On December 30, 2011, the U.S. Court of Appeals for the D.C. Circuit issued a stay of the Cross-State Air Pollution Rule (“CSAPR”) that became final on October 7, 2011. The rule, designed to replace the Clean Air Interstate Rule (“CAIR”) that had been promulgated in 2005 and remanded, but not vacated, in 2008, applies to fossil fuel-fired electric generating units (“EGUs”).

CSAPR imposes limits on the interstate transport of emissions of nitrogen oxides (“NOx”) and sulfur dioxide (“SO2”) from multiple states in the eastern, Midwestern, and southern United States that, according to the Environmental Protection Agency (EPA), affect the ability of downwind states to attain and maintain compliance with national air quality standards for particulates and ozone. CSAPR included a January 1, 2012, compliance deadline for those states subject to SO2 and annual NOx reductions and an additional compliance date of May 1, 2012, for those states subject only to ozone season NOx reductions. CSAPR also includes further reductions in 2014 for some sources.

These were the same compliance deadlines that had been included in the proposed rule, but completion of the proposed rule had been delayed for a year, causing some affected entities to expect the dates to change. Due to the uncertainty created by the delay in issuing the final rule, some sources that had not already started constructing the control projects they had planned for compliance purposes found it would be difficult to meet the requirements of the final rule. The effect of the court’s stay has been to add further uncertainty regarding not just the final deadlines that might apply but also whether the rule will survive judicial scrutiny.

Both CAIR and CSAPR incorporate emissions trading programs to facilitate compliance with air emissions budgets, but the programs differ in certain respects in terms of the compliance caps and interstate trading that is permitted. Not surprisingly, the value of CSAPR credits dropped substantially when the stay was announced and some exchanges delisted future sales of credits temporarily. EPA quickly transitioned back to using the CAIR emissions trading program while the challenges to the CSAPR rule are being considered.

Court Review Schedule

Oral argument on the rule challenge has been scheduled for April 13, 2012. Briefs for the petitioners were filed February 9; briefs for intervenors/amicus curiae supporting the challenge were filed February 14. EPA filed its initial brief on March
1; briefs for intervenors supporting EPA are due March 6. The Petitioners’ reply brief is due March 12; final briefs are due March 16.

Given one of the factors considered for issuing a stay — i.e., the likelihood that the moving party will prevail on the merits — the court’s December 2011 action imposing the stay might have signaled a readiness by the court to invalidate the rule in whole or in part. But, by setting a fairly expedited schedule for briefing and oral argument, the court also has signaled ome discomfort with the stay by indicating that it intends to resolve the merits of the issues quickly. In fact, in establishing the briefing and oral argument schedule, the court denied a motion by petitioners seeking to bifurcate and file separate briefs on the various issues raised in the challenge. The court advised the petitioners to “move to lift the stay” if they wished to expand the briefing format and schedule. See U.S. Court of Appeals for the D.C. Circuit, January 18, 2012, order in EME Homer City Generation, L.P. v. EPA.

Summary of the Petitioners’ Arguments

Petitioners raised four arguments in their February 9 brief:

(1) EPA does not have authority to impose federal implementation plans (“FIP”) without first allowing states to develop their own implementation plans;
(2) CSAPR violates the CAA (and the decision, North Carolina v. EPA, 531 F.3d 896 (D.C. Cir. 2008), that led to invalidation of the predecessor CAIR) by collectively regulating upwind states without regard to the significance of their individual contributions to downwind non-attainment or inability to stay in attainment (i.e., maintenance);
(3) that, contrary to the federal Clean Air Act (“CAA”), CSAPR does not give independent effect to potential impacts on a state’s ability to achieve compliance with air quality standards versus maintain compliance with them; and
(4) that EPA did not provide adequate opportunity for notice and comment on the proposed rule.

If the second of these arguments — that EPA did not adequately determine the individual impact of each state on downwind nonattainment and maintenance areas — prevails, it essentially undermines the basis for the rule, and, similar to the North Carolina decision regarding CAIR, would seem likely to result in invalidation the rule. EPA structured CSAPR differently than CAIR, however, limiting the amount of interstate trading that can be achieved, so it is difficult to predict the outcome of this argument. By contrast, if only the FIP argument were to prevail, it likely would lead to significant further implementation delays, but would not necessarily undermine the EPA’s technical basis for the rule. The decision on the way EPA has imposed FIPs under CSAPR, however, is very important to the states in terms of the flexibility of states to develop SIP programs that are tailored to the unique circumstances of their states.

Summary of EPA’s Initial Arguments

In its March 1 brief, EPA argued that CSAPR’s approach to determining the “significant contribution” of upwind states is consistent with the CAA and with precedent established in Michigan v. EPA, 213 F.3d 663 (D.C. Cir. 2000), in which the court upheld EPA’s 1998 NOx SIP Call rule. EPA also argued that it had the authority and the obligation to promulgate FIPs in light of the history of CAIR and prior actions by EPA either disapproving SIPs submitted by the states, or finding that the states had failed to submit SIPs relating to previously promulgated ozone and particulate air quality standards. EPA also defended the 2012 and 2014 compliance deadlines it established in CSAPR.

What to Expect

With oral argument scheduled to occur in mid-April, it is possible that the court will issue an opinion by early to mid-summer. Until an opinion is issued, power generators, emissions traders and large end-users of electricity and natural gas will face continued uncertainty about the potential impact of this rule.

Despite the ultimate outcome of the court’s review of the rule, the stay already has had an impact. On January 10, 2012, EPA returned the vintage 2012 CAIR allowances to allowance accounts and has been making additional allocations of 2012 allowances available as allocation files are submitted to EPA by the states.

Also, as a result of the stay, EPA already has revised some of the allocation provisions of CSAPR. On February 21, for example, EPA revised the assurance penalty provisions that were included in CSAPR. The CSAPR assurance provisions were included to provide sources within each state with limited, but necessary, flexibility so that they can continue to comply with the CSAPR allocations in years in which more fossil fuel generation occurs than projected in the average year. They are coupled with a penalty mechanism that would require generators to surrender allocations under certain circumstances if their emissions exceed specific levels. In light of the stay, the February 21 final rule amends the assurance penalty provisions for all states that are subject to CSAPR so that they start in 2014 instead of 2012. This step also should enhance the future transition from the CAIR trading program to the CSAPR program, assuming the CSAPR program is upheld. It also may be EPA’s signal that the CSAPR allocation deadlines will not be changed if CSAPR is upheld.

By early to mid-summer, the potential impact of CSAPR should become much more clear.