United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued May 10, 2010 Decided August 27, 2010
No. 09-1318
ARKEMA INC.,
PETITIONER
v.
ENVIRONMENTAL PROTECTION AGENCY,
RESPONDENT
Consolidated with 09-1335
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.
2
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
3
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 inter-
company transfers of baseline allowances and to disallow
permanent baseline changes resulting from inter-pollutant
trades. Protection of Stratospheric Ozone: Adjustments to the
4
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).
5
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
6
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 inter-
company 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
7
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 permanent transfer
of baseline production allowances or baseline consumption
allowances (the transferee) for a specific class II controlled
substance will be the person who has their baseline
allowances adjusted in accordance with phaseout schedules in
this section.” Id. § 82.23(d) (2003).
C. The 2010 Rule
In anticipation of the 2010 stepdown, on December 23,
2008, the EPA issued a proposed rule adjusting the allowance
system for control of HCFCs for the control periods 2010–
2014. Proposed Rule, 73 Fed. Reg. 78,680. As the EPA
explained in the Proposed Rule, as of December 23, 2008, it
had not yet allocated any calendar-year allowances for HCFC-
142b or HCFC-22 to cover the 2010 control period and
beyond. See id. at 78,686. Without a grant of calendar-year
allowances for those HCFCs, the EPA’s then-current
regulations prohibited their production and import after
December 31, 2009. Id. Under the 2007 Montreal Protocol
Adjustment, as of January 1, 2010, the EPA needed to reduce
by 65% its aggregate HCFC baseline for production and
1
The Final Rule indicates 26.1% of baseline for HCFC-22 and .47% of
baseline for HCFC-142b are available in 2014. 40 C.F.R. § 82.16(a)
(2009). Thus, neither HCFC will be completely phased out during the
2010–2014 stepdown period. It is unclear when the complete phaseout for
these two HCFCs will occur, but all HCFCs must be phased out by 2030.
8
consumption. The Proposed Rule stated the EPA was
proposing to apportion company-specific baselines in
amounts equivalent to the existing baselines published in the
2003 Rule, see 40 C.F.R. §§ 82.17 (2003) (apportionment of
baseline production allowances), 82.19 (2003) (apportionment
of baseline consumption allowances), “adjusted as necessary
to reflect permanent transfers of baseline allowances.”
Proposed Rule, 73 Fed. Reg. at 78,686.
The EPA presented five options for allocating HCFC-22
and HCFC-142b allowances. The first was allocating a
percentage of the baseline production and consumption
allowances “with or without considering any permanent
baseline transfers and/or inter-pollutant transfers that resulted
in a different amount of production or consumption for a
specific HCFC.” Id. at 78,687. The Proposed Rule also
contained a table showing the EPA’s proposed apportionment
of production and consumption baselines for HCFC-141b,
HCFC-22, and HCFC-142b. Id. at 78,694 tbl. As the EPA
acknowledged, the table “reflect[ed] adjustments resulting
from approved inter-pollutant and/or inter-company transfers
of baseline allowances (i.e., permanent rather than calendar-
year allowances).” Id. at 78,693. EPA noted only transfers
that had occurred prior to June 16, 2008 (second quarter of
2008 control period) would be reflected in the final
apportionment of baselines in the final rule. See id. The
proposed amendments to the regulations also updated the
baseline production and consumption allowance tables to
reflect permanent inter-pollutant transfers of baseline
allowances. Id. at 78,703–04 (proposed amendments to 40
C.F.R. §§ 82.17, 82.19).
On December 15, 2009, the EPA issued the Final Rule.
Final Rule, 74 Fed. Reg. 66,412. The EPA stated it was
updating the baselines for HCFC-22 and HCFC-142b to
9
reflect permanent inter-company baseline transfers but would
not recognize permanent intra-company, inter-pollutant
transfers of baseline allowances. Id. at 66,421. Noting only
two companies had supported recognizing such transfers, the
EPA stated that if it had recognized the transfers, those two
companies “would receive 38% and 912% more HCFC-22
allowances while the remaining companies would each
receive 16% fewer HCFC-22 allowances.” Id. The EPA
concluded recognizing the transfers might “disrupt the entire
market in 2010 and . . . encourage greater disruption in future
control periods.” Id. “[A]djusting the baselines to reflect
intra-company, inter-pollutant transfers,” the EPA explained,
“could create incentives for future manipulation of the
allocation system in anticipation of future control periods.”
Id. The EPA further noted, “[C]onsidering the language of
section 607 and the legislative history, EPA believes that
section 607(b) is best read as permitting only year-by-year
inter-pollutant transfers.” Id. Accordingly, the EPA stated it
“interprets section 607 as requiring that all inter-pollutant
transfers, whether occurring between companies or within a
single company, be conducted on a yearly—and thus
temporary—basis.” Id. at 66,422. The EPA represented it
had made statements consistent with its new position and
noted the percentages of baseline allowances for HCFC-22
and HCFC-142b in the table in 40 C.F.R. § 82.16 (“Phaseout
Schedule of Class II Controlled Substances”) had changed
from the Proposed Rule due to the Agency’s decision not to
recognize intra-company, inter-pollutant baseline transfers.
Id. at 66,422, 66,428–29. By not accounting for those
transfers, the total allocation in the Final Rule decreased. Id.
at 66,428.
10
II
This court may review any final action of the EPA
promulgating national air quality or emissions standards. 42
U.S.C. § 7607(b)(1). We will set aside a final rule
promulgated under the CAA if it is “arbitrary, capricious, an
abuse of discretion, or otherwise not in accordance with law,”
42 U.S.C. § 7607(d)(9)(A), or “in excess of statutory
jurisdiction, authority, or limitations, or short of statutory
right,” id. § 7607(d)(9)(C), and must affirm the Agency’s
final action if the record shows all relevant factors were
considered and the agency articulated a “rational connection
between the facts found and the choice made.” Catawba
County, N.C. v. EPA, 571 F.3d 20, 41 (D.C. Cir. 2009).
At its core, this is a dispute over whether the Agency has
changed its interpretation of Title VI of the CAA. Petitioners
argue the EPA’s practice under the 2003 Rule differs
markedly from the policy outlined in the Final Rule and thus
Petitioners accuse the EPA of departing from its prior policy
without adequate explanation. The EPA responds by insisting
it “never declared that inter-pollutant transfers . . . would be
recognized in subsequent step-down regulations,” EPA Br. at
25, and even if it did change its policy, it “adequately
explained the reasons for choosing not to recognize past inter-
pollutant transfers in establishing baselines for the new
regulatory period,” id. at 30.
Of course, the Agency is entitled to change its mind as
long as its new direction falls within the ambit of its
authorizing statute and the policy shift is adequately
explained. The requirement that an agency provide a
reasoned explanation for its actions ordinarily means the
agency must “display awareness that it is changing position.”
FCC v. Fox Television Stations, Inc., 129 S. Ct. 1800, 1811
11
(2009). But while an agency must show good reasons for its
new policy, there is no requirement that the policy change be
justified by reasons more substantial than those the agency
relied on to adopt the policy in the first place. See id. at 1810.
Thus, it would seem a straightforward proposition for the
EPA to state the Final Rule departed from the policy it had
adopted in the 2003 Rule and explain its reasons for doing so.
Instead the Agency attempts an awkward straddle. On
the one hand, the EPA insists the Final Rule did not change an
established policy. On the other, the Agency argues that even
if the Final Rule did alter a long-standing policy, the
Agency’s reasoned explanation cures any defect. The Agency
asserts “Congress left it to the broad discretion of EPA to
determine how transfers of baselines are to be treated.” EPA
Br. at 48. This is true, and that fact entitles the Agency to
Chevron deference, but it does not allow it to retroactively
alter the consequences of its actions.
As we have lamented, the retroactivity rules are easy to
state, less easy to apply. Generally, an agency may not
promulgate retroactive rules without express congressional
authorization. See Bowen v. Georgetown Univ. Hosp., 488
U.S. 204, 208 (1988). The EPA does not argue section 607
authorizes it to promulgate retroactive rules, and no such
congressional intent is apparent from the statutory language.
See also Sierra Club v. Whitman, 285 F.3d 63, 68 (D.C. Cir.
2002) (“The relevant provisions of the Clean Air Act contain
no language suggesting that Congress intended to give EPA
the unusual ability to implement rules retroactively.”).
A rule operates retroactively if it takes away or impairs
vested rights. See Nat’l Mining Ass’n v. United States Dep’t
of Interior, 177 F.3d 1, 8 (D.C. Cir. 1999) (National Mining I)
(quoting Ass’n of Accredited Cosmetology Sch. v. Alexander,
12
979 F.2d 859, 864 (D.C. Cir. 1992)). The critical question is
whether the interpretation established by the new rule
“changes the legal landscape.” Id. (quoting Health Ins. Ass’n
of Am., Inc. v. Shalala, 23 F.3d 412, 423–24 (D.C. Cir.
1994)). If a new rule is “substantively inconsistent” with a
prior agency practice and attaches new legal consequences to
events completed before its enactment, it operates
retroactively. Nat’l Mining Ass’n v. Dep’t of Labor, 292 F.3d
849, 860 (D.C. Cir. 2002) (National Mining II); see also
Mobile Relay Assocs. v. FCC, 457 F.3d 1, 11 (D.C. Cir. 2006)
(explaining “[r]etroactive rules ‘alter[] the past legal
consequences of past actions’” (quoting Bowen, 488 U.S. at
219 (Scalia, J., concurring))). Even where a rule merely
narrows “a range of possible interpretations” to a single
“precise interpretation,” it may change the legal landscape in
a way that is impermissibly retroactive. National Mining I,
177 F.3d at 141. Did that happen here? We think it did.
As a threshold matter, the EPA’s own transfer allowance
form, Form 2014.03, apparently allowed applicants to request
inter-pollutant baseline transfers. Item 2.2 on Form 2014.03
asks the applicant to identify the “Type of Allowances
Transferred” and specifically states the applicant must “check
only one.” The two options are “Current Year Allowances”
and “Baseline Year Allowances.” Arkema and Solvay both
used Form 2014.03 to seek the EPA’s approval of their inter-
pollutant baseline transfers from HCFC-142b to HCFC-22.
Arkema submitted the form on April 18, 2008 and Solvay
submitted it on February 15 and March 4, 2008. Both
Arkema and Solvay checked “Baseline Year Allowances”
under Item 2.2 and indicated they were seeking to transfer
HCFC-142b baseline allowances to HCFC-22. In a series of
“Non-Objection Notices,” the EPA approved each of these
transfers. The Non-Objection Notices indicated the
“Allowance Type” for each of the allowance transfers from
13
HCFC-142b to HCFC-22 was “Baseline.” These transactions
thus support the Petitioners’ assertion that the EPA approved
changes to their baseline allowances as a result of inter-
pollutant trades on the same basis as changes resulting from
inter-company trades.
The EPA attempts to minimize the significance of its
approval of Petitioners’ inter-pollutant baseline trades by
suggesting an agency’s policies are “evidenced by its express
statements, not by divining the agency’s purported thought
processes from check boxes on forms,” and “[n]othing on the
form or accompanying letters describes these transfers as
applying in perpetuity.” EPA Br. at 26. However, these are
not the only instances when the Agency’s practices supported
Petitioners’ position. In anticipation of the Proposed Rule,
the EPA sent Arkema letters on August 14, 2008 and January
9, 2009 confirming the Agency had recognized the transfers
of inter-pollutant baseline allowances.
The EPA tries to dismiss the subsequent letters by
suggesting they “do nothing more than show that Petitioners’
prior inter-pollutant transfers were reflected in the proposed
baselines for the 2010-2014 period.” EPA Br. at 27. Thus,
the EPA argues, it “originally proposed to reflect inter-
pollutant trades in the baselines for 2010-2014, but it
ultimately chose not to do so.” Id. This is not an accurate
reading of the letters, which purported to represent the EPA’s
assessment of the current status of Arkema’s allowances. For
instance, the EPA’s August 14, 2008 letter stated, “The table
below compares: (1) the baselines for your company that are
currently published in 40 CFR Part 82, Subpart A, as
apportioned in [the 2003 Rule]; and (2) the current baselines
for your company, updated to reflect permanent trades of
baseline allowances pursuant to 40 CFR 82.23.” Letter from
Ross Brennan to Dawn Mattia at 3 (Aug. 14, 2008) (emphasis
14
added). The table reflected Arkema’s inter-pollutant baseline
transfers from HCFC-142b to HCFC-22 as the “Current
baseline (as of July 1, 2008).” Id. at 3 tbl. Nothing in the
letter indicated this was the EPA’s “proposed” baseline for
the 2010–2014 period. To the contrary, the letter’s use of
“current” and “permanent” strongly suggests the EPA
considered the inter-pollutant transfers equivalent to inter-
company transfers.
Moreover, in the Proposed Rule, the EPA noted the
“leading option” it was considering for implementing the
2010 stepdown was an approach that could account for inter-
pollutant transfers: “Allocating a percentage of the baseline
allowances (§§ 82.17 and 82.19) for each HCFC respectively
with or without considering any permanent baseline transfers
and/or inter-pollutant transfers that resulted in a different
amount of production or consumption for a specific HCFC.”
Proposed Rule, 73 Fed. Reg. at 78,687. And the Proposed
Rule tabulated the baseline allowances for the Petitioners to
include the inter-pollutant transfers. See id. at 78,693 tbl.
The record thus reflects that the EPA’s practice under the
2003 Rule was to allow Petitioners’ baseline transfers of
inter-pollutant allowances. Not only did the Agency approve
inter-pollutant transfers where the companies indicated they
intended the transfers to change their baselines, but the EPA
also provided tables reflecting such baseline transfers in its
calculations and included an option in the Proposed Rule that
would have continued such transfers. The Agency’s approval
and acknowledgment of Petitioners’ actions distinguishes this
case from situations where a company’s unilateral business
expectations are thwarted by a change in the regulatory
framework.
15
Despite this clear practice, the EPA refused in the Final
Rule to recognize Petitioners’ inter-pollutant transfers in their
baseline allowances. The EPA discussed at some length the
concerns that led to the change in policy—the potential for
manipulation; the way recognition of permanent inter-
pollutant transfers would shift the phasedown from a “worst-
first” approach to an “ODP-weighted” approach; and the
possibility of market disruption or distortion. Final Rule, 74
Fed. Reg. at 66,420–22. These reasons may shield the
Agency’s prospective application of the Final Rule from an
arbitrary and capricious challenge. However, the Final Rule
is a successive iteration in a long-running regulatory regime,
and the effect of the EPA’s refusal to include Petitioners’
inter-pollutant transfers in their baseline allowances is to undo
what the EPA had, in practice, approved under the 2003 Rule.
See National Mining II, 292 F.3d at 860 (“If a new regulation
is substantively inconsistent with a . . . prior agency practice,
. . . it is retroactive . . . .”). Indeed, the EPA’s fundamental
justification for refusing to recognize the Petitioners’ inter-
pollutant transfers was that section 607 of the CAA precluded
it from doing so: “After considering the language of section
607 and the legislative history, EPA believes that section
607(b) is best read as permitting only year-by-year inter-
pollutant transfers . . . . Hence, EPA interprets section 607 as
requiring that all inter-pollutant transfers, whether occurring
between companies or within a single company, be conducted
on a yearly—and thus temporary—basis.” Final Rule, 74
Fed. Reg. at 66,421–22.
Because the EPA’s interpretation of section 607 in the
Final Rule contradicts its past practice, narrowing the range of
options and altering the legal landscape, the Agency’s refusal
to account for the Petitioners’ baseline transfers of inter-
pollutant allowances in the Final Rule is impermissibly
retroactive. See National Mining I, 177 F.3d at 8; see also
16
Mobile Relay Assocs., 457 F.3d at 11. The Agency contends
it may interpret what constraints, if any, Congress placed on
the establishment of baselines for each stepdown period.
That’s true. The Final Rule may more accurately track the
statutory mandate and better reflect the Agency’s
commitment to a “worst-first” HCFC reduction strategy, and
after reaching this realization, the Agency is certainly entitled
to change its mind and institute a program that forbids
baseline inter-pollutant transfers in the future. But once the
Agency has approved permanent changes to the baseline as a
result of inter-pollutant transfers on the same basis as changes
resulting from inter-company transfers, it cannot, without
Congress’ express authorization, use its new statutory
interpretation to undo these completed transactions. The EPA
argues businesses could not reasonably expect baseline
changes to last beyond the particular stepdown period. But
obviously they could expect exactly that outcome. In the
Final Rule, the EPA carried the inter-company baseline
changes forward, and carrying inter-pollutant baseline
changes forward was one of the options the Agency itself
proposed.
III
Relying primarily on the EPA’s present interpretation of
the 2003 Rule and its preamble, the dissent insists the EPA
did not alter its position. But as explained above, even
affording the EPA the deference it is due, the Petitioners have
clearly demonstrated from the record that the EPA’s
interpretation of section 607 did change between the 2003
Rule and the Final Rule. Moreover, if the EPA’s position was
always as settled as the dissent suggests it was, the Agency’s
“leading option” in the Proposed Rule, which proposed
recognizing inter-pollutant baseline transfers, would make
little sense. The dissent also points to the cover letters to
17
Solvay’s 2008 transfer requests as demonstrating its position
is “demonstrably false.” However, in determining what the
EPA’s practice was, we find the statements and actions of the
Agency itself to be the most telling evidence. In any event,
Solvay’s cover letters are hardly persuasive support for the
EPA’s current interpretation of section 607—that an inter-
pollutant transfer may only be made on an annual basis. As
the dissent acknowledges, Solvay’s cover letters referred to
the transaction as a “multi-year transfer for 2008 and 2009.”
The record reflects the EPA’s practice under the 2003 Rule
was to approve inter-pollutant transfers as permanent changes
to baseline allowances, a practice the EPA impermissibly
attempted to undo in the Final Rule by changing its
interpretation of section 607.
Following the EPA’s approach in this case, the dissent
next argues that even if the Agency did change its position,
the change did not create a retroactivity problem. The
dissent’s criticism sails wide of the mark. The Final Rule is
impermissibly retroactive not because it unsettled Petitioners’
expectations or imposed new liabilities on past conduct but
quite simply because it attempted to undo the Petitioners’
inter-pollutant baseline transfers based on the EPA’s new
interpretation of section 607. Although the 2010 stepdown
gave the EPA occasion to adjust its distribution of allowances,
it did not give the EPA an opportunity to revisit the baseline
transactions it previously approved.
IV
The Final Rule appears to have been properly
promulgated under the Administrative Procedure Act, and we
see no reason to vacate the Rule on that ground.
Prospectively, the EPA can limit inter-pollutant trades to a
single year and can prohibit inter-pollutant baseline transfers.
18
But the Final Rule cannot have retroactive effect. We
therefore grant the petitions for review in part, vacate the
Final Rule insofar as it operates retroactively, and remand the
case for prompt resolution consistent with this opinion.
So ordered.
RANDOLPH, Senior Circuit Judge, dissenting: I do not agree
that EPA changed its position. And I do not agree that if EPA
had changed its position, its new rule would violate the law
against retroactive regulations.
EPA never stated, not once, that a company’s inter-pollutant
transfers would permanently and forever alter the company’s
baselines for these pollutants. EPA’s 2003 regulations said
nothing of the sort. In fact, the regulations indicated otherwise.
The only “permanent” baseline transfers EPA recognized were
transfers from one company to another. EPA’s preamble to its
2003 regulations defined a “permanent transfer” as “a lasting
shift of some quantity of a company’s allowances to another
company.” 68 Fed. Reg. at 2835 (emphasis added). This
passage should have alerted all affected parties that there was no
similar option for transfers within one company, a position
reflected in the regulations themselves. Under 40 C.F.R.
§ 82.23(d) (2003), a “person receiving a permanent transfer of
baseline production allowances . . . will be the person who has
their baseline allowances adjusted in accordance with phaseout
schedules in this section.” As the government argues, this
provision contemplates inter-company transfers for the simple
reason that “there would be no reason to identify which party
receives the baseline adjustment if it was a one-party
transaction.” EPA Br. at 55.
The majority never directly confronts the preamble and
§ 82.23(d). Instead, we are offered two indirect responses. The
first is that if EPA had never authorized “permanent”
inter-pollutant transfers, EPA’s proposal to incorporate those
previous changes into the 2010 baselines “would make little
sense.” Maj. Op. at 16. In fact, the opposite is true. If EPA had
authorized and approved transfers that permanently and forever
altered the petitioners’ baselines, the proposal to allocate
allowances “with or without” considering those transfers would
be nonsensical.
2
The majority’s second response relies on EPA’s standard
transfer form. But the completed form, together with an agency
official’s approval of the a transfer, signified only that EPA
recognized a transaction known as a “baseline inter-pollutant
transfer.” Nowhere did the EPA form address the effective
duration of the transaction. The only correspondence to use the
word “permanent” in connection with these trades specifically
noted that it “should not be interpreted to signal a particular
course of action for development of HCFC allowances for 2010-
2014.”
Petitioners nevertheless insist that EPA led them to believe
that their inter-pollutant transfers would permanently adjust their
baselines. As to petitioner Solvay, this claim is demonstrably
false. Each of Solvay’s 2008 transfer requests reads: “[T]his
transfer is for Baseline Year Allowances and therefore is being
done on a permanent basis (i.e. multi-year transfer for 2008 and
2009).” In other words, Solvay believed that a baseline inter-
pollutant transfer was “permanent” only in the sense of lasting
beyond the current year and applying to the remainder of the
stepdown period (2008 and 2009 at the time of the request).
Clearly, whatever statements EPA made did not convey to
Solvay that the transfers were “permanent” in the sense
petitioners now urge. Thus the only evidence of how the
regulated parties actually interpreted the disputed terminology
shows Solvay interpreting “baseline inter-pollutant transfer” to
mean what EPA now says it meant.
Instead of relying on Solvay’s actual transfer requests, the
majority locates in EPA’s transfer form an unwritten implication
that if baseline inter-company transfers applied beyond the end
of the regulatory period, so did baseline inter-pollutant transfers.
No reasonable company would have viewed the form’s
arrangement of check-boxes as implying any such thing. Still
less could a company reasonably base its investment decisions
3
on such flimsy evidence. EPA’s failure to interpret its form in
the way the majority interprets it hardly amounts to arbitrary
action. The majority owes EPA deference for its interpretation
of its form, but it gives the agency none. See Global Crossing
Telecomms., Inc. v. FCC, 259 F.3d 740, 746 (D.C. Cir. 2001);
Wyoming Outdoor Council v. U.S. Forest Serv., 165 F.3d 43, 53
(D.C. Cir. 1999).
The interpretive choice reflected in the 2003 regulations and
the one EPA expressly adopted in the latest regulations was
utterly predictable. If regulated parties were permitted to make
permanent shifts in allowances between pollutants, the
transactions would give rise to potential manipulation. Arkema
attempted to convert permanently its HCFC-142b baseline
allowances into HCFC-22 baseline allowances just before its
HCFC-142b account was reduced (or “stepped down”) by 99.6
percent. If Arkema had succeeded, not only would it have
increased its total allowances but, going forward, it would have
been able to convert its new HCFC-22 allowances back into
HCFC-142b allowances on an annual basis. This maneuver
would have allowed Arkema to continue producing HCFC-142b
while avoiding the 99.6 percent stepdown. EPA, recognizing
that it had never promised to make these types of transactions
available, expressly made the transactions unavailable.
For these reasons, I do not believe the 2010 regulations
altered the policy embodied in the 2003 regulations. As a result,
there is no retroactivity problem. Cf. Health Ins. Ass’n of Am.,
Inc. v. Shalala, 23 F.3d 412, 424 (D.C. Cir. 1994).
But even if EPA changed its position, the 2010 regulations
barring future production and consumption of
hydrochlorofluorocarbons based on previous inter-pollutant
transfers is not retroactive. A rule is not retroactive solely
because it “upsets expectations based in prior law.” Landgraf v.
4
USI Film Prods., 511 U.S. 244, 269 (1994). Rather, a
retroactive rule is one that “takes away or impairs vested rights
acquired under existing laws, or creates a new obligation,
imposes a new duty, or attaches a new disability in respect to
transactions or considerations already past . . ..” Id. (quoting
Soc’y for the Propagation of the Gospel v. Wheeler, 22 F. Cas.
756, 767 (C.C.N.H. 1814)); accord Ass’n of Accredited
Cosmetology Sch. v. Alexander, 979 F.2d 859, 864 (D.C. Cir.
1992).
The majority relies primarily on cases in which new
regulations imposed liability on conduct that did not give rise to
liability at the time it occurred. See, e.g., Nat’l Mining Ass’n v.
U.S. Dept. of the Interior, 177 F.3d 1, 8 (D.C. Cir. 1999); Health
Ins. Ass’n, 23 F.3d at 425. These cases all recognize the
“unfairness of imposing new burdens on persons after the fact.”
Landgraf, 511 U.S. at 270. But when no new liability is created,
it is not enough that a party relied on existing regulations in the
hope that the law would remain unchanged. See, e.g., Mobile
Relay Assocs. v. FCC, 457 F.3d 1, 11 (D.C. Cir. 2006); DirecTV,
Inc. v. FCC, 110 F.3d 816, 826 (D.C. Cir. 1996); Ass’n of
Accredited Cosmetology Sch., 979 F.2d at 864. This is why a
new regulation that merely “affects a regulated entity’s
investment made in reliance on the regulatory status quo” will
be upheld as long as it is reasonable. Mobile Relay Assocs., 457
F.3d at 11.
EPA’s 2010 regulations impose no new liability or duty on
petitioners. They do not invalidate the effectiveness of the inter-
pollutant transfers for past years or impose liability on the
companies for exercising the allowances gained through them.
For the 2010 regulations to be considered retroactive, they must
have taken away some vested right petitioners possessed. But
these companies had no vested rights. The 2003 regulations
established allowances only for the years 2003 to 2009. 40
5
C.F.R. § 82.16 (2003). The preamble to the regulations made
clear that EPA would award allowances by notice-and-comment
rulemaking for years after 2009 and that it was merely “likely”
that EPA would do so by allotting a percentage of the baselines
established by the 2003 regulation. 68 Fed. Reg. at 2823. Even
if the inter-pollutant transfers had been recognized as carrying
over to years after 2009, that baseline would not vest these
companies with the right to produce or consume any particular
quantity of hydrochlorofluorocarbons—EPA would still have to
grant allowances as a percentage of that baseline.
The 2010 regulations may have frustrated the petitioners’
expectations that they would be able to produce and consume
certain quantities of hydrochlorofluorocarbons. But like the
regulation upheld in Mobile Relay Associates, the effect of the
regulation is purely prospective. “To conclude otherwise would
hamstring not only [EPA] in its [hydrochlorofluorocarbon]
management, but also any agency whose decision affects the
financial expectations of regulated entities.” Mobile Relay
Assocs., 457 F.3d at 11.
The majority recognizes that EPA adequately explained its
decision in the 2010 regulations not to recognize permanent
inter-pollutant transfers. Maj. Op. at 15. Because those
regulations do not impair vested rights, create new obligations,
impose new duties, or attach new disabilities based on past
transactions, the regulations are not impermissibly retroactive
and should be upheld.