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Looking at EPA's Authority After Utility Air Ruling

26 June 2014

Law360

The U.S. Supreme Court recently limited the U.S. Environmental Protection Agency's authority to require Clean Air Act permits for greenhouse gas emissions in Utility Air Regulatory Group v. EPA.

The Supreme Court examined two CAA permitting regimes: the Prevention of Significant Deterioration preconstruction permitting program and the Title V operating permit program. PSD applies to new "major sources" of emissions and "major modifications" to existing sources. PSD permits impose the best available control technology for emissions and require other substantive obligations. For example, a PSD permit for a new coal-fired power plant might require BACT for sulfur dioxide emissions. In contrast, Title V serves as a procedural umbrella, requiring major sources of emissions to obtain an operating permit that reflects the applicable requirements of the CAA.

In an opinion authored by Justice Antonin Scalia, the Supreme Court held the CAA prohibits the EPA from requiring PSD and Title V permits based solely on GHG emissions. However, the high court also held that the EPA may require BACT for GHG emissions when a project has to go through PSD permitting "anyway" due to "major" emissions of other "conventional" air pollutants (e.g., sulfur dioxide). The court therefore invalidated the EPA's Tailoring Rule, which required PSD and Title V permits for projects based solely on GHG emissions, regardless of whether conventional emissions increased.

Central Questions About GHG Permitting Going Forward

The legal reasoning of UARG will undoubtedly be analyzed for years to come. One could also debate at length the merits of regulating GHGs through provisions of the CAA enacted back in the 1970s. Rather than focusing on these heated legal and policy disputes, this article examines the questions facing companies that must move forward with projects and business plans in the wake of the decision. Four practical questions deserve particular consideration.

What Will Replace the Tailoring Rule?

In the coming months, the EPA will begin the process to amend the PSD rules in response to UARG. Under the opinion, projects that trigger PSD anyway for conventional pollutants will require BACT for GHGs, but the Supreme Court signaled that BACT would only be required for "significant" GHG emissions. Specifically, the high court held that "the EPA may require ‘anyway' sources to comply with greenhouse-gas BACT only if the source emits more than a de minimis amount of greenhouse gases." Slip. Op. at 28.

In the Tailoring Rule, for example, the EPA set the PSD permitting threshold for GHGs at 75,000 tons per year of emissions of carbon dioxide equivalent (i.e., only those projects at or above that threshold had to obtain a PSD permit). Justice Scalia explained that this Tailoring Rule threshold was not necessarily invalid for anyway projects, but that the agency needed to properly explain on remand why it was a de minimis threshold, rather than an arbitrary line. Companies should monitor and engage the EPA to ensure the proper GHG BACT thresholds for anyway projects.

Do GHG Projects Have to Undergo BACT Review Before EPA Finishes Amending PSD Rules?

While the EPA works on amending the PSD rules, companies will need to determine whether GHG emissions should undergo BACT review. The answer is not as straightforward as it would seem. Although the EPA's Tailoring Rule has been invalidated, several states incorporated the rule into their "State Implementation Plans" through a separate rulemaking process. Under the CAA, the EPA's rules set floors for states to adopt their own emissions rules in SIPs (although, in practice, most states simply adopt the agency's rules).

It is SIPs that actually impose PSD permitting and enforcement obligations on companies constructing projects, not the EPA's rules. See, e.g., 42 U.S.C. §§ 7410, 7413. This two-step process can create significant delays between the time that the EPA amends its rules and the adoption of those rules into SIPs. Unfortunately, these "SIP gaps" create serious uncertainty and compliance issues. The Supreme Court held in General Motors Corp. v. United States, that SIP provisions remain enforceable until the EPA finalizes a rulemaking to remove them. As a result, the EPA and citizens may continue to seek to enforce provisions of a SIP that reflect a long-dead EPA rule. (See, e.g., United States v. Cinergy). Indeed, the EPA disapproved so-called "rescission clauses" in SIPs that would have removed the Tailoring Rule automatically upon its invalidation. (See 79 Fed. Reg. 21,852 (April 18, 2014) (disapproving of South Dakota's recission clause).)

To avoid the uncertainties caused by SIP gaps, the regulated community will need to proactively engage with the EPA and state regulators. For example, the EPA could issue a direct final rule to address UARG, including removal of the Tailoring Rule from all SIPs. Direct final rules are issued without an opportunity for public comment because "good cause" exists under the Administrative Procedure Act for foregoing comment, a standard that would seem satisfied by a rule to strip the illegal Tailoring Rule out of SIPs. (See 5 U.S.C. § 553(b)(3)(B), providing that an agency may avoid notice-and-comment rulemaking "when the agency for good cause finds (and incorporates the finding and a brief statement of reasons therefor in the rules issued) that notice and public procedure thereon are impracticable, unnecessary or contrary to the public interest.") The same direct final rule strategy to excise the Tailoring Rule would work with federal implementation plans, which are plans that the EPA impose on states that fail to promulgate an adequate SIP. See 42 U.S.C. § 7410(c)(1). Timely guidance to the regions and states may also ease the burden of transitioning away from the Tailoring Rule.

Can Companies Unwind Existing Permits, Settlements and Other Actions Based on the Tailoring Rule?

The demise of the Tailoring Rule raises the question of whether companies may unwind existing permits, settlements and other actions that relied upon the rule. In the permitting context, the ability to undo a permit may depend on the circumstances, including the relevant provisions of the SIP. Settlements tied to the Tailoring Rule raise potentially complex procedural and remedy questions. (See, e.g., Rufo v. Inmates of Suffolk County Jail, which held that a "significant change in law" may justify relief from a judgment under Fed. R. Civ. P. 60(b).)

Will this Opinion Nullify the Obama Administration's Climate Action Plan?

The Supreme Court's opinion confirms that carbon regulation of the American economy will continue absent legislation amending the CAA. While the high court invalidated the Tailoring Rule, it is noteworthy that an opinion authored by Justice Scalia confirmed the EPA's authority to regulate GHGs from major projects under certain circumstances. Under the Obama administration, the EPA will continue to pursue the GHG New Source Performance Standards for new and existing power plants, the cornerstone of the President's Climate Action Plan.

To be sure, UARG may provide grounds for challenging important aspects of the GHG NSPS for power plants, such as the proposed "beyond-the-fence-line" mandates for energy efficiency. But it would be difficult to argue that any form of GHG NSPS lies outside the CAA. On the contrary, the EPA's statutory authority to issue a GHG NSPS proved critical in the Supreme Court's holding that the CAA displaced federal common law torts for climate change. (See American Electric Power Inc. v. Connecticut.)

Conclusion

While the Supreme Court limited GHG permitting of projects, important questions remain about the transition to the EPA's new PSD permitting rules. The regulated community will need to engage on key regulatory issues to ensure that projects continue to flow smoothly during this interim period.

—By Justin A. Savage, Hogan Lovells LLP

Justin Savage is a partner in Hogan Lovells' Washington, D.C., office. Before joining the firm last year, Savage served for nearly a decade at the U.S. Department of Justice, where he litigated and tried several PSD enforcement cases.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

The team

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