By Larry Kane, Attorney, Bingham Greenebaum Doll LLP
On Aug. 21, 2012, the United States Court of Appeals for the District of Columbia, in a 2-to-1 decision in EME Homer City Generation L.P. v. Environmental Protection Agency, et al., vacated the Cross-State Air Pollution Rule (CSAPR) and remanded this rule to the Environmental Protection Agency. The vacated rule would have required significant reductions in emissions from power plants in 28 Eastern and Midwestern states (including Indiana and Kentucky) that contribute to downwind pollution in other states. Indiana joined a number of upwind states in opposing the rule.
Background: From the Clean Air Act to the Cross-State Air Pollution Rule
In accordance with the Clean Air Act, the EPA establishes ambient air quality standards for pollutants. States then create State Implementation Plans (SIPs) to ensure compliance with the federal ambient air quality standards. SIPs further articulate emission standards and enforcement provisions applicable to air pollution sources within the respective state’s jurisdiction.
The Good Neighbor provision of Section 110 of the Act addresses interstate pollution transfer. Specifically, an upwind state must control its air pollution to prevent it from traveling over state lines and significantly contributing to a downwind state’s nonattainment with federal ambient air quality standards.
Over the last 15 years, the EPA has promulgated several air pollution transport rules. The Clean Air Interstate Rule (CAIR) was promulgated in 2005, creating a cap and trade program to regulate the emissions of sulfur dioxide and nitrogen oxide from upwind states. In 2008, this rule was remanded to the EPA by the court as exceeding the EPA’s statutory authority, but the court, on rehearing, decided not to vacate CAIR and ordered that the EPA could enforce the rule pending the promulgation of a replacement rule.
CSAPR was designed to be the successor to CAIR.
Litigation outcome of the Cross-State Air Pollution Rule
CSAPR included a complex sulfur dioxide and nitrogen oxide emission trading program. In the recent decision overturning this rule, the court noted that it was not interpreting the policy merits of the rule, but was merely enforcing the limits on the EPA’s authority set forth within the Act. The majority decision found that CSAPR “exceeds [EPA’s] statutory authority in two independent respects.” First, the rule required emissions reductions greater than necessary to eliminate upwind states’ significant contribution to downwind states’ nonattainment. Second, by simultaneously promulgating CSAPR and a Federal Implementation Plan, states were not given an opportunity to adopt and implement a state rule to establish reductions for sources within their boundaries.
As such, the court reaffirmed the statutorily ordained preferential role of the states in implementing the Act within their borders. Thus, any regulatory response by the EPA must allow states to exercise that authority. However, a regulatory response from the EPA could take years to develop. In the interim, the decision directs the EPA to continue to administer CAIR “pending implementation of a valid replacement.” Whether the EPA will appeal the decision remains to be seen. The EPA has 90 days from the entry of judgment by the court in which to file a petition for certiorari.
In ruling that the former CAIR rule will remain in effect until the EPA adopts a replacement rule on interstate transport of such pollutant emissions, the court unavoidably creates uncertainty for SIPs based on CSAPR’s provisions, as well as for future SIP development when the only transport rule in play is an interim rule with known flaws.
Indiana and Kentucky implications
Indiana Gov. Mitch Daniels issued a statement on Aug. 21, stating, “[t]his repudiation of EPA's overreaching regulation is great news for Hoosier ratepayers and job seekers. Indiana is in compliance with federal clean air limits for the first time ever, and our air quality is the best since measurement began. This ruling means that our affordable energy costs can remain one of our best arguments in attracting new businesses.”
Indiana and Kentucky receive the majority of their electricity from coal-fired power plants. The decision gives a partial reprieve to coal-dependent power generators facing the combined threats of increasing federal regulation and low natural gas prices.
Like Indiana, Kentucky benefits from one of the lowest cost per kilowatt-hour rates in the nation. These low electrical costs enable Kentucky to retain manufacturing that many other states have lost to other countries. If electric utility rates were to increase because of increased environmental compliance costs, the state’s ability to attract and retain manufacturers would be negatively impacted.
If you have questions about the implications of the recent decision and how it may impact you or your business, please contact a member of Bingham Greenebaum Doll LLP’s Environmental and Natural Resources Practice Group.
DISCLOSURE REQUIRED BY CIRCULAR 230. This Disclosure may be required by Circular 230 issued by the Department of Treasury and the Internal Revenue Service. If this article, including any attachments, contains any federal tax advice, such advice is not intended or written by the practitioner to be used, and it may not be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer. Furthermore, any federal tax advice herein (including any attachment hereto) may not be used or referred to in promoting, marketing or recommending a transaction or arrangement to another party. Further information concerning this disclosure, and the reasons for such disclosure, may be obtained upon request from the author of this article. Thank you.