The DC Circuit Court held oral arguments yesterday in State of North Carolina v. EPA, (No. 05-1244), a case challenging the EPA’s Clean Air Interstate Rule (CAIR). The CAIR program modifies the Title IV Acid Rain Program for 28 Midwestern and eastern states, establishing a cap-and-trade program to achieve reductions in sulfur dioxide and nitrogen oxide emissions from power plants.

CAIR requires that states cut sulfur dioxide (SO₂) emissions by an amount greater than required under the acid rain program, which also uses a cap-and-trade system. A potential consequence of mandating deeper emissions cuts is that the emissions allowances could lose their value due to excess supply in the market. CAIR addresses this situation by requiring emitters to surrender allowances at an accelerated rate. For example, if a state chose to regulate only electric generating units (EGUs), the surrender ratio will initially be two Title IV credits per ton of SO₂ emissions. If a facility had a 10,000 ton Title IV allowance, the facility would then be authorized to emit only half that amount - 5,000 tons and would be required to surrender the other 5000 credit tons, thereby preserving the value of other allowances.

Petitioners representing several states and industry parties claimed that this portion of the CAIR program violated the Clean Air Act (CAA), and that EPA did not have authority to change the allocation and surrender procedures specified in Title IV. Petitioners argued that Section 404 of the CAA specifies the initial allowance allocations for individual power plants. The petitioners, led by South Carolina Electric and Gas Co., argued that because Congress was so specific in establishing the program, EPA had no authority to change the allocation and surrender program.

One major point of contention focused on interpreting Section 403(f) of the CAA, which reads in part:

“[a]n allowance allocated under this subchapter is a limited authorization to emit [one ton of] sulfur dioxide . . . . Nothing in this subchapter or in any other provision of law shall be construed to limit the authority of the United States to terminate or limit such authorization.” (Emphasis added.)

Petitioners argued that the term United States” refers specifically to Congress and precludes EPA from acting independently. Judge Rogers noted that “United States” is a “broad term” which should not necessarily preempt EPA from exercising authority. Chief Judge Sentelle, however, said this provision “doesn’t prevent” EPA from acting, but, at the same time, does not provide “affirmative authority” to the agency. The third judge on the panel, Judge Brown, was mostly silent during this portion of the discussion.

During EPA’s argument, Chief Judge Sentelle pressed as to where “EPA thinks it got the authority” to issue the CAIR program, seeming to express skepticism that Section 403(f) provides the requisite authority. After EPA noted that the CAA also uses the term “Congress” in some sections, Judge Rogers responded that interpreting “United States” to mean only Congress and not the EPA was “not a logical construction” of 403(f). EPA argued that, in enacting CAIR, it was trying to preserve a nationwide cap-and-trade program, while providing for deep cuts in SO₂ emissions. Finally, EPA argued that the allowances can still be traded or sold on a nationwide basis, and have a reduced value only when surrendered under CAIR.

Given the tenor of today’s discussion on this issue, final resolution is likely to be determined by Judge Brown, who did not express any opinions on this matter or give the parties any indication of which way she is leaning.

For further information about this topic, please contact Akin Gump.