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 intercompany 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 HCFC142b 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 
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 interpollutant 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 HCFC142b 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 calendaryear 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 interpollutant 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 interpollutant 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 interpollutant 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 interpollutant 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 intercompany 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 interpollutant 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 interpollutant transfers would shift the phasedown from a “worstfirst” 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’ interpollutant 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 interpollutant 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 interpollutant 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 interpollutant 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 interpollutant 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 interpollutant 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.