Environmentalists often accused the Bush Administration of undermining environmental regulations. But in the area of air pollution, one administration cleanup attempt was stymied by the courts.

The Clean Air Interstate Rule (CAIR) of 2005, established under the Clean Air Act, created a regional cap and trade program in 28 eastern states and the District of Columbia. It was aimed at reducing smog-forming and soot-producing sulfur dioxide (SO2) and nitrogen oxide (NOX) emissions from coal-fired electric plants, with the intention of cutting pollution around the plants and in downwind states, where the emissions led to ozone and fine particulate matter pollution.

But in July 2008, the D.C. Circuit concluded in North Carolina v. EPA that the rule’s parameters exceeded the jurisdiction of the Environmental Protection Agency (EPA). Although people guessed the rule would need an overhaul, virtually no one expected the court to vacate the rule in its entirety–but it did.

“The decision was so sweeping that it surprised everyone because no one had asked the court to do such a thing,” says Kyle Danish, a member at Van Ness Feldman.

The EPA petitioned for reconsideration. In late December 2008, the court reversed itself and allowed the rule to remain in effect while the EPA sought to fix it.

Intertwined Regulations

State regulators, environmentalists, utilities and the EPA itself had been dumbfounded by the 2007 appeals court decision.

“The decision went off in a direction that none of the parties had briefed and affected their interests in a way that most of them had not expected,” says Jeff Gracer, a partner at Sive, Paget & Riesel. “There was an element of having thrown out the baby with the bathwater.”

So the court’s latest decision was a relief to parties on both sides of the regulatory fence.

“To be sure, everyone went at this from a different angle,” says Radha Curpen, a partner at Osler Hoskin & Harcourt. “Industry and the environmentalists, for example, had different issues with the rule, but in the end, the prospect of having no regulation at all was the greater evil.”

As for the EPA, vacating CAIR raised a host of problems with related regulatory schemes.

“EPA has designed a number of other air quality programs so that compliance with CAIR constitutes compliance with the other programs,” Danish says.

For example, EPA rules for fine particulate matter and ozone air quality standards allow states to use CAIR to meet the agency’s “Reasonably Available Control Technology” requirements. And the EPA’s Regional Haze Rule references CAIR for determining the “Best Available Retrofit Technology.”

For their part, states were counting on CAIR reductions to help them achieve the ozone and fine particulate matter standards by 2010. And power companies such as Duke Energy Corp. made substantial investments in emission allowances and technologies to prepare for compliance deadlines, the first of which came at the beginning of 2009.

“If CAIR disappeared, some utility companies would have to write off an enormous figure in investments,” Danish says.

Lingering Uncertainties

To be sure, not everyone is happy with the court’s resurrection of the rule.

“Our firm represented two parties in this litigation who supported vacating the rule, and they are most unhappy that they will have to comply with a regime that is legally flawed,” Danish says.

Although the court set no deadline for the EPA to repair CAIR, it cautioned that the reversal was not an “indefinite stay” of the original ruling.

“The difficulty is that lifting the mandate doesn’t address a lot of the legal uncertainty that exists,” Gracer says. “It’s not at all clear that the EPA will be able to revisit CAIR in a way that is consistent with the decision on the merits.”

Indeed, in its initial ruling the court found sweeping flaws in the rule. Among other things, the EPA failed to explain how the cap and trade system would achieve CAIR’s objectives; it may have omitted upwind states that should have been subject to the rule; it imposed a compliance deadline that didn’t give the downwind states enough time to achieve the relevant air quality standards; and it lacked authority to intermingle the cap and trade allowances designed to address acid rain with the new regime.

It reasoned that CAIR was “one, integral action” subject to “several fatal flaws” of such scope that “very little” would survive a remand in anything approaching recognizable form.

“No amount of tinkering with the rule or revising the explanations will transform the CAIR, as written, into an acceptable rule,” the court stated in its July ruling.

There’s nothing in the latest decision that countermands this reasoning. Rather, the court accepted the parties’ new argument that the rule “has become so intertwined with the regulatory scheme that its vacatur would sacrifice clear benefits to public health and the environment while EPA fixes the rule.”

Which leaves open the question: If the flaws are so sweeping, how is the EPA going to fix it? And what should parties do in the meantime?

Ticking Clock

There appears to be little choice.

“Regulated companies will have to comply with CAIR until the agency responds,” Curpen says.

That’s already begun. Under CAIR, the upwind jurisdictions began to reduce the levels of smog-forming NOX as of Jan. 1, 2009. And SO2 reduction must begin a year later.

In the long term, however, the EPA could respond in a number of ways. Its options include implementing a new strategy, letting the states sort it out through a series of petitions for reconsideration under Section 126 of the Clean Air Act or lobbying for new legislation that will provide it with the authority to implement CAIR.

But it’s not at all clear that the EPA will be the moving force in the ultimate shape of a new rule. Environmentalists are already on record as touting the reinstatement of CAIR as a springboard for more stringent controls to be drafted by the Obama administration. They’re pushing for a more comprehensive revision to the Clean Air Act that would embrace a broader range of environmental issues, including climate change.

Meanwhile, the clock is ticking. Late in 2008, the EPA reported that the number of geographic areas falling short of federal fine-particle pollution standards had nearly doubled to 58, including 211 counties in 25 states.