US Supreme Court Fires Warning Shot Across EPA's Bow

In a rare defeat for the U.S. Environmental Protection Agency, the U.S. Supreme Court ordered it on Monday to reconsider whether the EPA's regulations on mercury and other toxic emissions from power plants are appropriate and necessary.

While the EPA considered the costs and benefits of various regulatory options later in the rule-writing process, the court faulted it for not considering compliance costs at the beginning to determine whether regulation was appropriate in the first place.

The ruling is unusual because so far the federal courts, including the high court, have been deferential to the EPA's attempts to write ambitious rules to curb pollution from power plants.

While the courts have become increasingly aggressive in invalidating regulations issued by other federal agencies, the EPA's air pollution regulations have mostly survived judicial scrutiny.

Starting with "Massachusetts versus EPA" in 2007, the Supreme Court has repeatedly upheld the EPA's authority to issue wide-ranging regulations to curb air pollution and combat climate change, and lower courts have fallen into line.

The mercury and air toxics standards (MATS) which the Supreme Court faulted on Monday had previously been upheld by the Circuit Court of Appeals for the District of Columbia Circuit, a famously conservative and pro-business court.

Business groups and state governments have repeatedly challenged EPA regulations on cost and other grounds, so far mostly without success.

But the Supreme Court's decision to reject the EPA rulemaking on MATS suggests this deference has limits and judges will challenge the agency where compliance costs are very high in comparison with the claimed benefits of air pollution rules.
   

Cost and Benefits
Business groups and conservative politicians complain the EPA's wide-ranging rules on air pollution and greenhouse gases have transformed it from a narrowly focused pollution-control agency into a super-regulator with almost unlimited power to reshape the U.S. energy industry and economy.

Between October 2003 and September 2013, the EPA issued 34 "major rules" with estimated annual benefits of up to $900 billion and estimated costs up to $60 billion, according to the Office of Management and Budget ("Draft Report to Congress on the Benefits and Costs of Federal Regulations", 2014).

EPA rules accounted for almost 90 percent of all benefits claimed for major federal rules over 2003-2013 and more than 60 percent of the total compliance costs, according to the White House.

By any measure, the EPA is the most economically significant regulator in the country, which helps explain why its rules have become a lightning rod for business criticism.

New rules on power plant emissions of greenhouse gases and MATS issued since the 2014 White House report have added considerably to the cost and benefit totals claimed by EPA rules.

But the agency was also one of the earliest and most enthusiastic adopters of a quantitative approach to identifying the costs and benefits of pollution rules.

Cost-benefit analysis is popular with business groups, conservative lawyers and parts of the judiciary, which is probably one reason why the EPA's rules have survived so many challenges.

The EPA's formal and quantitative approach has often been held up as a model for other agencies when their own regulations have been struck down by the courts. But in this case, the cost-benefit analysis got the agency into trouble.

Rule-Writing
In theory, the court's decision turned on the question of when the agency should have considered costs as a factor in its rulemaking.

The EPA declined to consider costs explicitly when making its initial decision whether to regulate mercury and air toxics emissions from power plants, though it did consider them at later stages in the rule-writing process when deciding what standards to prescribe.

The majority on the court held, however, that the EPA should have considered costs at the outset before deciding to regulate.

For the minority, the EPA was entitled to take a more structured approach in which costs were considered later in the rule-writing process as they became clearer ("Michigan versus Environmental Protection Agency", 2015).

But the real concern for the majority seems to have been disparity between the estimated costs of the rule and its direct benefits.

The EPA's own impact analysis, to which the majority opinion repeatedly refers, estimated compliance costs would be $9.6 billion per year.

Set against this, the direct health benefits from reduced
mercury emissions in children eating recreationally caught fish were estimated at just $4-6 million per year ("Regulatory Impact Analysis for the Final Mercury and Air Toxics Standards", 2011).

Other direct benefits from the reduction in mercury emissions were not quantifiable. But the EPA claimed to have identified "co-benefits" from reducing particulate emissions and sulphur dioxide amounting to $37-90 billion per year which it included in the impact analysis.

This led the EPA to claim that "the benefits outweigh costs by between 3 to 1 or 9 to 1 depending on the benefit estimate and discount rate used".

But Justice Antonin Scalia, writing for the court majority, focused only on the direct benefits and observed "the costs to power plants were thus between 1,600 and 2,400 times as great as the quantifiable benefits."

Scalia's opinion, which was joined by Chief Justice John Roberts as well as the reliably conservative Justices Clarence Thomas and Samuel Alito and the court's swing voter Justice Anthony Kennedy, repeatedly comes back to this disparity.

"One would not say that it is rational, never mind appropriate, to impose billions of dollars in economic costs in return for a few dollars in health or environmental benefits," Scalia complained. "No regulation is appropriate if it does significantly more harm than good."

Scalia accepted there might be ancillary benefits but took issue with the agency's approach to incorporating cost considerations into its rule-writing.

For the majority, at least, there seems to have been a sense of unease that the agency ignored costs when deciding to regulate, and then considered them later, employing an ad hoc approach to justify an outcome on which it had already settled. It was an exercise of decision first, evidence later.


             
Justice Kennedy
Justice Kennedy has proved to be the court's swing vote on environmental regulation. Kennedy is normally a reliably conservative pro-business vote on the court but has been sympathetic to environmental concerns and delivered the crucial fifth vote on the celebrated "Massachusetts versus EPA", which established the agency's authority to regulate greenhouse emissions as a pollutant.

On this occasion, though, he tacked back to provide Scalia, Thomas, Roberts and Alito with the crucial fifth vote to overrule the EPA, in an opinion that was sharply critical of the agency.

In formal terms, the decision is a narrow setback: the court simply ordered the agency to redo its homework.

The agency was instructed to "consider cost - including, most importantly, cost of compliance - before deciding whether regulation is appropriate and necessary". It need not conduct a formal cost-benefit analysis but its decision must be "reasonable".

However, the broader criticism of the agency's approach, and Kennedy's willingness to join it, may also indicate the agency's rulemaking power has reached a high-water mark and its regulations will be subject to stricter scrutiny in future, particularly over how it accounts for and balances the benefits to the public with the costs to business.

The court has normally adopted a deferential approach to agency rule-writing under a standard dating to 1984 and known as "Chevron (CVX) versus Natural Resources Defense Council".

There are some signs, however, the majority may be starting to nibble away at the Chevron standard and take a stricter line in scrutinising agency decisions.

At the very least, the Supreme Court has fired a warning shot across the EPA's bow and instructed it to be more careful and sensitive to compliance costs in future.