On August 21, in in EME Homer City Generation, L.P. v. Environmental Protection Agency, the D.C. Circuit vacated the Environmental Protection Agency’s (EPA) Transport Rules governing air pollution emissions, which travel across state boundaries. The rules defined emission reduction responsibilities of 28 upwind states. The rules governed SO2 and NOx emissions, primarily from coal and natural gas fired power plants.

Under the Clean Air Act regulatory scheme, Congress set up a “federalism” approach to the regulation of air pollution. Under this regulatory scheme, the EPA sets standards for the states. EPA locates areas with air pollution problems, which are designated “nonattainment areas.” Then, the lead role shifts to the states, which are required to develop state-specific “State Implementation Plans” (SIPs). SIPs represent a state’s uniquely designed approach to improving air quality in nonattainment areas within that state. In essence, the EPA identifies problem areas, but the states are charged with finding a solution.

In some situations, pollution emitted in one state can travel across a state boundary and contribute to nonattainment areas in a downwind state. In order to deal with that problem, the Act also prevents states from emitting air pollution in amounts that will “contribute significantly” to nonattainment in another state. That provision is often referred to as the “good neighbor provision.”

In order to implement this portion of the Act, one of EPA’s primary role is to gather information about air quality in downwind states. EPA then calculates the contribution made by each upwind state and the resulting obligation of the upwind state to reduce emissions. The results of this analysis are then transmitted to the upwind states.

Using the information gathered by EPA, the upwind state can determine how to meet its good neighbor obligation in a new SIP or a revision to its existing SIP. Under the Act, no state can be required to do more than its share of the cleanup. As stated by the court, “Put simply, the statute requires every upwind State to clean up at most its own share of the air pollution in a downwind State – not other States’ shares.”

In this case, EPA departed significantly from the statutory scheme. Rather than determine whether an upwind state had made a significant contribution to downwind nonattainment, the EPA applied a “cost-based” standard. EPA based state obligations on emission reductions that could be obtained by implementing controls available at a given cost per ton of pollution. The court found that the cost-based standard violated the Act. Specifically, using a cost-based approach a state could be required to do more than its share of the clean-up.

As pointed out by the court, EPA did not stop there. Instead of allowing states to implement SIP’s to achieve EPA objectives, the EPA simultaneously promulgated a Federal Implemental Plan (FIP), essentially usurping state authority.

The court found that EPA had exceeded its statutory authority. The court pointed out that the EPA rules required states to cut all emissions they could eliminate at a specific cost per ton, regardless of that state’s contribution to downwind nonattainment. This result was found to be legally flawed. The court stated that “States are obligated to prohibit only those ‘amounts’ of pollution ‘which will . . . contribute significantly’ to downwind attainment problems – and no more.”

The second major flaw in the EPA approach was to issue FIPs in advance of giving states the opportunity to issue or revise their SIP’s. The court said that “EPA’s approach punishes States for failing to meet a standard that EPA had not yet announced and that States did not yet know.” The court continued: “But EPA pursues its reading of the statutory text down the rabbit hot to wonderland where EPA defines the target after the States’ chance to comply with the target has already passed.”

The court pointed out that “Absent a claim of constitutional authority (and there is none here), executive agencies may exercise only the authority conferred by statute, and agencies may not transgress statutory limits on that authority. Our limited but important role is to independently ensure that the agency stays within the boundaries Congress has set. Here EPA had failed to stay within those boundaries.”

Analysts have pointed out that the EPA Transport Rules would have impacted coal-fired power plants, a continuing target of EPA air quality regulation. Further, the rules would have particularly targeted specific coal-fired power plants in Texas, mainly those operated by Luminant, a large utility. The court’s ruling makes clear that EPA is not authorized to take such an approach to specifically design rules to target specific sources within a specific state.