In its last published opinion of the term, the United States Supreme Court held that EPA should not have ignored costs in deciding whether to regulate mercury and other hazardous air emissions from coal- and oil-fired power plants.  In that regulation, known as EPA’s Mercury and Air Toxics Standards (MATS), EPA had attempted to demonstrate that such regulation was “appropriate and necessary” without considering cost.  Although four justices found EPA’s actions to be reasonable based on the theory that EPA considered costs later in the process of setting specific emission limits, a five-justice majority held that EPA had acted unreasonably in ignoring costs in its threshold “appropriate and necessary” finding.

Justice Antonin Scalia, writing for the Court, began his opinion by recognizing that Congress intended EPA to treat power plants differently than other industries, in light of the heavy regulation already imposed under other Clean Air Act programs.  Whereas EPA must regulate the emissions of facilities in other industries if they exceed certain “major source” thresholds, “Congress instructed EPA to add power plants to the program if (but only if) the Agency finds regulation ‘appropriate and necessary,’” which the Court characterizes as a “classic broad and all-encompassing term.”  Given the “capaciousness” of that term, the Court criticized EPA for failing to consider cost, noting that “[a]gencies have long treated cost as a centrally relevant factor when deciding whether to regulate.”  The phrase “appropriate and necessary,” according to the Court, was not “an invitation to ignore cost” in this context.

The Court also expressed concern with the mismatch of costs and benefits in the case, based on EPA’s own calculations.  As identified by the challengers to the rule, including utility and coal industry groups and numerous states, EPA expected the rule to cost of over $9.6 billion and provide only $4-6 million in benefits.  “The costs to power plants were thus between 1,600 and 2,400 times as great as the quantifiable benefits from reduced emissions of hazardous air pollutants.”  Quoting previous precedent, the Court expressed concern over whether “too much wasteful expenditure devoted to one problem may well mean considerably fewer resources available to deal effectively with other (perhaps more serious) problems.” The Court pointed out that “[n]o regulation is ‘appropriate’ if it does significantly more harm than good.”

The Court specifically rejected each of EPA’s attempts to explain why ignoring cost in its “appropriate and necessary” finding was reasonable.  First, the Court rejected EPA’s claim that it could ignore costs because the word “cost” did not appear in the provision requiring an “appropriate and necessary” finding.  According to the Court, an express reference to cost was unnecessary because the term “appropriate” “plainly subsumes consideration of cost.”  Second, the Court rejected EPA’s claim that a prior Supreme Court decision on national ambient air quality standards authorizes EPA to ignore costs.  The statutory provision at issue in that case was far more restricted in the Court’s view.  Third, the Court rejected EPA’s claim that costs could be considered later, in setting emission limits, through use of an analogy—comparing EPA’s actions to someone “buy[ing] a Ferrari without thinking about cost, because he plans to think about cost later when deciding whether to upgrade the sound system.”  Fourth, the Court rejected EPA’s attempt to “harmonize” the requirement for power plants with other industries because Congress clearly intended disparate treatment.

The four dissenting justices faulted the majority for failing to recognize that EPA did in fact consider cost in setting the specific emission limits imposed under MATS.  Specifically, the dissenters claimed that (i) the limits based on existing unit performance inherently considers cost, (ii) subcategorizing the covered units inherently considers cost, (iii) EPA made efforts to reduce the cost of its rule through alternative emission limits and averaging procedures, and (iv) EPA prepared a cost-benefit analysis, as required by executive order.  But the Court rejected these claims because they were not the basis of EPA’s decision to regulate—in the view of the majority, EPA made no attempt to justify its “appropriate and necessary” finding on these grounds, but rather admitted freely that its “appropriate and necessary” finding ignored cost.  Because EPA did not rely on those arguments to support its finding, the Court could not uphold the rule on those grounds.  Justice Thomas also wrote separately to express his concerns generally over the level of discretion granted to administrative agencies, adding further weight to the recent authority that could become relevant in the review of future EPA regulations, including the Clean Power Plan.

As a result of the Supreme Court’s decision, the Court remanded the case back to the United States Court of Appeals for the D.C. Circuit for further proceedings consistent with its opinion.  The Supreme Court did not vacate the rule, which means that the rule remains in effect for the time being.  Now it will be up to the D.C. Circuit panel, which initially upheld EPA’s MATS rule in 2012, to decide whether leave the rule in place while EPA attempts to correct it, or vacate it and force EPA to start over entirely.  That process will likely begin in 30 days, when the Supreme Court transfers the case back to the D.C. Circuit, but the D.C. Circuit may not decide how to implement the Supreme Court’s opinion for several months and may ask the parties to submit briefs on that issue.

Regardless of whether the D.C. Circuit vacates the rule or leaves it in place, it will ultimately remand the rule back to EPA.  The agency must then undertake a new rulemaking to weigh the costs and benefits and determine whether its regulation is “appropriate and necessary.”  The Court left open two key issues that EPA will have to consider.  First, how formal must EPA’s cost-benefit analysis be?  And second, can EPA consider the “co-benefits” associated with reducing emissions that are not hazardous air pollutants (e.g., particulate matter) in deciding whether it is “appropriate and necessary” to regulate hazardous air pollutants?  The Court’s decision will likely give EPA the first opportunity to resolve those issues in a new “appropriate and necessary” finding, but that finding will also be subject to judicial review.

A copy of the Court’s opinion is available here:  Michigan v. EPA.