On July 11, the U.S. Court of Appeals for the District of Columbia Circuit vacated a regulatory program adopted under the Clean Air Act that had been the basis for significant investments in air pollution control technology and emission allowances, thereby casting doubt on the value of those investments. The circuit court, in North Carolina v. Environmental Protection Agency, considered challenges brought by several states and electric utility companies to provisions of the Clean Air Interstate Rule (CAIR).

The U.S. Environmental Protection Agency (USEPA) had adopted CAIR in 2005 pursuant to the Clean Air Act. The purpose of CAIR was to reduce or eliminate the impact of upwind sources on downwind states’ nonattainment of ambient air quality standards for fine particulate matter (PM 2.5) and eight-hour ozone concentrations. Concentrations of PM 2.5 are associated with respiratory and cardiovascular problems; excessive eight-hour ozone concentrations cause smog. Under the Clean Air Act, the states are required to demonstrate their compliance with air quality standards established by USEPA for certain air contaminants. CAIR was a reflection of USEPA’s recognition that the ability of some states to achieve or maintain attainment with certain air quality standards was adversely impacted by emissions from sources in upwind states. In seeking to address this issue, USEPA, through CAIR, identified 28 states and the District of Columbia as contributors to the nonattainment of air quality standards for PM 2.5 or eight-hour ozone concentrations in downwind states. CAIR then used an emissions allowance cap and trade program for sulfur dioxide (SO2) and nitrogen oxides (NOx) that the 28 states and District of Columbia could adopt to address this issue. SO2 and NOx emissions are components of PM 2.5, and NOx is a precursor to ozone.

Under the CAIR cap-and-trade programs, fossil fuel-fired electric generators operating within a CAIR state would need to acquire allowances for emissions of NOx and SO2, with each allowance authorizing the emission of one ton of the air contaminant. With respect to SO2, CAIR reduced the number of allowances available under the existing SO2 allowance-trading program adopted under the Clean Air Act for the control of acid rain. With respect to NOx, CAIR created allowance-trading programs for NOx emissions during the ozone season to address the eight-hour ozone standard, and during the nonozone season to address PM 2.5. The use of these allowances and corresponding reduction in emissions were to begin in 2009 and 2010 for NOx and SO2, respectively, with a further reduction in allowable emissions for both air contaminants by 2015. Given the pending regulatory requirements, significant investments were made by the electric generation industry and others in emissions allowances to comply with CAIR and pollution control technology to meet CAIR’s more stringent emissions limitations and allow for the sale of excess SO2 and NOx allowances.

The successful challenges to CAIR included issues surrounding USEPA’s selection of the states that were subject to CAIR, supplemental pools of allowances, calculation of emissions limits, compliance dates and the trading program. The court of appeals, rather than remand individual aspects of CAIR back to USEPA for amendment, vacated the entire program because it viewed CAIR as one integral action, and considered that little would be left of the program after the remand of the challenged aspects.

The decision calls into question the value of NOx and SO2 allowances intended for CAIR compliance purposes. On the SO2 side, CAIR tightened the pool of SO2 allowances available under the Clean Air Act’s Acid Rain Program, thereby arguably making the allowances more valuable. Following the court’s decision, SO2 allowances will still have value, but it is unclear how much. For NOx allowances, CAIR created a market for NOx ozone and nonozone season allowances where no such market had previously existed in some states. The court’s decision likely impacts the value of these allowances as well, absent another program that uses NOx ozone and nonozone season allowances, or reversal of the court’s decision on appeal. Further, a number of commentators on the court’s decision have questioned its impact on plans by many electric generators to construct capital-intensive pollution control technology for purposes of CAIR compliance or to enable those companies to sell excess CAIR allowances. Finally, downwind states that were to benefit from CAIR’s limits on emissions from sources in upwind states must now develop other means to achieve or maintain ambient air quality standards within their states, an action that may necessitate additional controls on in-state sources of emissions to mitigate the impact on air quality from emissions from out-of state, upwind sources.

The ultimate fate of investments made pursuant to CAIR, however, is not final. Parties have begun testifying before Congress on the need to take action to address the decision. New rulemaking from USEPA or from individual states also may occur.