Earlier this month, the U.S. Circuit Court of Appeals for the District of Columbia ruled in a case that challenged the Bush Administration's 2005 Clean Air Interstate Rule (CAIR). The controversial decision struck down the interstate pollution rule and came as a surprise to many, including the petitioners in the case. During today's OnPoint, Jeff Holmstead, a former EPA air chief and head of Bracewell & Giuliani's environmental strategies group, discusses the court's decision and the immediate impacts it may have on states and utilities. Holmstead, who crafted the CAIR during his tenure at EPA, explains how EPA and Congress should be acting on the decision and also discusses the possibility for a settlement in the case.
Monica Trauzzi: Welcome to OnPoint. I'm Monica Trauzzi. Joining me today is Jeff Holmstead, head of the Environmental Strategies Group at Bracewell & Giuliani and a former EPA air chief. During his tenure at EPA Jeff was responsible for crafting the Clean Air Interstate Rule, which was recently ruled on by the DC Circuit. Jeff, thanks for coming on the show.
Jeff Holmstead: I'm happy to be here.
Monica Trauzzi: OK, so a major and controversial ruling by the DC Circuit Court about a week and a half ago relating to the EPA's Clean Air Interstate Rule. Before we get into the decision and the fallout, I just want to briefly go over for our viewers what CAIR included, what the main highlights of the rule were.
Jeff Holmstead: Well, CAIR was by far the most significant rule that EPA has done in the last decade really. And what it did was create a new cap-and-trade program for SO2 and NOx emissions from power plants in the eastern part of the United States; I guess 28 states plus the District of Columbia. And in terms of the emission reductions it would have achieved and in terms of the health benefits and in terms of the cost of the rule it was the most significant thing that EPA has done in many, many years. In terms of the health benefits, it's second only to the phase out of lead back in the 70s. So it was a very important rule and I think a big surprise to almost everybody that it was struck down by the court.
Monica Trauzzi: Right. And about a week and a half ago the court ruled that EPA was overstepping its authority through the CAIR. So what were the key issues that the court found were problems with CAIR?
Jeff Holmstead: They didn't really find that EPA overstepped its authority. They just found all kinds of problems. In some ways they said it didn't go far enough. In other ways they said that it went too far. In other ways they said that you couldn't create a regional cap-and-trade program, even though what we did, and this was the surprising thing. Everybody assumed that all of these issues had been resolved back in the NOx SIP CAIR case and that was highly controversial. But once that rule was upheld by the D.C. Circuit, we all felt, and I think most everybody felt that CAIR was really the same as that rule, but this Court, including one judge who was a dissenter in that opinion, who made it quite clear he wasn't happy with the way the NOx SIP Call case went, came back and found a number of problems with CAIR that I think were a big surprise to everyone.
Monica Trauzzi: So, you have a personal connection to this. What's your reaction to the ruling?
Jeff Holmstead: Well, obviously, just personally I'm disappointed. But the other thing that's just curious about the ruling is it doesn't make anybody happy. If you look at all of the groups that challenged the rule, each of them had a small issue with CAIR and they were expecting or hoping that the court would fix their issue but leave CAIR alone. And that's not entirely true. I think certainly the state of Minnesota, which didn't want to be included, at least the utility, the company in Minnesota that brought the challenge, they're happy. The waste coal folks are happy because they just wanted to be out of CAIR. But other than that, I think all of the other parties who supposedly won this case actually end up worse off than they were before. So it's a very curious situation in which the court did something that none of the petitioners had asked for and that was to strike down the whole rule.
Monica Trauzzi: Right, because some of the major utilities, like Duke Energy, actually came out after the ruling and said, "We had issues with CAIR, but not enough to strike down the whole rule." So it's not the utilities giving a line, it's ...
Jeff Holmstead: No, no, it's actually ...
Monica Trauzzi: It's actually ...
Jeff Holmstead: It's clear that people like Duke, which supposedly won, actually end up worse off now. The thing that's surprising about it is this was a rule that had pretty widespread support, so virtually all of the industry said, "Look, we know we have to make these reductions. This is a fair approach for doing that. Let's just get on with it." And as I say, you did have some companies challenging, but by and large, they challenged these small parts of the rule. They felt like, well, the rule is OK, but we deserve more SO2 allowances or the rule is OK, but we deserve more NOx allowances. And then North Carolina, which for reasons that are understandable, sued because they wanted the rule to go further. And yet now the court has struck down the whole thing and, as I said to you before we got on camera, it's a big mess for lots of folks.
Monica Trauzzi: OK, so talk about some of the impacts of the ruling on the utilities and the states. How are they impacted immediately?
Jeff Holmstead: Well, the first thing is all of these states have to meet their attainment requirements. And virtually all of these states were depending on the CAIR reductions to meet those requirements. And so people who live in the eastern part of the United States are going to be breathing dirtier air longer than they otherwise would have, unless, and again I hope we get a chance to talk about some ways that this can be fixed, because I think there are some ways that CAIR could be kind of resurrected. But if the ruling stands, air quality will be worse, a number of companies that had been investing, I mean collectively billions of dollars in pollution controls, they were anticipating offsetting some of their costs by selling allowances. So you have people who have made enormous investments, literally billions of dollars, in reliance on this rule and now there's no longer an allowance market. The other thing that you see is the number of companies that had invested allowances in anticipation of their compliance obligations now find that if the decision stands, then they have something that's not what's very much. I think there was already an announcement from one company who said they were looking at taking a hundred million dollar hit on their balance sheets because of the decision. And I know that there are other companies that actually have more at stake than that. So, just in terms of the financial planning, in terms of the air pollution planning ...
Monica Trauzzi: Uncertainty.
Jeff Holmstead: In terms of all of those things, we have an enormous amount of uncertainty. And certain areas of law, which everyone thought were well settled, have now been turned upside down by the court as well.
Monica Trauzzi: Is it a free pass for some utilities though? It's one less thing that they need to worry about?
Jeff Holmstead: Not really, because all of them understand that in order to meet the attainment requirements, there will have to be some form of control over the power sector. And they thought they knew what that was going to be, how it was going to look for the next four, five or six years, and now that's very uncertain. And then there were other regulatory reforms that have been done, for instance in the Visibility program, where everyone largely agreed that because you were getting these reductions, you didn't need to do these so-called case-by-case BART determinations, which were troubling both from a state perspective and an industry perspective. And now that question is back on the table, the same with something called reasonably available control technology that this was going to take the place of, so there's a lot of unanswered questions.
Monica Trauzzi: So, what are the next steps then? Is EPA going to need to create a new rule? Are certain parts of this rule salvageable? Or do we need to start from scratch?
Jeff Holmstead: Well, people around the country are looking at different options. You know, one possibility I think is because it's an unusual case where you have the environmentalists who think it was a bad decision, you have the states who think it was a bad decision, and you have the vast majority of the industry who thinks the same way. And so one question is, is there a way to reach a settlement of a case that could be accomplished, that would basically leave the program intact? And that might be the simplest thing to do, although there's enough parties that that's not going to be easy, but given even the people who won have already come out and said, well, this isn't what we wanted, there is the possibility for us of, I think, a settlement that would preserve most. I mean you would have to take care of the waste coal guys and you'd have to take care of Minnesota, but other than that I think there's a potential settlement there. The other thing that certainly people are talking about is asking Congress to step in. And I think there's a sense that if Congress could be persuaded that all these other issues remain live issues, I mean for instance, Senator Carper has really tried to use this decision as support for his bill, but his bill goes well beyond CAIR in some ways. And so if he were willing to say, look, I still want to do my bill, but in the meantime we just need to fix this and basically codify CAIR. You can see that that might happen.
Monica Trauzzi: His is more of an update of the Clean Air Act.
Jeff Holmstead: Well, his also goes, it's not clear how insistent he is on including CO2. He has a much more stringent mercury cap that is problematic for a lot of folks and it does make some other changes. But there's some hope that maybe Congress would just come in and make this fix so that everybody who's been relying on this rule, the states and the industry and the environmental community, that their immediate needs would be taken care of and then there could be future efforts, either legislative or regulatory. So there's kind of the settlement possibility. I think there's a possibility of congressional action. One of the things that certainly people are thinking about is it's unusual for the court to grant a remedy that nobody asked for. And nobody asked them to vacate the NOx program and yet they vacated it anyway. And so there's a chance that perhaps all the petitioners would go back and ask them to clarify their decision. That's happened a couple of times recently, where the court vacated something without perhaps fully understanding what they were doing and to go back and get them to keep that part of the rule in.
Monica Trauzzi: Lots of options.
Jeff Holmstead: Lots of options and people are also thinking about appeals. And I think some of the legal reasoning is pretty suspect. But, on the other hand, those appeals take a long time and in the meantime you have all this uncertainty and I think there's some sense that people would like to regain the certainty that they thought they had before this decision came down.
Monica Trauzzi: This is the one area, many would say, where the Bush administration stepped up its game in terms of air pollution control and emissions control. Some cynics would claim that the administration only supported CAIR because they knew it wouldn't hold up in court. Is there any truth to that? I mean you were there when it was created. Was there consideration made in discussions and meetings as to whether EPA was exceeding its authority? Did you ever think that it would come down to a court ruling like this?
Jeff Holmstead: Well, first of all, you're the first person who I have heard who's suggested that somehow ...
Monica Trauzzi: Really?
Jeff Holmstead: Yeah, yeah, I mean people have said that about the mercury rule, which, again, is not true, but in this case, there was nobody who thought that we were on weak legal ground. I mean everybody looked at the NOx SIP Call decision and said, "We're doing it the exact same way." There was discussion about the linkage between the acid rain allowances and these allowances, but, again, everyone thought it was quite clear cut. So I can tell you with some certainty, that there was no one in the administration who thought that this rule would be struck down, certainly in any significant way. There were some states on the edges, Minnesota, others, but this was not a decision that anybody expected.
Monica Trauzzi: What does this do in terms of the Bush administration's legacy on environmental issues? Does it dampen things?
Jeff Holmstead: Look, I think I've actually said this to you before, if you look at the history of the Clean Air Act, since 1970 until today, the three most important things in terms of health benefits, number one was the phase down out of lead from gasoline, and that was the late 70s. The second most important rule in terms of health benefits was CAIR and the third was the Nonroad Diesel Rule. Well, the Nonroad Diesel Rule, thankfully, has not been touched. That's in place and so that will be an important part of a legacy. And there are many other smaller things, but CAIR was a big deal. It's something we were all very proud of, something that we thought really created a much better approach for states, for the environment, and for industry. And so there's no doubt that if this decision holds up it will be a big disappointment.
Monica Trauzzi: OK, it will be interesting to see what the next steps are and how it's taking care of. Thanks for coming on the show again.
Jeff Holmstead: My pleasure. Thanks for having me.
Monica Trauzzi: This is OnPoint. I'm Monica Trauzzi. Thanks for watching.
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