EPA's existing source proposal is the cornerstone of the administration's climate policy and, once finalized next year, will be the most signifcant federal climate policy move to date. Even relatively minor EPA rules face legal challenge from industry, environmental groups, or both. This rule's significance means it will be no exception. Legal challenges will not come until the rule is finalized next summer (assuming it remains on schedule). In fact, there will be no actual regulation in place until states begin to submit their plans to EPA in 2016, so litigants may not have standing until then. The rule may also change a lot before it's finalized and implemented, so making predictions is probably useless. But here are the biggest legal vulnerabilities I see today.
1) Renewables and Energy Efficiency
In the proposal, EPA sets emissions rate targets for each state, that the states must then meet with their plans. In building the rate targets, EPA uses four building blocks. The first two - efficiency improvements at coal plants and increased use of existing gas plants - are on relatively solid ground, I think. But the third (new renewable generation) and fourth (demand-side energy efficiency improvements) blocks are more legally risky. EPA argues that because both blocks would reduce emissions from the existing fossil power plants that are the subject of the rule, including them in the targets is legitimate. They're right that fossil emissions would go down - add zero marginal cost renwables or cut demand, and you don't have to run fossil as much (note that this is not true for carbon offsets like planting trees or cutting agricultural emissions, which EPA has not sought to include).
But, litigants will likely argue, the relevant part of the Clean Air Act (§111(d)) gives neither EPA nor the states any authority to regulate activity outside the sources subject to the rule's performance standards. Since renewables have no CO2 emissions, and energy efficiency isn't even a stationary source, neither is properly included in a "source category". Former EPA General Counsel Roger Martella pointed to this issue as a particular area of vulnerability in an interview today.
On balance, I think EPA has the better argument here, but I would not be surprised if a court disagreed. EPA appears to acknowledge this risk, requesting comment on the legal issue and, more importantly, cleanly separating renewables and energy efficiency into severable building blocks. If a court nixes either, the policy will survive, though it will be less stringent.
2) State Responsibility
A related practical problem is that it's hard to measure, verify, and attribute the emissions reductions that happen as a result of renewables and reduced demand. If a new wind farm is built, exactly which fossil plants will close or run less? How do we know whether a demand-reduction policy worked, or if demand simply changed due to outside factors in the economy? And how do we know that the demand reduction will persist? These issues make it difficult and arguably unfair to make the power plants subject to the rule accountable for achieving the emissions reductions achieved. Their ability to control the success or failure of renewables or demand reduction programs is limited (though it's not zero). States, on the other hand, are relatively well positioned to take on accountability for these efforts, and in fact are already doing so - state renewable portfolio standards and efficiency programs are common.
EPA therefore proposes allowing states to submit "portfolio" plans, in which they take direct responsibility for the emissions performance of these policies. This is a clever workaround for the practical problems with renewables and energy efficiency. But it's legally questionable. The statute allows states to set performance standards for existing sources in plans that EPA must approve. State-level policies stretch the definition of performance standards quite a bit, however much work EPA thinks "for" can do in this context. And including state policies in Clean Air Act plans gives EPA control over state energy policy - anything included in the plan becomes federally enforceable (though EPA tries to create a workaround for that). Finding authority for state energy policies in the statute is pretty tough.
If EPA were to lose on this point, it wouldn't mean renwables and energy efficiency can't be included in the policy. But it would make them much harder, maybe impossible, to implement in practice.
3) Trading
EPA's public statements about the proposal focus on its flexibility for states. The proposal encourages states to group together, and says they can use trading systems like those already in place in California and the Northeast to meet their obligations. The biggest legal question in advance of the proposal was whether it would allow such trading, and whether that would survive legal challenge. Most legal analysts believe that trading under §111(d) is permissible, as part of the "best system" of emissions reduction, but not all agree, and it's never been tested. It's a mistake to assume that trading is legal (though my personal view is that it is).
EPA largely kicked this question down the road. Since the proposal and presumably the final rule will not actually create a trading program, any challenge would have to wait until states do so (or until California or the RGGI states attempt to take credit for their programs in complying with the EPA rule). How that challenge would come out will depend on the details of the trading program and how it works within the §111(d) framework.
However, the legal vulnerability of trading isn't entirely out of EPA's hands. The most important trading opportunities are probably those between gas and coal plants. Traditionally, the two fuels have been regulated under different "source categories" for Clean Air Act purposes. My view is that trading is on much stronger legal footing within a source category than between them. As in its January proposal for new source standards, EPA preserved the traditional split-category approach, while cryptically "co-proposing" to combine coal and gas into a single category. The agency will have to make a choice when the rule is finalized next year. Some think combining the categories is itself legally risky, though I disagree. Leaving them separate sets up legal vulnerability for trading programs down the road.
4) Cooperative Federalism... or Civil Disobedience
EPA faces a different type of risk from states that simply decide not to participate. Some will likely sue the agency, delay participation, or otherwise obstruct implementation. EPA can issue a Federal Implementation Plan if states fail to act, but until recently the agency was loath to do so. EPA also lacks some of the powers states have over the power sector. However, this lack of authority is likely to make any federal plan less flexible and therefore costlier than a state's plan. Utilities are therefore likely to eventually pressure their states to participate, though that may take a long time. Until then, expect strong rhetoric, foot dragging, and legal challenge (on the issues above and others) from these states.
Like loud complaints from Congress, this is unlikely to block the rule. But it can certainly slow implementation and limit the emissions cuts achieved by the program's target dates.
