MATS Attack: Supreme Court Reversal of EPA’s Air Toxics Rule Signals Difficulties Ahead

On June 29, 2015, the US Supreme Court, in a 5-4 decision, reversed and remanded to the DC Circuit EPA’s Mercury and Air Toxics Standards rule (MATS). Michigan v. EPA, No. 14-46. MATS is a signature regulation of the Obama Administration, designed to reduce the emissions of mercury and other air toxics from coal and oil-fired power plants which EPA has found cause significant public health problems. In brief, in Michigan, the Supreme Court held that EPA acted unreasonably when it declined to consider costs in making its threshold decision whether to regulate these emissions, even though EPA then considered costs in determining how those emissions would be regulated. While the decision itself is fairly narrow, based on a unique provision in the Clean Air Act, it is a stark reminder that a majority of the Supreme Court, as currently configured, remains quite willing to limit the discretion it will provide to EPA and other federal agencies in making regulatory decisions and will delve deeply into the record of relatively technical agency decisions. This seems particularly likely when the agencies are promulgating rules that may have significant economic impacts on the regulated community, such as EPA is now considering with the Clean Power Plan.

A narrow issue with a complicated history

In Michigan, the specific issue before the Court was fairly narrow. Congress gave EPA authority to regulate hazardous air pollutants (HAPs) from various sources under section 112 of the Clean Air Act. In response to concerns that EPA was not moving fast enough in controlling HAPs, Congress in 1990 amended section 112. Congress listed specific pollutants and required EPA to list categories of sources, without consideration of costs, and to regulate the sources if emissions were above certain quantities. Congress, however treated power plants differently. Congress had also added in 1990 acid rain provisions designed to reduce sulfur dioxide emissions from power plants, and was uncertain how these reductions would impact HAP emissions from power plants, potentially rendering further reductions unnecessary. Thus, in Clean Air Act section 112(n), Congress called for a utility study of public heath hazards and alternative control strategies. It directed EPA to list power plants as a source and, hence, regulate power plant HAP emissions only if it determined such regulation were “appropriate and necessary after considering the results of the study.” (emphasis added)

The issue then became a bit of a political football. EPA submitted the utility study in 1998, determining that the acid rain provisions did not significantly reduce emissions of HAPs. EPA made its initial “appropriate and necessary” finding in late 2000, at the end of the Clinton Administration, listing power plants as a source of HAPs but not establishing regulations. In 2005, the EPA under the Bush Administration reversed the listing and set mercury regulations under a different Clean Air Act section, section 111 (the provision EPA is now using for the Clean Power Plan), calling it the Clean Air Mercury Rule (CAMR). In 2008, the DC Circuit reversed EPA’s delisting of power plants and vacated CAMR. In 2012, the Obama-led EPA re-affirmed the 2000 finding and set strict standards for HAP emissions from new and existing power plants, claiming it could, but need not, consider costs of compliance in its listing decision. EPA thus made its regulatory threshold determination without taking costs into account, basing its decision solely on harm from emissions. The Agency did, however, consider such costs in categorizing and setting emission standards based on different categories of power plants and fuel. The costs were quite substantial—the most expensive EPA regulations to date. EPA estimated annual compliance costs of $9.6 billion in its regulatory impact analysis, but also estimated $4-6 million per year in direct health benefits from HAPs reductions and ancillary health benefits from particulate and sulfur dioxide reduction of $37-90 billion per year.

The regulations were broadly challenged, and in 2104, the DC Circuit affirmed EPA’s decision. Judge Kavanaugh, the lone dissenter in that case argued EPA had erred in its listing decision by failing to consider costs. The specific substantive standards, i.e., limits on specific HAPs, were upheld unanimously. The Supreme Court took review on the fairly narrow issue of whether EPA could interpret “appropriate and necessary” as allowing it to consider only health effects or whether EPA was compelled to consider costs in its threshold regulatory determination.   The specific standards were not put on review. Meanwhile, the MATS standards went into effect in April 2015, although a majority of regulated plants had come into compliance well before then.

The Court finds EPA must consider costs

Thus, the issue before the Supreme Court was rather limited to the specifics of section 112(n) of the Clean Air Act, which focuses on only one specific source in the HAPs context. The Court did not disturb EPA’s long-held practice of listing other categories of HAPs sources based on health effects alone, nor did it review or question the substantive MATS standards, which had been upheld by the DC Circuit.

The majority opinion, written by Justice Scalia, held that EPA acted unreasonably when it interpreted section 112(n)’s “appropriate and necessary” test as allowing it to ignore compliance costs.   While recognizing that the Court typically provides agencies discretion to interpret ambiguous statutory commands (known as Chevron deference after a leading case), the Court ruled that EPA had strayed far beyond “the bounds of reasonable interpretation” when it read section 112(n) to allow it to ignore costs when deciding whether to regulate power plants. Slip Op. at 6. Indeed, the Court held “it is [not] rational, never mind ‘appropriate,’ to impose billions of dollars in economic costs in return for a few dollars in health or environmental benefits.” Slip Op. at 7. The Court dispensed with the argument that EPA considered costs in setting the regulations, claiming that that practice did not thereby render costs irrelevant at the threshold stage, and in any event, this was not the basis on which EPA made its regulatory decision. Significantly, though the Court found that EPA must consider costs before deciding if regulation is appropriate and necessary, it did not dictate how EPA was to conduct this inquiry. It expressly did not require EPA to conduct a “formal cost-benefit analysis in which each advantage and disadvantage is assigned a monetary value.” Rather, ‘[i]t will be up to the Agency to decide (as always, within the list of reasonable interpretation) how to account for cost.” Slip Op. at 14.

Justice Scalia’s opinion was joined by Chief Justice Roberts and Justices Alito and Kennedy. Justice Thomas concurred separately, expressing constitutional concerns that courts were given too much discretion to agency action in general. Justice Kagan wrote a long and detailed dissent, joined by Justices Breyer, Ginsburg and Sotomayor, refuting Justice Scalia’s arguments point by point. Justice Kagan asserted that EPA had the discretion to interpret the Clean Air Act as it did and that the Agency’s interpretation was quite reasonable, particularly in view of its painstaking consideration of costs throughout the remainder of the regulatory process. She particularly decried the majority’s “micromanagement of EPA’s rulemaking,” finding it “runs counter to Congress’s allocation of authority between the Agency and the courts.” Slip Op. at 3.

As is its general practice as reviewer of lower court rulings, the Court did not vacate the regulation; rather, it reversed the DC Circuit and remanded the rule back to the lower court to decide how to proceed. Therefore, as a legal matter, the rule is not stayed or vacated until the DC Circuit takes some action on remand.

Limited immediate impacts on the power sector expected

The immediate impacts of the ruling on the power sector are somewhat unclear until such time as the DC Circuit considers the issue on remand, which will not happen for at least 30 days when the Supreme Court actually sends its remand to the lower court and will likely extend further as the parties argue over the Court’s mandate. Until that time, the rule stays in place; indeed, the substantive emission limitations were not at issue and are unaffected by the ruling. But it is likely at least some petitioners will seek a stay and/or a full vacatur of the rule, arguing that EPA lacked the authority to set those standards in the first place. EPA and its allies will likely seek to keep the rule in effect while the Agency determines how it will take costs into account. EPA may simply request agency remand to recalibrate its listing determination, this time including its original cost analysis into its threshold finding, or conceivably might revise its analysis, looking at more current cost and benefit data. In any event, it will be up to the DC Circuit to decide how EPA may proceed, and there will likely be further spirited litigation by the parties, particularly on the issue of what types of benefits EPA can consider—direct or also ancillary—since the Court did not decide that question. Finally, even if the Court vacates the rule, it may allow it to remain in effect during EPA’s remand to ensure environmental protection. The DC Circuit has taken this approach with other EPA regulations it vacated.

However the DC Circuit decides to proceed, the impact of the ruling will be muted on the majority of the power industry, which long ago took actions to comply with the April 2015 compliance deadline. For example, one study estimated that 64 percent of the country’s coal capacity was in compliance as early as 2012, and more have come into compliance since then. On the other hand, some 174 plants received a year extension for compliance until April 2016. If the rule stays in effect, those plants may still need to secure compliance and many in fact may be well on their way. If the rule is vacated, those plants may not need to comply, which would presumably help those plants that planned to retire in April 2016 rather than those now installing controls under permit authorizations.

Even if the rule is ultimately vacated and stricken from the books, it is fairly unlikely that most plants will change their practices, particularly if they already reached compliance by building new controls, re-firing with gas or retiring. Capital decisions, investments and permit authorizations were made long ago, and largely based on the economics of gas versus coal, which has not changed nor is affected by the ruling. Moreover, other EPA rules, particularly the Cross-State Air Pollution Rule (also pending in the DC Circuit on remand) will require reductions of sulfur dioxide in 2017, and some plants still face significant state regulation of mercury. In the end, then, the Michigan case may be a temporary bump in the road for significant reductions of mercury and other air toxics from power plants.

Broader impacts on EPA regulation are likely

Perhaps the question that is being asked more is whether and how the Court’s opinion may impact future EPA regulations, including the Clean Power Plan and other greenhouse gas regulations EPA is set to finalize this Summer. When published in final, those regulations will certainly be challenged and find their way to the DC Circuit and potentially to the Supreme Court.

The direct precedential effect of the case is likely limited to its specific context—a narrow provision in the Clean Air Act toxics section that expressly treats power plants differently than other sources. The ruling does not change EPA’s practice of listing other categories of HAP sources without considering cost, nor does its require EPA to take cost into account in every decision under the Clean Air Act, particularly where there is clear statutory direction not to consider costs, such as setting National Ambient Air Quality Standards.

As to the Clean Power Plan and EPA’s other GHG regulations, such as section 111(b) standards for new power plants, those regulations arise under a different Clean Air Act section with different language and different requirements. For example, Clean Air Act section 111, the basis for the Clean Power Plan, expressly requires consideration of costs in the text itself. Hence, in its proposed rule, EPA asserts it has considered and made its regulations as cost effective as possible, setting strict goals but allowing states broad discretion in determining how they can meet those goals over a relatively long compliance period.   Therefore, it is difficult to see how the recent ruling would directly impact regulations established under the Clean Air Act or even other statutes. Ironically, a vacatur of the MATS rule could even help EPA defend the Clean Power Plan by eliminating a threshold legal issue on EPA authority, since parties have already argued a House version of the Clean Air Act prohibits EPA from regulating a source under section 111 if it is already regulated under section 112. If MATS goes away, so does this argument. Ultimately, however, every regulation that goes under judicial review will ultimately be judged within its own specific context and on its own merits.

More broadly, however, the majority opinion can be seen as further evidence that at least half the Justices now on the Court appear quite willing to closely question EPA’s interpretation of its authority under the Clean Air Act, particularly when it reads that authority broadly from relatively narrow statutory provisions. A five justice majority, including Justice Kennedy, recently ruled in UARG v. EPA that the Court would view with “a measure of skepticism” efforts to “bring about an enormous and transformative expansion in EPA’s regulatory authority [under the Clean Air Act] without clear congressional authorization.”   That same majority has now upended another EPA interpretation of its authority, in a case where EPA arguably had clearer congressional direction to act. Moreover, MATS, though costly, applies in a fairly limited context; it sets emission standards for individual plants. By contrast, EPA in its proposed Clean Power Plan, is pursuing a more aggressive interpretation of its authority to regulate broad energy networks outside the plant fence line. If and when that final rule comes before the Court, EPA may be facing a majority equally skeptical of EPA regulations with significant widespread impacts and high costs based on broad readings of limited provisions.

This perspective will certainly embolden foes of the Clean power Plan to step up their attacks on the proposal and argue that states shouldn’t comply with the final rule because it will be inevitably reversed. That is still a risky decision, though, since no judicial determination is ever certain or pre-ordained, and a final judicial opinion on the Clean Power plan might take so long, that states will be as far down the road to compliance with the Clean Power Plan as plants were under MATS when the Michigan case came down.

In the final analysis, the Michigan case serves as a reminder to EPA that it likely faces a difficult battle in securing judicial approval of the Clean Power Plan, particularly if the issue comes down to the degree of deference owed EPA to its broad interpretation of authority under section 111. Undoubtedly, EPA is well aware of this fact, especially following the UARG decision last year, and has taken steps to bolster its authority and rationale in the administrative record. Moreover, EPA can certainly point to prior Supreme Court rulings authorizing its regulation of greenhouse gases under section 111. Ultimately, time will tell not only how EPA will address HAPs from power plants in light of Michigan, but how it may fashion a comprehensive greenhouse gas strategy that will survive judicial scrutiny.

Jim Rubin is counsel at Denton U.S. LLP.

Morning Consult