On Monday, in an opinion written by Justice Antonin Scalia, the U.S. Supreme Court ruled that the Environmental Protection Agency “strayed far beyond [the] bounds” of reasonableness by not considering costs in its decision to regulate emissions of hazardous air pollutants from fossil fuel-fired power plants. The case, Michigan vs. EPA, was decided 5-4, with Justices Scalia, Roberts, Kennedy, Thomas, and Alito in the majority. The Court did not vacate the regulations, but remanded the case to the D.C. Circuit Court of Appeals for further proceedings. The Court of Appeals will decide whether EPA’s regulations will remain in place while the agency revisits its decision.
Pursuant to the Clean Air Act (“CAA”) amendments of 1990, EPA was directed to conduct a study of the public health hazards posed by emissions of hazardous air pollutants from fossil fuel-fired power plants. If, after considering the results of this study, EPA finds that it is “appropriate and necessary” to regulate such emissions, EPA was directed to do so under Section 112 of the CAA. EPA completed its study in 1998, and in 2000 concluded that regulating emissions of hazardous air pollutants from power plants was “appropriate and necessary.” Once it made this finding, EPA was required by the CAA to establish emission standards. It did so in 2012, when the agency promulgated its Mercury and Air Toxics Standards (“MATS”).
Supreme Court Decision
Numerous parties, including twenty-three states and various energy industry groups, challenged the MATS in the D.C. Circuit Court of Appeals, arguing that EPA erred by not considering the costs of compliance when it made its “appropriate and necessary” finding, which triggered the requirement to establish emission standards. The case hinged on the meaning of the words “appropriate and necessary” as used in Section 112 of the CAA. The Supreme Court reviewed EPA’s interpretation under a deferential standard that requires courts to uphold an agency’s interpretation of ambiguous statutory provisions as long as that interpretation is reasonable.
According to EPA, regulation of hazardous air emissions from power plants is “appropriate” because emissions of mercury and other hazardous pollutants pose risks to human health and the environment, and controls are available to reduce these emissions. EPA found that regulation is “necessary” because imposition of other CAA requirements do not eliminate these risks. EPA specifically found that “costs should not be considered” in deciding whether regulation of hazardous air emissions from power plants is “appropriate and necessary,” arguing that it could consider cost later when setting restrictions on emissions.
While noting that the phrase “appropriate and necessary” may not always require consideration of costs, the Court found that in the regulatory realm, “[a]gencies have long treated cost as a centrally relevant factor when deciding whether to regulate.” In addition, the Court read the phrase “appropriate and necessary” in the context of other provisions of Section 112 that do specifically reference costs. EPA argued that it was sufficient for it to consider costs later in the process, when developing the emission standards, but the Court disagreed, finding that EPA was required by Section 112 to consider costs before deciding whether it needed to regulate hazardous emissions from power plants in the first place.
Status of MATS Regulations
The direct implications of this case are uncertain. First, the Supreme Court gave no specific instruction to the D.C. Circuit Court of Appeals on remand. It is unknown whether the Court of Appeals will vacate the MATS or allow them to remain in place while EPA revisits its “appropriate and necessary” finding in light of cost considerations. Some power plants have already implemented controls and are in compliance with the MATS, while others were granted extensions to comply. Regulated entities will simply have to wait and see what the Court of Appeals does before they know whether they are still subject to the MATS requirements. For power companies that shut down coal-fired units in response to the MATS, the status of the regulations may not matter because, as the trade press has reported, some have already indicated that those retirements will not be reversed.
Second, while the Supreme Court concluded that EPA is required to consider costs before it can decide to regulate hazardous air emissions from power plants, the Court did not instruct EPA how to do so. One significant question will be whether EPA can take indirect effects into account. As the Court noted in its opinion, after EPA made its decision to regulate, it belatedly concluded that complying with the MATS would cost the power industry $9.6 billion per year. EPA estimated that the benefits of reducing hazardous air emissions would be $4 to $6 million per year—far less than the estimated cost of compliance. However, EPA concluded that if power plants reduce emissions of hazardous air pollutants such as mercury, emissions of particulate matter and sulfur dioxide will also be reduced as an indirect benefit. EPA estimated that these ancillary benefits would increase the overall benefits of the MATS regulation to between $37 and $90 billion per year, far outweighing its estimate of the cost of compliance. The ultimate fate of the MATS regulations will depend in part on whether EPA is allowed to take such ancillary benefits into consideration. Some believe that EPA will not wait long in conducting its cost analysis, so the benefits of the Supreme Court’s ruling may be only temporary.
Finally, while some have suggested that the Supreme Court’s decision provides a road map for challenging EPA’s proposed Clean Power Plan for regulating carbon dioxide emissions from power plants under Section 111 of the CAA, EPA has acknowledged that Section 111 has a cost analysis component and claims to have already discharged that obligation.
This article was authored by Jennifer L. Hughes, Jackson Kelly PLLC.