By Tom Kleckner

The Supreme Court ruled Monday that the Environmental Protection Agency acted “unreasonably” when it failed to consider costs before deciding to regulate mercury and other toxic emissions from power plants under the Clean Air Act.

The court’s 5-4 ruling did not void EPA’s authority to regulate the emissions but will require the agency to rewrite the Mercury and Air Toxics Standards (MATS) with a consideration of costs at the beginning of the process. It remanded the case to the D.C. Circuit Court of Appeals for further review.

Muted Impact

The ruling in Michigan v. Environmental Protection Agency is not expected to affect the number of coal-fired plant retirements. Industry analysts say about two-thirds of the nation’s 460 coal plants are already in compliance and investments in emission controls have already been made. (See MATS Challenge Too Late for Targeted Coal Plants.)

“EPA is disappointed that the court did not uphold the rule, but this rule was issued more than three years ago, investments have been made and most plants are already well on their way to compliance,” EPA spokeswoman Melissa Harrison said in a statement.

“Because of the stricter air regulations that have been in place in New England for years, most plants would not have been affected by this rule,” said ISO-NE spokeswoman Marcia Blomberg. “And further, the economics of low-priced natural gas have driven many of the region’s older fossil-fired units to retirement, so we expect there will be limited impact from this ruling.”

NYISO is analyzing the decision, spokesman David Flanagan said.

Coal plants also are under pressure from EPA’s cross-state pollution rule and the carbon emission rule expected later this summer. Even without MATS, EPA Administrator Gina McCarthy told HBO’s “Real Time with Bill Maher” on Friday, “we’re still going to get at the toxic pollution from these facilities.”

Overreach

Nevertheless, the ruling gave EPA’s opponents something to celebrate. “The Supreme Court’s decision today vindicates the House’s legislative actions to rein in bureaucratic overreach and institute some common sense in rulemaking,” House Majority Leader Kevin McCarthy (R-Calif.) said.

Coal stocks rallied on the news. Peabody Energy rose almost 10% on the day, while Alpha Natural Resources was up 8.6%, Cloud Peak Energy gained 6.4% and Arch Coal jumped 4.5%.

‘Appropriate and Necessary’

MATS went into effect in April, although some power plants were given an extension until April 2016. Michigan v. Environmental Protection Agency combined what began as three challenges by industry groups and 23 states.

After the D.C. Circuit upheld the rule last year, the Supreme Court agreed to consider whether EPA acted unreasonably by refusing to consider costs in determining whether it is “appropriate and necessary” to regulate hazardous air pollutants emitted by electric utilities.

“EPA strayed well beyond the bounds of reasonable interpretation in concluding that cost is not a factor relevant to the appropriateness of regulating power plants,” Justice Antonin Scalia wrote in the majority opinion, in which he was joined by Chief Justice John Roberts and Justices Clarence Thomas, Samuel Alito and Anthony Kennedy.

“It is not rational, never mind ‘appropriate,’ to impose billions of dollars in economic costs in return for a few dollars in health or environmental benefits,” Scalia said.

In a dissent, Justice Elena Kagan noted that while EPA’s power plant regulations would have been unreasonable without considering costs, the agency had taken an “exhaustive” consideration of costs.

“Over more than a decade, EPA took costs into account at multiple stages and through multiple means as it set emissions limits for power plants,” Kagan wrote. “And when making its initial ‘appropriate and necessary’ finding, EPA knew it would do exactly that — knew it would thoroughly consider the cost-effectiveness of emissions standards later on.” Justices Sonia Sotomayor, Stephen Breyer and Ruth Bader Ginsburg joined in the dissent.

Cost-Benefit

EPA has said MATS compliance will cost electric utilities $9.6 billion annually but produce total benefits of at least $37 billion to $90 billion per year, while preventing as many as 11,000 premature deaths and 130,000 asthma attacks. It will also eliminate 5,700 hospitalizations and emergency room visits and 540,000 missed workdays, the agency said.

However, only a fraction of the benefits — $500,000 to $6.2 million annually — are directly related to cuts in mercury emissions. The remainder are “co-benefits” that arise not directly from reducing toxic emissions, but from reductions in particulate matter and carbon emissions expected to result from the standards.

EPA critics have said the agency has engaged in over counting, citing the same co-benefits to justify multiple EPA regulations.

Clean Air Act Amendments

The MATS regulations were initiated when Congress amended the Clean Air Act in 1990. The amendments ordered EPA to regulate 189 hazardous air pollutants, including mercury, arsenic and cadmium, which had not been previously controlled. (See MATS: 25 Years in the Making.)

“It is disappointing that a quarter century after the 1990 Clean Air Act amendments, Americans are still waiting on the first-ever limits on mercury from coal-fired power plants, the single largest source of these toxic emissions,” Ken Kimmell, president of the Union of Concerned Scientists, said in a statement.

Implications for Future Regulations

The ruling is a “groundbreaking administrative-law case,” Justin Savage, a partner at the law firm Hogan Lovells and a former Justice Department environmental lawyer, told the National Journal. “It essentially says that when a statute is ambiguous, an agency must consider costs.”

“After this decision, an agency would not want to walk into court saying, ‘Your Honor, we did not consider costs at all when deciding to take regulatory action on an issue,’” agreed environmental law professor Jonathan Adler of Case Western Reserve University.

Sean Donahue, who represents environmental and public health groups that supported EPA, told The New York Times that the ruling will require the agency “to do more homework on costs.”

“But I’m very confident that the final rule will be up and running and finally approved without a great deal of trouble. This is a disappointment. It’s a bump in the road, but I don’t think by any means it’s the end of this program.”

FBR Capital analyst Benjamin Salisbury told StreetInsider.com that the ruling could ultimately result in tougher regulations on mercury and toxic emissions. “EPA could resurrect MATS in a stronger form, given the ‘baseline’ EPA will observe includes less of the older, high-emission coal-fired plants and current units with more emission control than previously,” he said.

— William Opalka contributed to this article