On December 23, 2008, the U.S. Court of Appeals finally answered the request for reconsideration of its decision to vacate the Clean Air Interstate Rule known as “CAIR.” As reported previously, CAIR is a cap-and-trade program designed by EPA to ensure that the emissions from power plants in one state do not interfere with efforts to attain the national air quality standards in another state. In the Court’s July decision, it found “more than several fatal flaws in the rule” and vacated it in its entirety, rendering the rule of no force or effect. In December, however, the Court reversed its decision to vacate the rule in order to “temporarily preserve the environmental values covered by CAIR” until EPA has time to revise the program.

As such, beginning January 1st of this year, electric generating units must ensure that they hold enough allowances to cover their annual and ozone-season emissions of nitrogen oxides (NOx) – sources holding too few allowances must either curtail emissions or purchase additional allowances from others sources that have more than they need. The sulfur dioxide (SO2) portion of the program is scheduled to begin next year on January 1, 2010, and will dovetail with the existing Acid Rain program that utilizes a similar cap-and-trade approach for reducing emissions of SO2.

The implementation of the program, however, does not render the Court’s July 2008 decision meaningless. EPA must still rewrite the program to address CAIR’s “fundamental flaws,” including the decision to forego a state-by-state analysis in favor of a regional approach. The Court will also expect EPA to complete the necessary revisions relatively quickly – although it did not set a firm deadline for EPA to re-promulgate the rule, the Court expressly noted that it was not staying the effectiveness of its decision indefinitely and even reminded challengers that they could ask the Court to take up the case again if EPA failed to modify CAIR as required.

It will be up to the new Administration to decide how best to reformulate the program and whether to respond to the critics of CAIR that claim the current requirements are not stringent enough. In particular, the challengers of the program will likely seek to persuade EPA to adopt even lower emission caps for both the current Phase I requirements as well as for Phase II, which is scheduled to begin in 2015.