Arkema Inc v. Envtl. Prot. Agency

• Decision Date: 27 August 2010
• Docket Number: 09-1335.,No. 09-1318,09-1318
• Citation: 618 F.3d 1
• Parties: ARKEMA INC., Petitionerv.ENVIRONMENTAL PROTECTION AGENCY, Respondent.
• Court: U.S. Court of Appeals — District of Columbia Circuit

618 F.3d 1

ARKEMA INC., Petitionerv.ENVIRONMENTAL PROTECTION AGENCY, Respondent.

Nos. 09-1318, 09-1335.

United States Court of Appeals District of Columbia Circuit.

Argued May 10, 2010.

Decided Aug. 27, 2010.

On Petitions for Review of an Order of the Environmental Protection Agency.

Dan Himmelfarb argued the cause for petitioners. With him on the briefs were John S. Hahn, Roger W. Patrick, Brian D. Netter, William J. Hamel, David M. Williamson, and Gia V. Cribbs.

David E. Mills was on the brief for amici curiae Professors Robert H. Gertner, et al., in support of petitioners and vacatur.

Perry M. Rosen, Attorney, U.S. Department of Justice, argued the cause for respondent. With him on the brief was Diane E. McConkey, Attorney.

Before: SENTELLE, Chief Judge, BROWN, Circuit Judge, and RANDOLPH, Senior Circuit Judge.

Opinion for the Court filed by Circuit Judge BROWN.

Dissenting opinion filed by Senior Circuit Judge RANDOLPH.

Brown, Circuit Judge:

In 1987, the United States signed the Montreal Protocol on Substances that Deplete the Ozone Layer (the Protocol). The agreement sought to “limit or eliminate the[ ] production and consumption of ozone depleting substances” by incrementally decreasing the manufacture or consumption of these substances using a series of decreasing caps, with an initial focus on chlorofluorocarbons (CFCs). Protection of Stratospheric Ozone; Listing of Substitutes for Ozone-Depleting Substances, 65 Fed.Reg. 42,653, 42,655 (proposed July 11, 2000). In 1990, the Protocol was amended to accelerate the phaseout schedule for CFCs and identified hydrochlorofluorocarbons (HCFCs) “as transitional substitutes for chlorofluorocarbons ... and other more destructive ozone-depleting substances, but agreed to phase out HCFCs because of their significant potential to destroy stratospheric ozone as well.” Id.

Under the terms of the Protocol, the United States was required to phase out 35% of its historic HCFC production (measured by 1989 levels) by 2004; 65% by 2010, 90% by 2015; 99.5% by 2020, and 100% by 2030. Protection of Stratospheric Ozone: Allowance System for Controlling HCFC Production, Import and Export, 68 Fed.Reg. 2820, 2821 (Jan. 21, 2003) (2003 Rule). Section 607 of the Clean Air Act (CAA) requires the Environmental Protection Agency (EPA or the Agency) to use a market-based cap and trade regulatory system-a system of pollutant production allowances transferable between companies and between types of HCFCs-to control production and importation of HCFCs. See 42 U.S.C. § 7671f. In 2003, the EPA promulgated a final rule for a cap and trade regulatory system, allocating HCFC allowances on a one-time basis to each participating company and authorizing those companies to expend their baseline allowance during each control period (a calendar year). See 2003 Rule, 68 Fed.Reg. at 2823. The 2003 Rule allowed these companies to trade their allocations, subject to EPA approval, between companies and between regulated HCFCs on an annual or permanent basis. The EPA sought to create a system with “maximum flexibility,” id. at 2833, making “allowances easily tradable with minimum regulatory interference and oversight, thereby encouraging companies to make business decisions[s] as they would in an unregulated industry.” Id. at 2824.

Preparing for the intermediate reduction in HCFC production in 2010 (the “2010 stepdown”), the EPA initiated a new rulemaking in late 2008. See Protection of Stratospheric Ozone: Adjustments to the Allowance System for Controlling HCFC Production, Import, and Export, 73 Fed.Reg. 78,680 (proposed Dec. 23, 2008) (Proposed Rule). The EPA outlined five possible approaches in the Proposed Rule, one of which was to continue the existing cap and trade system and reduce the caps pro rata. Id. at 78,687. In the Final Rule, however, the EPA chose to honor only intercompany transfers of baseline allowances and to disallow permanent baseline changes resulting from inter-pollutant trades. Protection of Stratospheric Ozone: Adjustments to the Allowance System for Controlling HCFC Production, Import, and Export, 74 Fed.Reg. 66,412, 66,421-22 (Dec. 15, 2009) (Final Rule). Arkema Inc. (“Arkema”), Solvay Flourides, LLC, and Solvay Solexis, Inc. (“Solvay”) (collectively Petitioners) filed this consolidated action arguing the Final Rule is arbitrary and capricious and has an impermissibly retroactive effect as to their HCFC baseline allowances. We agree the Final Rule unacceptably alters transactions the EPA approved under the 2003 Rule, and we therefore vacate the Final Rule in part and remand it to the EPA.

I

A. The Clean Air Act

In 1990, Congress enacted Title VI of the Clean Air Act, 42 U.S.C. §§ 7671-7671q, implementing as domestic law the Protocol's goal of protecting the stratospheric ozone layer. Title VI established a framework for gradually phasing out the production and consumption of ozone-depleting substances by annually reducing quantities of CFCs (class I substances) and HCFCs (class II substances) as measured against a baseline year. For HCFCs, Title VI defined the baseline year as a representative calendar year selected by the EPA Administrator. See id. § 7671(2). Congress gave the Administrator substantial discretion, permitting the EPA to accelerate the phaseout if a more stringent schedule was deemed necessary or practicable. See id. § 7671e. Otherwise, the Administrator was generally authorized to promulgate rules providing for the issuance of allowances controlling the production of class I and class II substances and governing the transfer of allowances. See id. § 7671c (class I substances); id. § 7671d (class II substances); id. § 7671f (transfer of allowances).

In Section 607 of Title VI, Congress gave the EPA a single, clear directive concerning transfers of allowances: “Such rules shall insure that the [transfer] transactions under the authority of this section will result in greater total reductions in the production in each year of class I and class II substances than would occur in that year in the absence of such transactions.” Id. § 7671f(a). Subsection (b) of Section 607 (“Interpollutant transfers”) permits “a production allowance for a substance for any year to be transferred for a production allowance for another substance for the same year on an ozone depletion weighted basis.” Id. § 7671f(b)(1). Subsection (c) ( “Trades with other persons”) permits “2 or more persons to transfer production allowances (including inter-pollutant transfers which meet the requirements of subsections (a) and (b) of this section) if the transferor of such allowances will be subject, under such rules, to an enforceable and quantifiable reduction in annual production which exceeds the reduction otherwise applicable to the transferor ..., exceeds the production allowances transferred to the transferee, and would not have occurred in the absence of such transaction.” Id. § 7671f(c).

B. The 2003 Rule

On January 21, 2003, the EPA promulgated regulations to ensure compliance with the first stepdown milestone, reducing HCFC consumptions by 35% and freezing production, by January 1, 2004. 2003 Rule, 68 Fed.Reg. at 2821. The individual company baselines were calculated using the company's individual highest ozone depletion potential (ODP)-weighted consumption among the years 1989, and 1994 through 1997. Id. at 2832. The EPA believed selecting a company's year of highest activity over a range of years as its baseline created less of a disadvantage to the industry and the HCFC market as a whole than basing each company's baseline on a single year. See id. at 2831-32. The EPA allocated calendar-year allowances equal to a percentage of the baseline for specified control periods (defined as the period from January 1 to December 31). To carry out the 1993 phaseout schedule, the EPA issued calendar-year allowances of 100% of baseline for HCFC-22 and HCFC-142b for each control period from 2003 through 2009. See 40 C.F.R. § 82.16(a) (2003). The EPA noted it was allocating HCFC allowances “on a one-time basis.” 2003 Rule, 68 Fed.Reg. at 2823. Thus, “allocations would remain the same from control period to control period (one calendar year to the next) until each chemical is phased out or until the percentage of baseline allowances is reduced to ensure compliance with the Protocol cap. Only through permanent transfers of allowances would a company's baseline allocation be changed.” Id.

The 2003 Rule allowed both inter-pollutant and intercompany transfers of allowances. Id. at 2833-34; 40 C.F.R. § 82.23(a), (b) (2003). The preamble to the Rule distinguished between (1) the “permanent transfer of baseline allowances,” which it described as “a lasting shift of some quantity of a company's allowances to another company,” and (2) “the transfer of current-year allowances.” 2003 Rule, 68 Fed.Reg. at 2835. The EPA explained that with a permanent transfer of baseline allowances, “[i]n all relevant subsequent years, the transferor's quantity of baseline allowances would be permanently reduced, while the transferee's quantity of baseline allowances would be permanently increased.” Id. (emphasis added). Furthermore, “at the time of a reduction step or a phaseout of the substance, the current holder of baseline allowances that were received in a permanent transfer would be the person who would have them deducted.” Id. The EPA stated it “w[ould] allow permanent transfers of baseline allowances with those allowances disappearing at the phaseout date for the specific HCFC, regardless of what inter-pollutant transfers had taken place.” Id.¹ The regulations described procedures for making inter-pollutant and inter-company transfers. See 40 C.F.R. § 82.23(a), (b) (2003). To satisfy section 607's reduction mandate, the regulations applied an offset to every HCFC trade by deducting 0.1% from the transferor's allowance balance. See id. § 82.23(a)(i)(G) (2003). Moreover, the regulations stated: “A person receiving a...