DC Circuit's Cross-State Decision: A Nearly Inescapable Straitjacket for EPA

by Thomas McGarity

August 22, 2012

Yesterday afternoon, the D.C. Circuit Court of Appeals issued a long-awaited decision on the validity of EPA’s “Cross-State” rule governing interstate transport of pollution. 

The EPA has been trying for more than two decades to come up with a solution to the vexing interstate transport problem, but every attempt has failed. The court has now vacated EPA’s most recent (and most ambitious) attempt to protect the residents of “downwind” states (primarily in New England and the mid-Atlantic) from two pollutants (ozone and fine particulate matter) that can cause a number of adverse health effects, ranging from minor eye irritation to premature mortality.  EPA’s rule was estimated to prevent 13,000 to 34,000 premature deaths every year.

Worse, the court interpreted the Clean Air Act in a way that ensures that EPA may never be able to implement it with the analytical tools currently at its disposal.  If the Obama Administration is serious about protecting children, the elderly, and other vulnerable Americans, it must ask the entire membership of the D.C. Circuit to overturn the panel’s decision.   Failing that, it must appeal the decision to the Supreme Court of the United States.

As states along the East Coast struggled over the years to fulfill their obligation under the Clean Air Act to write state implementation plans (SIPs) capable of achieving the national ambient air quality standards (NAAQS), they discovered that the sources of the pollutants were located in upwind states and were therefore not subject to any legal requirements promulgated by the downwind states.  The complexity of the problem was magnified by the fact that the relationships between upwind state emissions and downwind state ambient air quality were not well understood.

The Clean Air Act envisioned this possibility and addressed it in two sections of the statute.  First, the statute required every state’s SIP to contain adequate provisions “prohibiting . . . any source . . . within the state from emitting any air pollutant in amounts which will . . . contribute significantly to nonattainment in . . . any other state with respect to any [NAAQS].”  Second, if the state failed to promulgate a SIP that adequately implemented this obligation, EPA could issue a “SIP call” requiring states to amend their plans to “mitigate adequately” the interstate transport of pollutants, or EPA could issue its own federal implementation plan (FIP) prohibiting sources within the state from emitting pollutants in amounts that contributed significantly to downwind states’ nonattainment.

In 1998, EPA seized the bull by the horns and issued a “NOx SIP Call” that required 22 upwind states and the District of Columbia to modify their SIPs to require power plants to implement “highly cost-effective controls.” The D.C. Circuit upheld most aspects of the SIP call in 2000.

Although the NOx SIP call resulted in significant emissions reductions, “highly cost-effective” controls were not enough to attain the standards.

At the urging of environmentalists and downwind states, EPA, in May 2005, promulgated a more comprehensive SIP call that it labeled the “Clean Air Interstate Rule” (CAIR).  The new rule was applicable to power plants in 28 states and the District of Columbia.  It created a “cap-and-trade” program in which every power plant in the 28 states would have to participate, unless a state containing the power plant opted out of the program and promulgated a SIP that otherwise adequately controlled power plant emissions.  The states had a year to opt in or promulgate their own SIPs.  Power plants in states opting into the cap-and-trade program could purchase or sell allowances in an open market.  A states opting out of the cap-and-trade program was obliged to develop a SIP that limited emissions to the amount specified in its allocation.

A panel of the D.C. Circuit struck down the CAIR in 2008 primarily because it did not adequately implement the responsibility of upwind states to “prohibit” emissions that significantly contributed to nonattainment in downwind states.  In particular, the cap-and-trade program did not adequately assure that power plants in an upwind state would not come into compliance by purchasing allowances, rather than reducing pollution, in which case no emissions in the upwind state would be prohibited.  Furthermore, since EPA had based the emissions reductions that determined each state’s emissions budget on whether they were “highly cost effective” at the region-wide level, it never determined the “significant contribution” from sources within an individual state to downwind nonattainment areas.

The court remanded the standard to the agency for further proceedings, but, in a subsequent opinion, it stayed its mandate to allow the CAIR to remain in effect until EPA promulgated a new regulation to replace it.

The Obama Administration responded to the remand with an even more comprehensive regulation, now called the Cross-State rule, which retained the basic structure of the CAIR.  Using complex air quality modeling analyses, EPA determined whether any state’s contribution to downwind nonattainment was above specified thresholds for each of the pollutants.  If not, then the state was eliminated from the program. 

For the remaining states, EPA used a “multi-factor analysis” that took into account “both air quality and cost considerations” to identify the portion of the state’s contribution that was in fact significant, and it required that the states reduce emissions by that amount.  Cost played a heavy role in this calculation as EPA determined on a regional basis the emission reductions that could be achieved at a given cost-per-ton without regard to the extent to which any state contributed to any other state’s pollutant levels.  But it also factored in air quality considerations in searching for “significant cost thresholds” that resulted in steep drops in emissions or increases in air quality in downwind states.

This time, EPA simultaneously promulgated federal implementation plans (FIPs) for all of the upwind states and allowed states to opt out of the FIPs only if they promulgated and EPA approved SIPs that prohibited emissions from sources significantly contributing to nonattainment in downwind states. The FIPs adopted different cap-and-trade programs based on a “site-specific methodology” that identified emissions reductions that had to be accomplished in each covered state.  The FIPs allocated initial allowances to individual units within the state based on historic heat-input data.  The allowances could be consumed by the existing unit or traded to another source, but only if the selling source reduced emissions by an equivalent amount.  Interstate trading was limited to ensure that the necessary emissions reductions occurred within each covered state. 

On Tuesday, a D.C. Circuit panel held that EPA had still not gotten it right.  The court had two problems with EPA’s latest effort.  First, the court said EPA lacked the authority to promulgate FIPs for the upwind states before giving them an opportunity to submit SIPs capable of meeting their obligation to protect downwind states.  And they could not do that until EPA had defined their obligation by specifying the emissions reductions necessary to meet that obligation.  This holding is highly questionable, because it ignored the language of the statute placing the burden on upwind states, not EPA, to determine their obligations to downwind states, but it is not debilitating.  EPA just needs to give the states the option of submitting a plan that achieves the emissions reductions called for in the rule before, rather than after, the FIP goes into effect.

The impact of the second holding on EPA’s efforts to regulate interstate transport is far more devastating.

The court held that once EPA determines an amount that is “insignificant” for purposes of excluding states from the programs it cannot force any un-excluded upwind state to “reduce more than its own contribution to that downwind State minus the insignificant amount.”  Having subtracted those emissions, EPA had to avoid “over-controlling” emissions in upwind states by ensuring that the sum total of emissions reductions in all upwind states was no larger than necessary to just meet the NAAQS in the downwind state.  If EPA’s models showed that controls in upwind states made the air in downwind states too clean, EPA had to “ratchet back the upwind States’ obligations to the level of reductions necessary and sufficient to produce attainment in the downwind States.”  Finally, “the collective burden must be allocated among the upwind States in proportion to the size of their contributions to the downwind State’s nonattainment.”

The court found that EPA’s cross-state rule failed to accomplish this because it focused too heavily on the costs of emissions reductions, rather than on their impact on downwind air quality.  EPA did not determine each un-excluded upwind state’s proportionate share of the amount to which the level of the air quality in the downwind state exceeded the relevant NAAQS.  Instead, it grouped all un-excluded states into a single category in which each state was obliged to impose controls capable of reducing emissions at a given cost per ton.

The defect in this analysis is the court’s almost childlike trust in the power of air quality modeling tools to predict the impact of emissions reductions with such precision.  Although air quality modeling is considerably more sophisticated than it was when Congress enacted the good neighbor provisions, it is still more of an art than a science.  Large uncertainties cloud the estimates provided by even today’s highly sophisticated models.  It is simply asking too much of these models to expect them to determine the precise degree of emissions limitation from all of the sources within a state that is both necessary and sufficient to represent that state’s proportionate share of the contribution to the extent to which a downstream state’s ambient air quality exceeds a particular NAAQS. 

The court recognized that “it may not be possible to accomplish the ratcheting back in an entirely proportional manner among the upwind States.”  But it provided not a clue as to what the agency was supposed to do if it turned out that it was in fact an impossible task. 

The majority opinion observed that the Clean Air Act was “not a blank check for EPA to address interstate pollution on a regional basis without regard to an individual upwind State’s actual contribution to downwind air quality.”  Instead, the court turned the good neighbor provision into a straitjacket that bound the agency’s discretion so tightly that it may never be able to accomplish the critical task of protecting downwind states from pollution.

EPA could, of course, come up with an even more powerful model that purported to perform the astonishingly complex calculus that the court demands, but the affected industries and/or environmental groups would immediately attack the model because of its unavoidable inaccuracies.  The agency could spend a decade or more creating and testing the model, applying it to the emissions in upwind states, and eliciting public comment on the modeling exercise, only to be hauled into court once again to defend the new modeling exercise.

Before sending EPA down that treacherous and winding road, the Obama Administration should appeal the three-judge panel’s decision to the full D.C. Circuit.  The withering dissent of Judge Rodgers, the only member of the panel not appointed by George W. Bush, should assist the government in that regard.  If the court refuses to reconsider the case, the administration should appeal the decision to the Supreme Court.

The other way to solve the problem is for Congress to amend the statute to give EPA authority to address interstate transport directly by promulgating standards requiring existing power plants to install the best available technology or indirectly through a stringent cap-and-trade program.  Given the D.C. Circuit’s overly demanding standards of EPA rulemaking, statutory amendment may be the only approach that will work. 

It is clear, however, that the current Congress is utterly incapable of taking on this highly controversial topic.  Absent a judicial reversal, it will therefore be up to the 113th Congress to fix the interstate transport problem.  Thus, the upcoming “down-ballot” congressional elections are just as critical from a public health perspective as the presidential election.

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Thomas O. McGarity holds the Joe R. and Teresa Lozano Long Endowed Chair in Administrative Law at the University of Texas in Austin. He is a member of the board of directors of the Center for Progressive Reform, and a past president of the organization.

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