Earlier this year, a federal court of appeals struck down the Clean Air Interstate Rule (CAIR).  EPA designed CAIR to reduce or eliminate the impact of upwind sources on downwind nonattainment of NAAQS (ambient air quality standards) for fine particulate matter and smog.  EPA categorizes sources at the state level and, in CAIR, determined that 28 states and DC (the “upwind states”) contributed significantly to downwind nonattainment of one or both NAAQS.

One part of CAIR modified the Clean Air Act’s (CAA) cap-and-trade program for sulfur emissions by reducing the number of available allowances required for compliance and by designing a surrender mechanism to offset the drop in demand.  The intended result was to decrease emissions from electrical generating facilities in upwind states without completely unraveling the SOx markets.  The court, however, found that in enacting CAIR, the EPA exceeded its authority under the CAA and remanded the case to the agency to “redo its analysis from the ground up.”

As Congress returns to session, there is some talk of legislatively enacting all or part of CAIR.  The EPA Clean Air Markets Division recently published a presentation detailing several potential Congressional action scenarios for ensuring that the clean-air benefits from CAIR may yet be delivered.  According to EPA’s analysis, up to 35,000 people could die prematurely over a three year period due to air pollution emissions that would be eliminated by CAIR.

CAIR was scheduled to operate in two phases, with NOx reduction mandates beginning in 2009 and SOx mandates in 2010.  Should components of one or both phases be enacted by Congress, it will impact the supply of and demand for emissions allowances under the EPA’s Acid Rain Program and state or regional cap-and-trade programs.

Prospects for action do not appear to be great, given the number of days left in the current session, and the focus on the Presidential election.  While CAIR is not a high profile issue for the general public, it is an important program for reducing air pollution, and one that will help determine the direction of future air pollution regulation in the US.  Most likely, however, the issue will be put off until there is a new President and Congress in place.  Both Presidential candidates are considered supporters of market-based approaches to solving environmental problems.  It is therefore likely that we will see a revised version of such programs from the next administration that is designed to deliver environmental benefits without undermining the integrity of the Acid Rain Program and the underlying market mechanisms.

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