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August 14, 2008

D.C. Circuit Invalidates EPA's Clean Air Interstate Rule

On July 11, 2008, the United States Court of Appeals for the District of Columbia Circuit vacated the Clean Air Interstate Rule ("CAIR"), remanding the rule back to the United States Environmental Protection Agency ("EPA"). North Carolina v. United States Environmental Protection Agency, No. 05-1244 (D.C. Cir. 2008). The Court rejected CAIR -- which would have had far reaching impacts on air emission regulation and permitting in more than half the country -- in no uncertain terms, finding that "[n]o amount of tinkering with the rule or revising of the explanations will transform CAIR, as written, into an acceptable rule."

Section 110 of the Clean Air Act ("CAA")

Title I of the CAA requires the EPA to issue national ambient air quality standards ("NAAQS") for, inter alia, fine particulate matter ("PM2.5") and eight-hour ozone ("8-hour ozone"). The EPA then must identify "attainment areas," i.e., areas where air quality complies with the applicable NAAQS, and "nonattainment areas," areas where the standards are not being met. Section 110 of the CAA requires states to impose stringent emissions controls on sources that "interfere with maintenance" of the NAAQS or"contribute significantly" to nonattainment in downwind states.

In 2004, the EPA identified twenty-eight states that "contribute significantly" to the nonattainment of the NAAQS for PM2.5 and 8-hour ozone (which includes the precursors NOx and SO2. Based on its findings, the agency promulgated CAIR (70 Fed. Reg. 25,165 (May 12, 2005)), the stated intent of which was to reduce or eliminate the impact of the upwind states on nonattainment in downwind states by requiring significant emission reductions. To achieve these emission reductions, CAIR establishes an interstate "cap-and-trade" program for NOx and SO2. 71 Fed. Reg. 25,162 (May 12, 2005); 71 Fed. Reg. 25,328 (Apr. 28, 2006). CAIR NOx credits have already been allocated to affected sources and trading of the CAIR NOx and SO2 credits has been occurring for the last several months. The Court's ruling injects significant uncertainty into that process.

D.C. Circuit Rejects EPA's Interpretation of its Authority Under the CAA

The Court identified multiple, fatal flaws in CAIR. First, it rejected EPA's regional approach to emission reductions as beyond the powers granted by Section 110, finding that the statute compelled the agency to ensure that each upwind state contributing to downwind nonattainment was only responsible for mitigating the impacts of its actual contribution to nonattainment. Second, the Court found that EPA's proposed two-phase reduction in Title IV allowances impermissibly devalued or terminated existing Title IV allowances. Third, the Court rejected the agency's reliance on the "interference with maintenance" language of the statute as a basis for further emission reductions in Phase II of CAIR, finding that EPA's interpretation would "unlawfully nullif[y] that aspect of the statute" with the result being "that states that find themselves barely able to meet the NAAQS in 2010 due to upwind sources will not have any recourse under CAIR." Instead, these states would have to petition the EPA under CAA Section 126 (typically a time consuming process). Finally, the Court nullified the rule on the ground that the deadline established in CAIR for requiring attainment in all states by 2015 is inconsistent with the mandate in Section 110 that requires downwind states to meet the NAAQS by 2010, but which explicitly allows states that "contribute significantly" to downwind nonattainment until 2015 to attain compliance.

As a result of these defects, among others, the Court vacated CAIR and its associated Federal Implementation Plan.

Practical and Political Impacts of the Decision

One of the impacts of the Court's ruling is that EPA's NOx and SO2 trading programs associated with CAIR are eliminated and the NOx SIP Call and the Title IV SO2 trading programs continue to be applicable. In addition, the federal annual NOx allowance regime, which was created by CAIR to address emissions outside of the ozone season, is eliminated by the decision. New York State has had an annual NOx emission trading regime since 2005, which will presumably remain in effect in the absence of CAIR.

The decision also impacts emission trading markets that have been developed for the NOx and SO2 allowances associated with the CAIR program. This ruling already has had a significant impact on the emissions trading market. Following the decision, the valuation of NOx and SO2 emission credits fell dramatically. Cantor brokerage, a firm specializing in emission trading, has reported that CAIR annual allowances have gone down from $5,000/ton to $3,000/ton since the decision was issued.

This decision also may affect already implemented compliance and financing strategies of affected companies. CAIR NOx allowances, in many cases, have already been allocated to affected companies and have been trading in the market. In reliance on CAIR, many utilities, particularly coal-fired utilities, have already spent hundreds of millions of dollars on credits that may now be worthless. Several utilities have already disclosed financial affects of the decision in filings with the Securities and Exchange Commission.

If you require further information regarding the information presented in this Legal Alert and its impact on your organization, please contact Richard R. Capozza, PA Chair at or author Danielle E. Mettler at


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