Washington’s Clean Air Rule: State Supreme Court Invalidates Key Components of Climate Change Regulation

In a much-anticipated 5-4 decision on January 16, 2020, the Washington Supreme Court decided the fate of the state’s Clean Air Rule (CAR). The Clean Air Rule, which created a cap-and-trade system for regulating greenhouse gas emissions (GHGs), was promulgated by the Department of Ecology (Ecology) in 2016 and was quickly challenged by a coalition of utilities and industry associations. The challengers argued successfully at the trial court that the CAR exceeded Ecology’s statutory authority by seeking to regulate “indirect emitters” that contribute to emissions by importing and distributing products like natural gas and fuel. The Washington Supreme Court agreed. Despite declaring that dramatic steps are needed to address climate change and that reducing GHG emissions was laudable, the Court determined that the ends did not justify the means used by Ecology. However, rather than vacating the entire rule, as the trial judge had done, the Court left in place the CAR as applied to “actual emitters” and remanded the case back to the trial court.

As the trial court is parsing the decision, Ecology will have to consider how, if at all, to implement the hollowed-out CAR, as “indirect emitters” represent 70 to 80 percent of the GHG emissions originally covered by the rule. The Court’s ruling also is likely to spur legislative action to provide for additional GHG reduction strategies. Finally, the ruling raises questions about the viability and scope of other regulatory efforts at the regional and local levels to control GHG emissions in Washington.

Background on the Clean Air Rule

In 2008, the state enacted Chapter 70.235 RCW, which established GHG reduction goals and encouraged Ecology to use “existing statutory authority” to reduce GHG emissions in the state. Subsequently, the state legislature failed to pass at least two major climate change bills, leading Governor Jay Inslee to ask Ecology to develop a GHG emissions program by rule. 

As promulgated,[1] the CAR sought to cap and reduce GHG emissions from “stationary sources,” “petroleum product importers and producers,” and “natural gas distributors” with annual emissions of more than 70,000 metric tons carbon dioxide equivalent (CO₂e). The CAR provides several options for compliance – by reducing emissions by about 1.7 percent each year relative to baseline levels or by obtaining “emission reduction units” generated in Washington or “allowances” from other jurisdictions with GHG programs. The CAR includes special mechanisms to establish baseline emissions and reduction requirements for energy-intensive, trade-exposed industries.

In response to the CAR, a business and industry coalition filed challenges in state court and in federal court. The federal court litigation has been stayed pending the resolution of the state court process.[2] 

Dissecting the Court’s Decision

Emissions Standards Do Not Apply to “Nonemitters”

The Washington Supreme Court’s decision was issued nearly a year after oral arguments. The opinion focuses on whether Ecology may set “emissions standards” for businesses that “do not directly emit greenhouse gases, but whose products do” and whether the CAR can be severed so that the “portions that apply to actual emitters … remain in effect.” 

Under the Washington Clean Air Act, Ecology is authorized to “[a]dopt by rule air quality standards and emissions standards.” RCW 70.94.331(2). These “requirements may be based upon a system of classification by types of emissions or types of sources of emissions ….” Id. The CAR sets emissions standards, which are “a requirement … that limits the quantity, rate, or concentration of emissions of air contaminants on a continuous basis.” RCW 70.94.030(12).

However, on the threshold question of the scope of Ecology’s authority, the Court found that “basing an emission standard on a type of emission does not mean Ecology can regulate any entity regardless of whether that entity is a source of emissions.” Based on the “text and the structure of the definition section … and that of the Act as a whole,” the Court concluded that an emission standard can only apply to “those entities that release air contaminants.” The Court also noted that “emission standard” and “emission limitation” were defined in the same way and that the statute used the emission limitation “exclusively in reference to direct sources of emissions.”[3] Because the terms are “synonymous,” emissions standard “cannot reasonably be interpreted more broadly than emission limitation.”

The majority’s opinion appears to have been particularly sensitive to the expansion of regulatory power, stating that Ecology could not use the “purpose statement” in the statute to “selectively” “regulate every entity whose activities may eventually contribute to quantifiable emissions.” Although the Court agreed that “dramatic steps are needed to curb the worst effects of climate change,” the Court was resolute that Ecology could not “justify a need to use emission standards to solve every air pollution problem.” 

Finally, for reasons that are likely to generate some debate, the Court briefly discussed the differences between emissions standards and air quality standards under the state Clean Air Act, suggesting that “both should be brought to bear when Ecology promulgates rules to combat the effects of greenhouse gases.” The Court observed that the CAR “creeps beyond the scope of an emission standard and into the realm of an air quality standard” by attempting to “curb the overall effect of greenhouse gases.” Although the Court indicated that it “need not decide today” whether the CAR might have been “properly promulgated as an air quality standard,” the discussion raises the possibility that this issue may become a battleground in the future.

“Emitters” Must Comply with the Rule

While the “nonemitters” – i.e., the natural gas distributors and petroleum importers and producers – obtained relief, the Court decided to maintain the portions of the CAR that applied to “direct emitters.” In this respect, the ruling is significant for both environmental and general administrative law in Washington, as the Court had “not before addressed severability in the context of an administrative rule.” 

The Court held that “the test for the severability of regulations should be governed by the concepts of intent and workability that inform our test for the severability of statutes.”[4] Applying the test against the administrative record, the Court concluded that invalidating only the CAR as applied to “nonemitters” would not “bear on the authorized regulation of any particular emitter.” In addition, the Court rejected the challengers’ argument that Ecology would have chosen not to regulate only direct emitters because the “nonemitters” accounted for “the majority of expected emissions reductions.” 

In reaching this conclusion, the Court allowed the record to be supplemented with a cost-benefit analysis completed by an Ecology economist justifying regulation of only direct emitters after the trial court had vacated the CAR. The Court also found that “requiring annual emission reductions from the state’s 48 largest stationary sources” of GHGs “alone marks significant progress in Washington’s efforts to … combat climate change.”

Although the Court’s decision clarifies the limits of Ecology’s authority to set “emissions standards” while leaving components of the CAR intact, the decision will not be the last word on the CAR or climate change regulation in Washington, and the ramifications of the decision will implicate more than the CAR alone. 

What Is Left to Litigate

At this stage, the legal challenges to the CAR have not been dismissed. Procedurally, the Court has remanded the case to the trial court for further proceedings consistent with its opinion. Ecology recently indicated that the trial court would now determine “how to separate the rule.” In addition, after invalidating the rule as exceeding Ecology’s statutory authority, the trial court chose not to rule on other issues that had been advanced by the challengers.[5] It remains to be seen whether the challengers will seek determinations on those issues. On another front, the federal court litigation, which is premised on federal constitutional claims, remains pending in the U.S. District Court for the Eastern District of Washington, No. 2:16-cv-00335-TOR (filed September 27, 2016). However, the federal court case was brought only by utilities, which stand to gain the most by the Washington Supreme Court decision.

Broader Implications for Climate Change Regulation in Washington

Even if litigation over the CAR comes to an end in the short term, Ecology and elected officials are faced with the question of how to respond to the Court’s ruling. 

Governor Jay Inslee released a statement urging legislative action. Washington’s short legislative session kicked off on January 13. Currently, there are several climate change-related bills being considered. These include:

• HB 2427 (Tackling climate change as a goal of the growth management act)
• HB 2311 (Amending state greenhouse gas emission limits for consistency with the most recent assessment of climate change science)
• HB 2472 (Incorporating comprehensive measurements of greenhouse gas emissions from certain fossil fuels into state environmental laws)
• SB 5811 (Reducing emissions by making changes to the clean car standards and clean car program)
• SB 5412 (Reducing the greenhouse gas emissions associated with transportation fuels)
• SB 5981 (Implementing a greenhouse gas emissions cap and trade program)
• SB 6272 (Amending state greenhouse gas emission limits for consistency with the most recent assessment of climate change science)

Ecology also will have to consider how to proceed with implementing the CAR, if at all.[6] The effectiveness of the CAR depends on the scale of the emission reductions and on market efficiencies to manage compliance costs. The decision ensures that most of the desired emissions reductions will not be obtainable and may lead to a less efficient market for the businesses that continue to have compliance obligations. In addition, Ecology likely will examine whether the Court’s decision preserves the option of a broader regulatory program in any form, such as through the state Clean Air Act’s air quality standards, for example. We think it is unlikely, however, that the agency will take any affirmative steps while the current short legislative session is ongoing.

As a final observation, other regulatory actions to address GHG emissions in Washington will have to be evaluated in light of the Court’s decision. For example, the Puget Sound Clean Air Agency has made national news with a proposed regional low carbon fuel standard to address GHG emission in the transportation sector. The proposed standard is out for public comment until February 10, 2020. If implemented, will the low carbon fuel standard be vulnerable to challenges that it, too, seeks to regulate “nonemitters”? And, the evaluation of GHG emissions under the State Environmental Policy Act has long-posed challenges for regulators and project proponents alike.[7] How will the existence of a state-wide GHG program for stationary sources affect, if at all, significance determinations and/or mitigation conditions for projects with GHG emissions under applicable environmental assessment requirements?

Beveridge & Diamond will continue to monitor and report on the remaining CAR litigation and the implications of the Court’s decision on climate change regulation and policy in Washington State.

Beveridge & Diamond’s Air and Climate Change practice group helps private and municipal clients navigate all aspects of permitting and compliance under the Clean Air Act. For more information, please contact the authors.