The Supreme Court Holds Unlawful EPA's Mercury and Air Toxics Standards

The U.S. Environmental Protection Agency (EPA) must consider costs in deciding whether to regulate air toxics from fossil fuel-fired power plants. So held a sharply divided Supreme Court Monday in Michigan v. EPA, Nos. 14-46, 14-47, 14-49. In a win for industry and a significant blow to EPA, Justice Scalia, writing for a five-justice majority, reversed the decision of the D.C. Circuit and remanded EPA's Mercury and Air Toxics Standards (MATS) to that court for further proceedings consistent with the Court's opinion. The Court held that the Clean Air Act's (CAA) use of the term "appropriate and necessary" is so "capacious" and "all-encompassing" that ignoring costs was patently unreasonable. 

The Court's decision could have profound implications for the electric utility sector, impacting not just hazardous air pollutant (HAP) emission standards, but also looming carbon dioxide regulations targeting the same facilities under the proposed Clean Power Plan (CPP). On remand, there will now almost certainly be a battle there about whether MATS may stay in place while the Agency considers costs. If the D.C. Circuit ultimately vacates the rule, as may be likely given the breadth of the majority opinion, then electric utilities would no longer be regulated under section 112 for HAP. This result, in turn, could affect pending and future arguments for challenging the CPP. Indeed, a major challenge to the CPP has been based on whether EPA lacks legal authority to regulate power plants for carbon dioxide emissions if they are already regulated for HAP under section 112. 

Background

Michigan v. EPA turns on EPA's interpretation of section 112(n)(1)(A) of the CAA, 42 U.S.C. § 7412(n)(1)(A). Congress enacted the provision as part of the 1990 Clean Air Act Amendments to address HAP from power plants. The provision requires EPA to conduct a study measuring the "hazards to public health" that are "reasonably anticipated to occur" as a result of HAP emissions from power plants. EPA must then "regulate electric utility steam generating units … if [EPA] finds such regulation is appropriate and necessary after considering the results of the study." 42 U.S.C. § 7412(n)(1)(A).¹ Once a source is listed as one for which regulation is "appropriate and necessary," EPA must issue emission standards based on the maximum achievable control technology (MACT). Id. § 7412(d)(1)-(2). MACT generally "shall not be less stringent" than the "average emission limitation achieved by the best performing 12 percent" of existing sources. Id. § 7212(d)(3).

MATS was proposed in 2011 and finalized in 2012. Under the rule, EPA deemed regulation of electric utilities for HAP to be "appropriate and necessary." EPA found that regulating electric utilities for HAP was "necessary" because "imposition of the other requirements of the [Clean Air Act] will not adequately address the identified hazards to public health or the environment" caused by HAP emissions from power plants. 76 Fed. Reg. 24,976, 24,992 (May 3, 2011); 77 Fed. Reg. 9304, 9363 (Feb. 16, 2012). EPA further determined that regulating was "appropriate" because HAP emissions from electric utilities pose a hazard to either public health or the environment, and because controls are available to reduce such emissions from power plants. 76 Fed. Reg. at 24,988-24,989; 77 Fed. Reg. at 9363. EPA declined to consider costs as part of the "appropriate" determination, concluding that it was "reasonable to assess whether to list [electric utilities] … without considering costs." 77 Fed. Reg. at 9327. Costs, the Agency said, would be considered when the Agency determined the level of the emission standard.

The Court's Holding

At issue in Michigan was whether EPA must consider costs in its initial determination—that is, when considering whether it is "appropriate and necessary" to regulate power plants for HAP.  Relying on the plain text of the statute and statutory context, the Court concluded that EPA acted unreasonably by failing to do so. 

Looking first to the text of the statute, the Court determined that the term "appropriate" is "capacious" and "all-encompassing" and therefore requires "at least some attention to cost." The Court grounded its conclusion in foundational precepts of administrative law, noting that "[a]lthough this term leaves agencies with flexibility, an agency may not entirely fail to consider an important aspect of the problem when deciding whether regulation is appropriate." Because MATS imposes billions of dollars in costs with a return of only "a few dollars in health or environmental benefits," EPA did not act reasonably when it entirely ignored costs.

At the same time, the Court acknowledged that the term "appropriate and necessary" is, on its face, ambiguous, and does not always require consideration of cost. But instead of deferring to EPA's judgment under a traditional Chevron Step 2 analysis, the Court instead concluded that EPA had "strayed far beyond th[e] bounds" of "reasonable interpretation." Looking to statutory context, the Court noted that other parts of section 112 mention costs, particularly section 112(n)(1)(B), which requires EPA to study not only the health and environmental impacts of emissions, but also the costs of technologies to control them. EPA considered the results of that study in making its "appropriate and necessary" determination, but only the environmental impacts that the study documented, while ignoring the cost results of the study. The Court explained that "Chevron allows agencies to choose among competing reasonable interpretations of a statute; it does not license interpretive gerrymanders under which an agency keeps parts of statutory context it likes while throwing away parts it does not." 

This case does not mark the first time the Court has analyzed EPA's authority to consider costs under federal environmental statutes. But it is the first time the Court has required consideration of costs where Congress was silent on the issue. In Whitman v. American Trucking Ass'ns, Inc., 531 U.S. 457 (2001) (9-0)—also penned by Justice Scalia—the Court rejected similar calls to compel EPA to consider costs under another CAA provision. Similarly, in Entergy Corp. v. Riverkeeper, Inc., 556 U.S. 208 (2009) (5-4), Justice Scalia, again writing for the majority, held that congressional silence on the issue of costs constituted a delegation of discretion to the agency whether to consider costs or not.

In Monday's opinion, Justice Scalia distinguished Whitman by noting that Congress' discrete command to "protect the public health" in setting national ambient air quality standards (NAAQS) at issue in that case allowed no room to consider costs. He did not mention, much less attempt to distinguish, his own opinion in Riverkeeper. In the present case, by contrast, Justice Scalia wrote that the broad and capacious term "appropriate and necessary" "plainly subsumes consideration of cost."

The Court refrained from prescribing EPA's path forward. It did not require a specific type of cost analysis, nor did it restrict EPA to considering the benefits from limiting only HAP emissions. In its Regulatory Impact Analysis, EPA concluded that costs would be roughly $9.6 billion to industry against $37 to $90 billion in benefits. But most of those benefits were co-benefits, i.e., the salutary incidental impacts from regulating HAP. Limiting mercury emissions would, alone, result in only $4 to $6 million in direct benefits. The Court did not foreclose EPA from considering co-benefits in addition to direct benefits.

Implications

The Court's decision injects considerable uncertainty into the state of utility air regulations. Ironically, Monday's opinion could potentially eliminate what has been viewed as a viable argument against the Obama Administration's proposed CPP, issued under CAA § 111(d), which would regulate carbon dioxide emissions from fossil fuel-fired electric utilities. Current and prospective challengers of the CPP have argued that the regulation is illegal because of MATS. Under a literal interpretation of CAA § 111(d)—or at least the version of section 111(d) passed by the U.S. House of Representatives—EPA cannot regulate a source category under that section that is already regulated for HAP under section 112. But without MATS, utilities are no longer regulated under section 112. Thus, the theory goes, EPA cannot regulate electric utilities for carbon dioxide so long as MATS is in effect. If MATS is vacated by the D.C. Circuit, however, the grounds for this argument would be undercut.

The Court's remand of Michigan to the D.C. Circuit therefore sets up another fight over whether MATS should be left in place while EPA considers costs. This could lead to counterintuitive legal positions—for instance, by those seeking to preserve the section 111/112 argument, who might argue for retention of MATS on remand to the Agency simply to avoid mooting the issue.

The Court's decision also sows uncertainty for utilities that are still in the process of complying with MATS. Many utilities shuttered plants or installed controls to meet the MATS rule deadline of April 16, 2015. But other utilities received one-year extensions. Given that the future of MATS has now been thrown into doubt, it remains unclear whether utilities and their state regulators will "rethink" their approaches to compliance or allow for more flexibility in the operation of controls. In this regard, it should be kept in mind that even if MATS is vacated, EPA could still engage in additional rulemaking that takes the Court's opinion into account and promulgate new rules to control HAP from the same sources.  

Finally, the Court's decision could indicate a weakening of the well-established Chevron deference standard. Where the Court concludes that a statutory provision is ambiguous at Step 2 of the Chevron analysis, it has typically deferred to the implementing agency's interpretation. But in two consecutive terms, and in two cases involving the CAA, the Supreme Court has rejected EPA's interpretation at Step 2.² In dissent, Justice Kagan chided the majority for departing from Chevron, arguing that EPA, and not the Court, was better positioned to determine how to take costs into account in the course of the regulatory process in the face of statutory ambiguity. 

Justice Scalia's approach to Chevron in Michigan takes to its logical conclusion an argument that he first advanced in Entergy Corp.—that is, that there is no need for separate Chevron Step 1 and Step 2 analyses. As he said in that case, an agency's interpretation of a statute will prevail so long as it is reasonable and must fail when it is not. Entergy Corp., 556 U.S. at 217-18. In Monday's opinion, Justice Scalia did not argue that the statute is clear on its face and that this is accordingly a Chevron Step 1 case. Instead, he conceded the statute's ambiguity, but nonetheless found that the Agency's interpretation of it was unreasonable given the "capacious" nature of the word "appropriate."   

At any rate, what is clear from Monday's decision is at least five justices are committed to closely scrutinizing EPA rulemakings that impose high economic costs and reflect a broad exercise of agency power. That could spell trouble for EPA's CPP, which is rooted in an expansive interpretation of yet another provision of the CAA.

---

¹ For a more thorough discussion of CAA § 112 and EPA's MATS rulemaking process, please see our previous Client Alert discussing the case, "The Supreme Court Grapples with EPA's Mercury Rule."

² The other case was Utility Air Regulatory Group v. EPA, 134 S. Ct. 2427 (2014), in which Justice Scalia, writing for the same five-justice majority, rejected EPA's interpretation of the term "any air pollutant" as including greenhouse gases for purposes of the CAA's prevention of significant deterioration permitting program.

---