D.C. Circuit Vacates CAIR

July 14, 2008

In a devastating critique of the EPA’s regulatory approach, the D.C. Circuit Court of Appeals vacated the entire Clean Air Interstate Rule (CAIR). Issued on July 7, 2008, the court’s opinion agreed with state and industry objections that the EPA acted beyond its statutory authority in the Clean Air Act (CAA) and that several of its regulatory decisions were without support in the record. The Court determined that the rule was so fatally flawed that the EPA needed to start from the beginning and craft an entirely new approach. In the meantime, the Court held that the prior NOx SIP Call rules, which had been vacated by CAIR, would remain in effect.

CAIR was intended to be EPA’s comprehensive program for addressing the impact of pollutants emanating from upwind states (primarily in the Southeast and Midwest) on the attainment of air quality goals in downwind states (primarily on the East Coast). The rule established a cap and trade program which set emission budgets for Nitrous Oxide (NOx) and Sulfur Dioxide (SOx) emissions for each of the upwind states with phased reductions in those budgets planned for 2010 and 2015. States were allowed to allocate emission allowances among their existing and future sources. CAIR further established a nationwide trading program to trade these allowances thereby providing incentives for larger sources to reduce their emissions more quickly than provided for in the schedule. Such a cap and trade program had been extremely effective in reducing SOx emissions in the CAA Title IV acid rain program.

As an attempt at a compromise, CAIR provoked complaints from all segments of the spectrum, most of which were adopted by the Court. The major conclusions and implications of the decision are wide ranging and go to the heart of the EPA’s attempt to address regional air emissions issues:

  • CAIR is vacated and the Phase I 2009/2010 and the Phase II 2015 compliance deadlines no longer apply.
  • The Court effectively concluded that EPA has an obligation to ensure that emissions from states do not significantly interfere with attainment or maintenance of air quality standards in other states such that EPA will be obligated to replace CAIR with a new, and probably more stringent rule. This new rule is unlikely to be promulgated before the 2009-2010 CAIR Phase I deadlines, but will likely be issued and effective by or perhaps before the 2015 Phase II CAIR deadline.
  • The Court’s most devastating conclusion is that since multi-state regional emissions trading programs do not ensure that emissions from any specific state do not significantly contribute toward nonattainment in other states, EPA has no authority under Title I to develop such broad trading programs. Consequently, EPA will likely have to promulgate a new rule that caps emissions from each state, which would severely diminish the favorable economics of regional trading programs, and make the new program more expensive. As well, since significant state contributions to nonattainment in other states must be eliminated (however EPA defines that) it is likely that the required reductions under any new rule will be more stringent than CAIR. This conclusion not only has significant implications for any new rule addressing interstate transport of NOx and SOx, but further calls into question the ability of EPA to use CAA authorities to generate any broad emissions reduction program for CO2.
  • The Court held that EPA’s determination of the level of a state’s significant contribution to nonattainment must also include a meaningful analysis of whether a state also contributes to the ability of another state to maintain air quality standards. Hence, any new rule that EPA issues will also need to cover at least some areas that are attaining air quality standards, but just barely. As a consequence, EPA’s new rules will likely need to require additional reductions from states than contemplated by CAIR, and may also require reductions from additional states not covered by CAIR.
  • The Court further concluded that EPA has no authority to require sources covered by CAIR to surrender excess Title IV SOx allowances. While this restriction will have little impact on the requirements of any new rule regarding interstate transport, it will leave unaddressed EPA’s obvious concern that if sources in the eastern half of the country must reduce SOx emissions well below Title IV’s requirements, many excess SOx allowances will be generated, the allowance price will plummet. Sources in the western half of the U.S. will no longer have any incentive to continue to control emissions of SOx, and will buy allowances instead of reducing emissions. Since this issue can only be addressed by Congress, and the adverse implications to air quality in the western half of the U.S. seem quite real, there will be great pressure on Congress to address the issue, and perhaps the trading issue as well, by implementing a regional air quality plan akin to CAIR by statute.
  • Finally, the Court concluded that the timing for implementation of any Title I interstate emissions reduction rule must take into account the Act’s attainment deadlines, severely limiting EPA’s ability to phase in emission reduction deadlines to address labor, material or financing concerns.

The court recognized the significance of its complete demolition of the program, but believed that the EPA’s many departures from its statutory directives left it no choice, even reminding EPA that it was a creature of statute, “lest it forget.” As a going forward matter the Court held that its vacature of CAIR left the NOx SIP Call regulations in place. While the Court’s reasoning would also invalidate these NOx SIP Call rules, the Court specifically noted that the same issues were not raised in the NOx SIP Call challenges, and left those rules undisturbed. In the end, the Court found that the issues with the CAIR rule were so deep, fundamental and numerous that the EPA simply had to start again from scratch.

The impact of this decision will be to add to the regulatory chaos left in the wake of the numerous other decisions striking down portions of the EPA’s air program. Many states had adopted SIPs to implement CAIR. Those that were based solely on CAIR will likely be revoked now and those, such as Illinois, which were based on independent state authority, will move forward with required reductions but without the CAIR trading program. Just as significant, this decision demonstrates the difficulty of using the current CAA to craft economic responses, such as cap and trade program, to control greenhouse gas emissions and may show that further regional and national approaches to broad problems require revisions to the CAA.