, oil, and gas-fired emission units for NOX, and based on the state CAA Title IV (Acid Rain Program) allowance budgets for SO2.  Because U.S. EPA set the budgets on a regionwide basis and then apportioned the budgets to states based on other factors, it did not quantify the “significant contribution” of sources in each upwind state to nonattainment in each downwind state.

The court determined that U.S. EPA’s approach to CAIR using regionwide caps with no state-specific quantitative contribution determinations or emissions requirements was contrary to the requirements of CAA section 110(a)(2)(D)(i)(I) and therefore unlawful.  In part, the court stated that CAIR “must actually require elimination of emissions from sources that contribute significantly and interfere with maintenance in downwind nonattainment areas.  To do so, [U.S. EPA] must measure each state’s ‘significant contribution’ to downwind nonattainment…”

U.S. EPA Must Reconsider Which States are Included in CAIR

The D.C. Circuit Court stated that U.S. EPA must “consider anew which states are included in CAIR…after giving some significance to the phrase ‘interfere with maintenance;’ in [CAA] section 110(a)(2)(D)(i)(I).”  As noted previously, section 110(a)(2)(D)(i)(I) requires that each state’s SIP includes provisions to prohibit sources within a state from emitting pollutants that “contribute significantly to nonattainment in, or interfere with maintenance by,” any other state with respect to the NAAQS.

U.S. EPA included a state in CAIR if it contributed more than a threshold amount of PM2.5 or ozone to downwind areas that were in nonattainment with the NAAQS.  Such states were said to “contribute significantly” to nonattainment in downwind states.  However, U.S. EPA did not include states in CAIR if they “interfered with maintenance” of the NAAQS in downwind areas.  U.S. EPA implemented the “interfere with maintenance” requirement only by using it as the basis for implementing further reductions in Phase Two of CAIR.

The court stated that the failure to give independent effect to the “interfere with maintenance” clause to identify upwind sources interfering with downwind maintenance “violates the plain language of section 110(a)(2)(D)(i)(I).”

U.S. EPA Must Decide What Date is as “”Expeditious as Practicable”” for States to Eliminate their Significant Contributions to Downwind Nonattainment

One of the petitioners challenged U.S. EPA’s 2015 Phase Two CAIR deadline as being incompatible with the CAA section 110(a)(2)(D)(i)(I) requirement that SIPs contain adequate provisions to prohibit significant contributions to nonattainment “consistent with the provisions of [Title I].”  The petitioner argued, and the court agreed, that the requirement to promulgate CAIR “consistent with the provisions of [Title I]” included consistency with the deadlines in Title I for states to attain the NAAQS.

Title I requires states to attain the NAAQS “as expeditiously as practicable,” but no later than 2010 for the PM2.5 NAAQS, and by certain codified dates for the ozone NAAQS (2010 for the petitioner).  Under CAIR, however, upwind states would not fully eliminate their significant contributions to downwind nonattainment until the Phase Two deadline of 2015.  The court stated that this Phase Two deadline would force downwind states to make greater reductions than required by section 110(a)(2)(D)(i)(I) because the downwind states would be required to attain the NAAQS before upwind states eliminated their significant contributions to nonattainment.

Because U.S. EPA “ignored its statutory mandate to promulgate CAIR consistent with the provisions in Title I mandating compliance deadlines for downwind states in 2010,” the court granted the petition challenging the 2015 Phase Two deadline.  When redoing its CAIR analysis, the court stated that U.S. EPA “must decide what date, whether 2015 or earlier, is as expeditious as practicable for states to eliminate their significant contributions to downwind nonattainment.””

The SO2 Regionwide Caps are Entirely Arbitrary

U.S. EPA set upwind states’ CAIR SO2 emissions caps based on the number of CAA Title IV (Acid Rain Program) allowances received by the electric generating units (EGUs) in each state.  For 2010, the SO2 caps were set at 50% of the number of Title IV allowances, and for 2015, at 35%.  The court found these CAIR SO2 emission caps to be “arbitrary, capricious,…or not otherwise in accordance with law.”   The court indicated that it reached this conclusion because U.S. EPA did not explain how the objective of eliminating significant contributions to downwind nonattainment specified in section 110(a)(2)(D)(i)(I) relates to U.S. EPA’s choice of setting CAIR SO2 emissions caps based on Title IV allowances.

Among other faults found by the court related to the CAIR SO2 emission caps, the court did not agree with U.S. EPA’s assertion in the CAIR rulemaking that the Title IV allowances were a “’logical starting point’ for setting CAIR’s SO2 emissions caps.”  Specifically, the court stated “Congress designed the Title IV allowance scheme…to address the national acid rain problem.  Nowhere does [U.S.] EPA explain how reducing Title IV allowances will adequately prohibit states from contributing significantly to downwind nonattainment of the PM2.5 NAAQS.”  And, “it is unclear how the quantitative number of allowances created by 1990 legislation to address one substance, acid rain, could be relevant to 2015 levels of an air pollutant, PM2.5.”  The Court also noted that “[a]part from the arbitrary Title IV baseline, [U.S.] EPA has insufficiently explained how it arrived at the 50% and 65% reduction figures.”

The Allocation of State Budgets from the NOX Caps is Arbitrary

U.S. EPA calculated regionwide CAIR NOX caps by multiplying a NOX emission rate by the heat input of affected sources in upwind CAIR states; the NOX emission rate was 0.15 lb/MMBtu in 2010 and 0.125 lb/MMBtu in 2015.  In order to ensure that the distribution of CAIR NOX allowances was fair, U.S. EPA apportioned the regionwide NOX budget to individual states using fuel adjustment factors that counted all of the heat input from coal fired units, 60% of the heat input from oil-fired units, and 40% of the heat input from gas-fired units.  In the CAIR rulemaking, U.S. EPA indicated that the fuel adjustment factors created a more equitable budget distribution, as the factors reflect the inherently higher emission rate of coal-fired plants, and consequently the greater burden on coal plants to control emissions.  The D.C. Circuit Court found U.S. EPA’s CAIR NOX emissions caps to be arbitrary and capricious because they contravened the requirements of CAA section 110(a)(2)(D)(i)(I).

As with the SO2 emission caps discussed above, the court took issue with a number of factors relating to the manner in which U.S. EPA established the CAIR NOX emission caps.  Although the court did not explicitly call it arbitrary, the court found it unclear “why [U.S.] EPA considered [the NOX SIP Call emission rate of 0.15 lb/MMBtu] a useful starting point beyond the fact that such an emission rate had been considered in the past.”  The court indicated that the net result of U.S. EPA’s fuel-adjustment methodology was “that states with mainly oil- and gas-fired EGUs will subsidize reductions in states with mainly coal-fired EGUs,” and that while “[U.S.] EPA’s redistribution instinct may be laudatory…section 110(a)(2)(D)(i)(I) gives [U.S.] EPA no authority to force an upwind state to share the burden of reducing other upwind states’ emissions.”

In concluding their discussion of the NOX emission caps, the court stated that “[b]ecause the fuel-adjustment factors shifted the burden of emission reduction solely in pursuit of equity among upwind states—an improper reason—the resulting state budgets were arbitrary and capricious.””

U.S. EPA Does Not Have the Authority to Terminate or Limit Acid Rain Program Allowances

The D.C. Circuit Court agreed with petitioners’ claims that U.S. EPA lacks the authority to terminate or limit Title IV Acid Rain Program allowances as is specified in CAIR.  In evaluating the arguments of the petitioners, U.S. EPA, and environmental groups intervening on behalf of U.S. EPA, the court concluded that “no statute confers authority on [U.S.] EPA to terminate or limit Title IV allowances, and [U.S.] EPA thus has none.”

What Happens Next?

Reaction to the vacatur of CAIR is not only happening at the Federal level, but affected states are considering what state regulatory adoption independent of the U.S. EPA actions are appropriate, and Congress is holding hearings to determine if new Federal legislation is the best remedy.

U.S. EPA has until August 25, 2008 to request a rehearing by the D.C. Circuit (either by the panel that decided this case or by the entire court) or to petition for a stay of the court’s mandate to vacate CAIR.  In both the Circuit Rules and the Handbook of Practice and Internal Procedures for the D.C. Circuit, it is noted that petitions for rehearing are very rarely granted, and that sanctions may be imposed as a penalty if a petition for rehearing is filed and found to be wholly without merit.  U.S. EPA may also file a writ of certiorari asking the U.S. Supreme Court to review the D.C. Circuit’s decision.  Given the imperative condemnation of CAIR by the D.C. Circuit, it is not likely that the Circuit Court would approve a rehearing or that the U.S. Supreme Court would grant a stay and hearing.

Implications of the CAIR Vacatur

The implications of U.S. EPA’s actions in promulgating CAIR as it did, and of the court’s decision to vacate the rule, will be significant for years to come.  The impacts will include both short and long term effects with regard to ambient air quality; the economic impact on industry and the public; and the significant changes that many states must now make to their CAIR, regional haze, PM2.5, and ozone SIPs in order to meet their responsibilities under the CAA.

In the immediate future we will see the continuation of the Title IV Acid Rain Program and the NOX SIP Call NOX Budget Trading Program.  Other impacts that are likely will be on Reasonably Available Control Technology (RACT) and Best Available Retrofit Technology (BART) rules for EGUs because of U.S. EPA’s reliance on CAIR to meet those requirements.  Many other impacts are not fully understood at the moment, but are bound to arise when such a significant environmental rule is found to be in direct conflict with Congressional intent as written in the CAA.