July 11, 2011

Lisa Jackson, Administrator

Environmental Protection Agency

jackson.lisa@epa.gov

Subject: Prevailing Academic View on Compliance Flexibility under § 111 of the CAA

Dear Administrator Jackson:

We submit the following description of areas of general academic agreement on the authority to use 

compliance flexibility options under Section 111 of the Clean Air Act, for your consideration in the 

development of performance standards for greenhouse gas emissions.

Executive Summary

EPA will soon propose performance standards under Section 111 of the Clean Air Act for 

greenhouse gas pollution from the two largest emitting sectors—fossil-fueled power plants and 

petroleum refineries. The form these standards will take remains unclear. Many from industry, 

environmental groups, and academia argue that to be effective and efficient, the standards should 

incorporate compliance flexibility. This broad term encompasses a range of design choices that 

provide spatial or temporal flexibility in achieving aggregate emissions outcomes.

There is widespread agreement in the academic community that § 111 authorizes the use of many 

types of flexible approaches. Given agency discretion to define uncertain statutory terms like “best

system of emission reduction,” and given the potential of compliance flexibility mechanisms to 

reduce costs while preserving total emissions reduction goals, EPA and the states should be able to 

fit a variety of flexible approaches into the statutory criteria for performance standards.

EPA and states can likely grant compliance flexibility to existing sources. EPA can outline 

specific flexible structures in its guidance to states, though it likely cannot reject state 

implementation plans solely for failure to adopt a flexible approach. 

Compliance flexibility may be possible for new sources, albeit limited in practice. The plain 

statutory text supports flexibility for new sources, though a lack of precedent and possible 

interactions with New Source Review could complicate application. 

Inter-sector trading is probably permissible. EPA has broad statutory authority to define the 

scope of categories of regulated polluters. EPA can likely define a category encompassing multiple 

types of major greenhouse gas emitters, and thereby allow trading between sources currently in 

different categories. Alternatively, even without newly defined or larger categories, there is no 

express statutory preclusion to trading across existing categories.

No consensus exists on whether offsets are permissible. But even if offsets are not compatible 

with performance standards, states have broad authority to use offsets for additional emissions 

reductions. 

Banking and price floors are likely permissible; borrowing and price ceilings are more 

uncertain. States likely have broad powers to assign compliance responsibilities among sources, 
2

including the allocation of allowances within a trading program. Whether EPA’s powers are as 

broad is unclear. 

Pre-planned changes in the breadth and stringency of standards over time are likely 

permissible. Both EPA and the states can likely identify a schedule of incremental steps over time 

to implement additional emissions reductions and lower costs.

Compliance Flexibility Tool Legal under CAA?

General compliance flexibility (existing sources) Probably

General compliance flexibility (new sources) No consensus*

EPA rejection of state plans granting more/less flexibility Probably not

Inter-sector trading Probably

Offsets No consensus

Banking Probably 

Borrowing No consensus

Price floors Probably 

Price ceilings No consensus

Declining caps/increasing stringency Probably 

State programs that exceed EPA-mandated stringency Probably 

State use of tools unavailable under CAA Probably**

Discretionary allocation/auction authority (states) Probably

Discretionary allocation/auction authority (EPA) No consensus

*Even if permissible, New Source Review may be a practical barrier.

**But sources likely cannot use these tools to comply with CAA requirements.
3

Introduction

EPA will soon propose performance 

standards under Section 111 of the Clean Air 

Act (CAA) for greenhouse gas (GHG) pollution

from the two largest emitting sectors—fossilfueled power plants and petroleum refineries. 

These standards will apply to both new 

sources and, via § 111(d) and the states, 

existing sources—they will be the first federal 

GHG regulations on these sources. 

The form these standards will take remains 

unclear. Many from industry, environmental 

groups, and academia argue that to be 

effective and efficient, the standards should 

incorporate compliance flexibility.1

This document addresses whether the CAA, 

and specifically § 111, allows EPA to use 

these tools. Generally the relevant legal 

questions have not yet been directly 

answered by the courts.

 This 

broad term encompasses a range of design 

choices that provide spatial or temporal 

flexibility in achieving aggregate emissions 

outcomes. The array of policy options 

includes tradable rate-based performance 

standards, bubbles over commonly owned 

facilities, trading between plant-specific 

lifetime emissions budgets, and nationwide 

emissions budgets with market-based 

exchange, with banking and borrowing—all 

of which feature the common characteristic of 

lowering costs without sacrificing ultimate 

emissions goals.

2 Nevertheless, there 

is widespread agreement in the academic 

community that § 111 does authorize the use 

of many types of flexible approaches. This 

document explores some areas of potential 

confusion surrounding flexibility and § 111. 

Where the prevailing academic view is 

identified, the findings presented reflect 

general agreement in the academic 

community and the unanimous position of 

the signatories. 

Overview of Statutory Structure

Section 111 of the CAA governs EPA’s powers 

to set performance standards for “source 

categories” (sectors) defined by the agency. 

First, the agency must list categories of 

stationary sources that contribute 

significantly to air pollution that endangers 

public health or welfare.3 Once a category 

has been defined, EPA must propose a federal 

standard of performance to regulate all new 

sources within that category.4 These 

standards must reflect emissions cuts 

achievable under “the best system of 

emission reduction which . . . the 

administrator determines has been 

adequately demonstrated,” taking into 

account costs and other factors.5

For pollution regulated elsewhere under the 

CAA, the § 111 process ends here. But if 

emissions from existing sources are not 

controlled via other CAA regulation (and so 

far for GHG emissions, they are not), § 111(d) 

of the CAA authorizes EPA to regulate them 

with performance standards.6 EPA sets 

guidelines for these standards, but the states 

implement them. This process is explicitly

similar to that found in § 110 of the CAA7 and 

requires states to submit a plan establishing a 

“standard of performance for any existing 

source for any air pollutant.”8 States have 

broad flexibility to implement § 111(d) 

standards,9 though EPA retains approval 

power and the ability to regulate if a state 

fails to do so.10 The only explicit limitations 

on state authority are the requirement that 

they establish “performance standards” and

the EPA regulations requiring that plans be at 

least as stringent as, and occur at least as 

quickly as, the federal guidelines, creating a 

federal emissions backstop.11
4

FINDING #1: EPA and states can likely grant compliance flexibility to 

existing sources.

Compliance flexibility (as defined above) for existing sources is almost certainly available to state 

authorities. EPA can outline specific flexible structures in its guidance to states, though it likely 

cannot reject state implementation plans solely for failure to adopt a flexible approach.

a. Fundamental Justifications for a Flexible System

Section 111 of the CAA allows for a high degree of flexibility in implementing standards of 

performance. As defined under § 111, a standard of performance is based on “the best system of 

emission reduction . . . taking into account the cost.” This language almost certainly is broad enough 

to enable both EPA and states to incorporate compliance flexibility: using their statutory 

discretion, those authorities can define many flexible approaches as the most efficient (and 

therefore the “best”) systems for reducing emissions at the sector level.12

The minority opposing view holds that flexible mechanisms cannot be justified, based on an 

assumed negative inference from statutory silence on specific flexibility mechanisms. A further 

objection claims that § 111 requires regulation of individual sources, implying no single source can 

be allowed to emit more and then pay for it.

 This discretion to define 

statutory criteria is central to EPA and states’ ability to implement any flexibility mechanisms.

13 However, particularly given the deference owed to 

agencies under Chevron v. NRDC,14 such a negative inference is unwarranted. Courts do not 

typically act on negative inferences without clear congressional intent.15 Furthermore, to the 

extent that Congress has spoken on the issue, it has removed, rather than added, barriers to flexible 

mechanisms in EPA regulations. In 1990, Congress amended § 111 to remove the word 

“technology” from its definition of performance standards, indicating that standards need not be 

technology-based.16

The legality of flexibility for existing sources under § 111 also has support from past EPA actions. 

EPA explicitly agreed with, and defended, this interpretation in its 2005 Clean Air Mercury Rule 

(CAMR).17 It is true that EPA’s interpretation does not have a long history; as recently as 1998, EPA 

believed that “trading across plant boundaries is impermissible under sections 111 and 112.”18 

However, agencies have generally been granted deference in their evolving interpretation of 

statutes.19

Moreover, states may have some augmented authority to use compliance flexibility for existing 

sources. Section 111(d) gives states extra authority to consider “other factors” when regulating 

existing sources. Additionally, the § 111(d) procedure explicitly mimics the § 110 process, which 

grants states great leeway in designing State Implementation Plan equivalents (SIPe)—and which 

specifically mentions the use of “economic incentives such as . . . marketable permits, and auctions 

of emissions rights.”20

b. EPA Guidance and Approval of SIP-like State Programs

EPA has the authority to outline flexible structures in its guidance to states on existing source 

regulation, either in the form of a specific preferred option or by listing several alternative 

options.21 EPA almost certainly also has the authority to implement flexible systems in any Federal 

Implementation Plan equivalent (FIPe), because the CAA gives EPA the identical authority as states 

in the design of a federal “backstop” program for existing sources.22 In fact, if EPA includes some of 

these flexible mechanisms in its proposed FIPe, it may reduce some of the uncertainty around the 

question of state equivalency (which is measured against a federal backstop that the FIPe helps to 

set).
5

There has been little scholarship on whether states will be able to submit a joint or coordinated 

SIPe, which would allow trading between states and might be useful in meshing CAA standards with 

existing regional trading programs (like RGGI). However, neither is there any explicit statutory 

bar. A limitation on joint SIPes might arise if EPA interprets the statute to require each individual 

state to develop equivalency with the federal standards. In such a scenario, states buying 

allowances from other states might fail to reduce their own emissions sufficiently. A negative 

inference against joint bids may also arise from the fact that other sections of the CAA do explicitly 

allow for state coordination. However, nothing in the statute requires that EPA mandate state

compliance on an individualized basis,23

States retain substantial discretion under the CAA to design their own SIPes for existing sources.

and so states can likely assert this flexibility.

24

State efforts to implement reductions through other techniques, including renewable portfolio 

standards (RPSs), demand-side management, utility planning, and other indirect emission 

reduction systems, might also qualify for SIPe treatment to the extent that they achieve equivalent 

emissions reductions and satisfy the criteria of “performance standards.” EPA has issued guidance 

that would allow states to claim credit for emissions reductions of criteria pollutants (like ozone)

achieved through adopting energy efficiency and RPS measures under their § 110 SIPs.

 

EPA probably lacks the ability to disapprove a given SIPe simply for failing to include flexibility 

mechanisms that EPA might prefer. States otherwise achieving sufficient reductions cannot be 

forced to implement any specific flexible system. Nor, conversely, could EPA disapprove a SIPe that 

includes flexibility that the model rule does not, so long as the flexibility mechanisms are allowable 

under the CAA.

25 Because 

§ 111(d) allows states to consider “other factors” and makes explicit reference to following a § 110 

SIP-like process, it is possible that states could similarly receive credit for RPSs and energy 

efficiency efforts under § 111.26

c. Potential Conflict with NAAQS

There is no legal certainty on whether EPA can be forced to adopt National Ambient Air Quality 

Standards (NAAQS) for greenhouse gases. This is a complex question outside the scope of this 

document.27 However, if EPA were forced to adopt a GHG NAAQS (or chose to do so), regulation of 

existing sources under § 111(d) would be prohibited.28

FINDING #2: Compliance flexibility may be possible for new sources, 

albeit limited in practice.

 It is worth noting that the legal path to 

forcing EPA to issue NAAQS would be a very long one: even if this potential conflict does eventually 

become a problem, a §111-based program could operate successfully for many years.

The plain statutory text supports flexibility for new sources, though a lack of precedent and 

possible interactions with New Source Review could complicate application. 

a. Fundamental Justifications for a Flexible System

Unlike states’ authority over existing sources under § 111(d), Congress did not grant EPA leeway to 

consider “other factors” or use SIP-like mechanisms to regulate new sources under § 111(b).29 

EPA’s ability to use flexible mechanisms therefore turns entirely on whether such approaches fit 

the definition of “performance standard.” As explored above, flexible mechanisms can satisfy all the 

criteria of a performance standard under the plain statutory text.30

Nevertheless, the application of flexible approaches to new sources is legally and practically more 

uncertain than for existing sources. The negative inference argument is plausibly stronger for new 

sources, given legislative history that continued to link new source standards to technology-specific 
6

controls even after the 1990 Amendments.31 The regulatory precedent is also weaker: though EPA 

did include new sources in the market created by CAMR, that rule also simultaneously bound new 

sources to baseline performance standards.32 Finally, some argue that a D.C. Circuit Court of 

Appeals decision, ASARCO v. EPA, disallowed trading under § 111(b), although EPA and others 

believe the subsequent Supreme Court case Chevron v. NRDC invalidated ASARCO. We further note 

that the statute has been amended since both those cases and the original decision concerned the 

definition of “source” rather than “performance standard”33

Ultimately, courts typically only accept negative inferences if they are confident that Congress 

intended to preclude the unmentioned policy option.

—ASARCO’s holding apparently would 

not apply to an EPA definition of compliance flexibility as “the best system of emission reduction.”

34 Additionally, agencies are generally granted 

deference in their evolving interpretation of statutes,35 and EPA will be afforded some discretion to 

interpret the statutory criteria for “performance standards” under § 111(b).36 Thus, flexible 

mechanisms are likely available for new sources,37 though they remain a risky option because they 

are untested.38

Note that any limitations on EPA’s authority to regulate new sources under § 111(b)—either due to 

negative inferences or legal precedents—will not affect its more expansive authority to regulate 

existing sources with a § 111(d) FIPe in lieu of adequate state action.

 A safer option might be for EPA to issue baseline performance standards for new 

sources (as it did in CAMR) and, in a separate and severable rulemaking, incorporate new sources 

under a single flexible regime with existing sources.

b. Potential Interactions with New Source Review

New sources are also subject to permit requirements under a different CAA program: new source 

review (NSR). Traditionally, performance standards are less stringent than NSR’s “best available 

control technology” (BACT) requirements.39

FINDING #3: Inter-sector trading is probably permissible.

 As the flexibility created under § 111 incentivizes new 

sources to adopt tighter emissions controls, emerging technologies may become “available” for 

purposes of BACT determinations and ratchet up NSR requirements even further. EPA will likely 

need to provide guidance on the interaction between §111 performance standards and NSR, 

particularly if flexibility for new sources is explored.

EPA has broad statutory authority to define the scope of categories of regulated polluters. EPA can 

likely define a category encompassing multiple types of major greenhouse gas emitters, and 

thereby allow trading between sources currently in different categories. Alternatively, even 

without newly defined or larger categories, there is no express statutory preclusion to trading 

across existing categories.

a. Defining Source Categories

EPA has broad authority to “distinguish among classes, types, and sizes within categories of new 

sources.”40 Courts have found EPA has “considerable discretion under section 111” and have 

upheld EPA’s decision to issue a single, uniform standard for sources that were previously treated 

as separate subcategories.41 Thus, EPA can likely expand any existing category to include sources 

from any other existing category or newly regulated source types (though the latter would also 

require a new endangerment finding). EPA could even plausibly create a single category for all 

sources with GHG emissions above a certain threshold. While EPA should be able to exercise this 

authority to recategorize at any time, it could be more complicated legally or practically for EPA to 

adjust categories in the future after performance standards already exist. Though EPA is only 

contemplating GHG performance standards for one or two categories initially, if the agency wants 
7

to pursue this option of combining multiple categories in the future, it may want to start soliciting 

comments now.

b. Trading Between Source Categories

There is no express statutory preclusion to trading across existing categories. In fact, a flexible 

mechanism that allows trading across categories could arguably fit the definition of “the best 

system of emission reduction.”42 Nevertheless, several academics worry that the lack of clear 

statutory authority or precedent creates some doubt, particularly on the question of whether state 

equivalency must be demonstrated independently in every regulated category.43

c. Other Coverage Issues

 The existence of 

such doubts may suggest that the recategorization method discussed above is the least risky path to 

inter-sector trading. In any case, states with emissions limits more stringent than EPA’s could allow 

inter-category trading to meet emissions goals beyond EPA’s. EPA will likely need to provide 

guidance on how states will establish equivalency.

A few other legal issues relating to flexibility and scope of coverage are worth mentioning. As with 

EPA’s § 202 endangerment finding, the agency should be able to define the targeted pollutant under 

§ 111 as the mix of all GHGs;44 therefore, trading among GHGs should not present any legal 

problems. Trading between states is also plausibly permissible; though the D.C. Circuit recently 

limited interstate trading of other pollutants in North Carolina v. EPA, that decision was based on 

language in §110 that does not apply to §111 regulation.45

However, there are some limitations on the scope of potential flexibility programs under § 111. For 

example, the categories of sources covered by § 111 only include “buildings, structures, facilities, or 

installations which emit or may emit any air pollutant.”46

FINDING #4: No consensus exists on whether offsets are permissible.

 Since upstream sources of GHGs, like 

natural gas importers, do not directly emit the pollution generated when a consumer burns the 

natural gas it processed or sold, these indirect emissions likely cannot be covered under § 111.

Consensus is lacking on whether offsets are compatible with § 111 performance standards. Even if 

not, states have broad authority to use offsets for additional emissions reductions.

a. Offsets under § 111(d)

As noted above, the prevailing view among legal scholars is that EPA, states operating under 

§ 111(d) regulations, and states operating independently can permit trading among sources 

covered by regulation. This general agreement breaks down somewhat when considering whether 

emissions reduction measures taken outside the regulated sphere can be included within trading 

programs. The most prominent such measures are offsets.

Analysts taking the position that offsets are permissible point to elements of legislative history, like 

the statute’s move away from requirements for on-site, technology-based compliance and 

congressional references to allowable reductions achieved by third parties;47 to the lack of 

statutory preclusion;48 and to the explicit availability of a limited class of offsets under NAAQS.49

Other proponents argue that it is difficult to draw principled distinctions between inter-sector 

trading (see Finding #3 above) and offsets.50

Those taking the opposite position argue that the availability of NAAQS offsets generates a negative 

inference,51 or that offsets appear incompatible with the source category-driven design of § 111.52 

Section 111 performance standards, unlike NAAQS, explicitly target emissions reductions from 

regulated source categories, rather than concentrations of a regulated pollutant.53 Offset critics 
8

argue that this may pose a modest problem for offsets created by reducing emissions at 

unregulated facilities, since they do not reduce emissions from any regulated source category. They 

further suggest that it poses more serious problems for offsets that have no effect on emissions, but 

putatively affect ambient greenhouse gas concentrations (such as forest offsets).54

b. Federal-State Interactions under § 111(d)

There appear to be few limits on states’ ability to incorporate offsets into their independent state 

and regional-level programs, such as AB32 and RGGI.55

It is not clear whether a state could implement more stringent regulation, perhaps including offsets, 

via its SIPe (relying on CAA authority)

 If states are able to use offsets (or other 

alternative compliance mechanisms) in their independent programs, but not under § 111(d), the 

relationship between the CAA and state/regional programs becomes more complex. To the extent 

that emitters use offsets or other tools to comply with state program requirements, EPA and the 

states may be unable to count those reductions for purposes of compliance with § 111(d) 

regulations. This is not necessarily fatal to efforts to achieve compatibility: the CAA does not 

preempt state programs, which would presumably be more stringent. Offsets and related tools 

could still be used to meet this additional compliance burden. 

56 or if separate supporting state legislation would be 

required. Constitutional limits on state power (for example, the requirement for congressional 

approval of inter-state compacts,57 or the inability of states to engage in binding international 

agreements58

FINDING #5: States have broad allocation authority; EPA’s powers are 

less clear. Banking and price floors are likely permissible; 

borrowing and price ceilings are more uncertain.

) may also limit certain types of offset arrangements. 

States likely have broad powers to assign compliance responsibilities among sources, including the 

allocation of allowances within a trading program. Whether EPA’s powers are as broad is unclear. 

Banking and price floors are likely permissible, though there is no consensus on borrowing or price 

ceilings.

a. General Allocation Authority

States almost certainly have the authority to allocate permits however they choose, provided 

minimum federal emissions standards are still met.59 For example, states could conduct a 

coordinated auction or distribute permits in a manner that promotes policy goals, such as 

protecting consumers by allocating based on output in order to lessen electricity price changes and 

preserve in-state generation, or rewarding individual facilities for repowering and/or biomass 

use.60 EPA can also allocate permits in many different ways. There is no consensus on whether 

EPA can auction permits,61 but if it can, any revenue would need to go directly to the treasury.62

b. Banking and Borrowing

Several existing market-based approaches to flexible compliance include banking and borrowing 

mechanisms, whereby excess reductions can be saved for future compliance periods or facilities 

with insufficient reductions can pay extra in future compliance periods. Unlimited banking would 

probably not compromise state equivalency requirements, because emissions reductions need only 

be realized at least as quickly as the federal standard.63

Borrowing against future compliance periods is more legally ambiguous, since it could violate the 

requirement that a SIPe achieve reductions at least as quickly as the EPA backstop would. Some 

scholars have pointed to § 110(a)(2)(A), which allows SIPs to include schedules and timetables for 
9

compliance, as granting states some independence on the timeline for compliance from federal 

norms (recall that § 111(d) references the § 110 SIP-approval process).64 Further, the ability of 

states to account for “other factors” under § 111(d) may imply that states can consider future 

compliance promises in allowing more immediate deviations from EPA baselines. However, there 

is no academic consensus on whether such language in fact justifies borrowing. The strongest 

language against borrowing comes in EPA’s own requirements that state plans achieve emission 

reductions “at least as quickly” as the federal baseline65

c. Cost-Containment Mechanisms

—though this requirement is not explicitly

mandated by the statutory text, and EPA could change this regulation in the context of GHGs in 

order to more clearly permit some borrowing mechanisms.

Another common feature of emissions markets is a floor and ceiling price beyond which no 

allowances can be sold. A floor price does not present any complications, because if it has any 

effect, it will be to reduce emissions. However, a ceiling price on allowances enforced with an 

unlimited ability to buy allowances at a given maximum price could (similar to offsets, above) cause 

a SIPe to fail the equivalency requirement. A ceiling price that works by borrowing future 

allowances might be permissible if borrowing itself is allowed.

The ability of states to consider cost and other factors in setting up their emissions reduction 

systems under § 111(d) may independently allow for controls on allowance prices.66 EPA may be 

able to reduce some of the uncertainty around the question of state equivalency and price ceilings if 

it uses its own statutory authority to apply reasonable cost constraints to its FIPe and emissions 

standards.67

FINDING #6: Pre-planned changes in the breadth and stringency of 

standards over time is likely permissible.

 States could then likely set a price ceiling at or above EPA’s own determination of 

reasonable costs.

Both EPA and the states can likely identify a schedule of incremental steps over time to implement 

additional emissions reductions and lower costs. 

The text and structure of § 111 likely authorize rulemakings that both set an initial emissions 

reduction target and establish a schedule for incremental steps over time to implement additional 

reductions. It is possible that § 111(b)(1)(B)’s description of a specific process for the review and 

revision of performance standards creates a negative inference against a prospective timetable of 

automatically increasing requirements. However, the eight-year review process could apply as 

easily to prospective timetables; the provision requires retrospective analysis regardless of the 

rule’s form, but it does not bind EPA’s hands on policy design choices.

The real question is whether an automatic timetable could fit the definition of a “performance 

standard.” Performance standards must reflect the degree of emissions limitations achievable

through application of the best system adequately demonstrated. However, at least as applied to 

new sources, the courts have found that § 111 “looks toward what may fairly be projected for the 

regulated future, rather than the state of the art at present.”68 Neither “adequately demonstrated” 

nor “achievable” means that the standard is limited to what can already be routinely achieved.69 

While EPA cannot base standards on pure theory or speculation, it can make reasonable 

extrapolations of technological performance.70 This understanding of the definition of 

“performance standard” could support a rule that prospectively sets a schedule of incremental 

steps.
10

EPA’s mandate to consider costs71

States should also have the ability to establish a series of incremental steps under § 111(d). As 

described above,

could also support such an interpretation of its authority. 

Implementation costs will be affected by the implementation schedule. A timetable allows the 

agency to gradually increase the emissions limitations in line with cost-sensitive predictions about 

the rate of technological development. If the agency instead were forced to set a single standard 

meant to govern for the foreseeable future, that standard would likely be initially more stringent 

and, therefore, more costly.

72 states are given two sources of additional authority under § 111(d). First, the 

section references the procedures under § 110; section 110 specifically notes the states’ ability to 

set “schedules and timetables for compliance.”73

Even if EPA or the states choose not to exercise this authority to adopt mandatory timetables with 

incremental steps, they can still include non-binding language in the rule or the preamble signaling 

future intent to increase stringency, redefine categories, or make other changes. If the agency does 

ultimately make substantive changes to its policies pursuant to such signaling statements, new 

rulemakings would be required. But in the meantime, such signals can be helpful in aligning 

expectations and investments in the regulated community, even though such signaling statements 

are not likely binding on the agency. Moreover, either the signaling of intent or enactment of a 

series of incremental steps could be relevant to the ability of the United States to make 

commitments in international negotiations. 

 Second, § 111(d) instructs states to consider other 

relevant factors, including the remaining useful life of existing sources. One way to account for the 

remaining lifetimes of plants might be to establish a timetable of gradually increasing stringency.

Conclusion

There is agreement—broad among legal academics and universal among the authors here—that 

EPA has the tools under § 111 of the CAA to implement relatively flexible and efficient GHG 

regulation. The agency could use a range of compliance flexibility options itself, or facilitate state 

implementation plans that adopt such measures at the state or regional level. 

EPA appears to have authority to include many specific flexible or market-design tools in § 111 

regulation, including tradable performance standards operating across sectors, price floors, 

banking of credits or allowances, and, in principle, nationwide cap-and-trade. Regulations likely 

can also increase in breadth or stringency over time—EPA appears to have the authority (and the 

opportunity) to achieve ambitious environmental goals while providing regulatory predictability to 

industry. These tools can make CAA policy more effective and more efficient. More broadly, EPA 

can—indeed must—consider both costs and other environmental impacts in setting GHG 

performance standards. 

Authority under § 111 is not unlimited and at times not clear, however. For instance, it is unclear 

whether EPA can grant full compliance flexibility to new sources. Moreover, even for existing 

sources it is unclear what powers EPA would have to allocate any allowances, and whether the use 

of offsets, borrowing, or price ceilings by either the states or EPA would be compatible with § 111 

standards. Courts (or Congress) may ultimately resolve these ambiguities—though litigation is 

likely even if EPA is cautious.

States are key to the CAA pathway. The statute allows and requires substantial participation by the 

states, which retain significant control over the degree of compliance flexibility allowed for in-state 

emitters regardless of EPA’s position. If their chosen system involves emissions allowances, states 

can likely allocate them as they see fit. States can also regulate more stringently than EPA if they 

wish—§ 111 regulation does not preempt existing state emissions programs like RGGI and AB32.
11

Tools unavailable to EPA likely remain available to the states in their presumably more stringent 

programs, though states that use such tools may be forced to choose between subjecting emitters to 

dual requirements or allowing their use only for the additional local compliance burden.

The above uncertainty should not, however, distract from the larger conclusion that EPA has much 

of the authority it needs. To forgo compliance flexibility would be excessively cautious; arguably, 

carefully designed compliance flexibility is required for the agency to meet its statutory 

requirement to implement the best system of emissions reductions.

Sincerely,

Dallas Burtraw, Senior Fellow and Darius Gaskin Chair

Nathan Richardson, Resident Scholar

Resources for the Future

Michael B. Gerrard, Director

Gregory E. Wannier, Deputy Director

Center for Climate Change Law, Columbia Law School

Michael A. Livermore, Executive Director

Jason A Schwartz, Legal Director*

Institute for Policy Integrity, New York University School of Law

 * Corresponding author: Jason A Schwartz

Institute for Policy Integrity

139 MacDougal Street, Wilf Hall 317

New York, NY 10012

212-998-6093

jason.schwartz@nyu.edu
12

Notes

 1 For example, see Coalition for Emission Reduction Policy, Comments on EPA’s Forthcoming Proposal to Establish New 

Source Performance Standards for GHG Emissions from Electric Generating Units and Refineries, Mar. 18, 2011 (support 

for compliance flexibility from industry groups); Franz T. Litz, Nicholas M. Bianco, Michael B. Gerrard, & Gregory E. 

Wannier, World Resources Institute & Columbia Law School Center for Climate Change Law, What’s Ahead for Power 

Plants and Industry? Using the Clean Air Act to Reduce Greenhouse Gas Emissions, Building on Existing Regional Program

(World Resources Institute Working Paper, 2011) (support from an environmental group and an academic center).

2 Notably, the D.C. Circuit Court of Appeals had the opportunity to rule on whether § 111 allows one form of compliance 

flexibility (a nationwide cap-and-trade system), during litigation challenging EPA’s 2005 Clean Air Mercury Rule. The 

court did not reach the issue and instead rejected the rule on other, unrelated grounds. See New Jersey v. EPA, 517 F.3d 

574 (D.C. Cir. 2008). Recently, in Am. Elec. Power Co. v. Connecticut, No. 10-174 (U.S. June 20, 2011), the Supreme Court 

discussed that EPA will be using § 111 to regulate GHGs from power plants, but did not explore EPA’s authority in depth.

3 Clean Air Act § 111(b)(1)(A), 42 U.S.C. § 7411 (2010) [hereinafter CAA].

4 CAA § 111(b)(1)(B).

5 CAA § 111(a)(1). States also have an important role here: under § 111(c), they are free to propose plans to implement 

and enforce the new source standards created by EPA.

6 Specifically, if existing sources are not already covered by national ambient air quality standards under § 110 or 

hazardous air pollutant standards under § 112, then § 111(d) is triggered.

7 This section governs the National Ambient Air Quality Standards (NAAQS), under which “conventional” pollutants such 

as NOx, SO2, lead, ozone, and particulates are regulated.

8 CAA § 111(d). Note that the same § 111(a) definition of “standard of performance” applies to states’ § 111(d) regulation.

9 States are guided in part by § 111(d)(1)’s reference to § 110’s State Implementation Plan process, notably including 

§ 110(a)(2)(A), which allows states to employ “other control means, measures or techniques (including economic 

incentives such as fees, marketable permits, and auctions of emissions rights).” States are also permitted by 

§ 111(d)(2)(B) to take into account the remaining useful life of an existing source.

10 See CAA §111(d)(2).

11 Emissions Standards and Compliance Schedules, 40 C.F.R. § 60.24(c) (2010).

12 See Standards of Performance for New and Existing Stationary Sources: Electric Utility Steam Generating Units (Clean 

Air Mercury Rule), 70 Fed. Reg. 28,606 (July 18, 2005) (EPA’s interpretation of the definitions of “performance standard” 

under §§ 111 and 302); Inimai M. Chettiar & Jason A Schwartz, The Road Ahead: EPA’s Options and Obligations for 

Regulating Greenhouse Gases 86-88 (Institute for Policy Integrity Report No. 3, 2009). The statutory mandate to “tak[e] 

into account the cost” could also be important here. While courts have determined that this language does not require 

EPA to base its determinations on a formal cost-benefit analysis, they have stated “because Congress did not assign the 

specific weight the Administrator should accord each of these factors, the Administrator is free to exercise his discretion 

in this area.” New York v. Reilly, 969 F.2d 1147, 1150 (D.C. Cir. 1992).

13 For a description—and refutation—of the alleged negative inference from statutory silence and the structure of 

§ 111(h), as well as of the argument that §§ 111 and 302 require emissions reductions from individual sources, see 

Chettiar & Schwartz, supra note 12, at 87-89.

14 Chevron U.S.A. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984). 

15 See Texas Rural Legal Aid Inc. v. Legal Serv. Corp., 940 F.2d 685, 694 (D.C. Cir. 1991) (explaining that the expressio unius 

est exclusion alterius canon “has little force in the administrative setting. Under Chevron, we normally withhold deference 

from an agency's interpretation of a statute only when Congress has ‘directly spoken to the precise question at issue,’ and 

the expressio canon is simply too thin a reed to support the conclusion that Congress has clearly resolved this issue”); Fin. 

Planning Assoc. v. SEC, 482 F.3d 481 (D.C. Cir. 2007) (noting “this court has repeatedly held that expression unius is ‘an 

especially feeble helper in an administrative setting, where Congress is presumed to have left to reasonable agency 

discretion questions that it has not directly resolved’”).

16 See Jonas Monast et al., Avoiding the Glorious Mess: A Sensible Approach to Climate Change and Clean Air Act (Nicholas 

Institute for Environmental Policy Solutions Working Paper, Duke University, 2010) (citing EPA’s reference to these 

amendments).

17 See CAMR, 70 Fed. Reg. 28,606. Note that although CAMR was overturned in the D.C. Circuit Court of Appeals, the 

grounds for this decision were based on EPA’s incorrect delisting of mercury under § 112, and did not address EPA’s § 

111 interpretations. New Jersey, 517 F.3d 574. EPA has also permitted states to use trading programs for solid waste 

combustion performance standards under § 129, a statutory section that shares some common elements and history with 

§ 111 (though § 111(d) arguably gives states even more flexibility). See EPA, Section 129 Rules for Solid Waste 

Combustion, http://www.epa.gov/ttn/atw/129/gil2.pdf.
13

 18 See Memorandum from Jonathan Cannon, EPA General Counsel, to Carol Browner, EPA Administrator, Apr. 10, 1998, 

available at http://www.law.umaryland.edu/environment/casebook/documents/EPACO2memo1.pdf.

19 See Nat’l Cable & Telecomm. Assoc. v. Brand X Internet Services, 545 U.S. 967 (2005). 

20 CAA § 110(a)(2)(A).

21 Such language would not have legal force, and therefore would likely be unreviewable; any limits to EPA’s authority to 

allow innovative systems will instead likely come in its SIPe approval process.

22 CAA § 111(d)(2) (“The Administrator shall have the same authority”).

23 We do not address the issue here of whether such joint SIPes would be open to challenge on constitutional grounds, 

such as possible violation of the Compacts Clause.

24 See Virginia v. EPA, 108 F.3d 1397 (D.C. Cir. 1997); Florida Power & Light Co. v. Costle, 650 F.2d 579 (5th Cir. 1981); 

Train v. NRDC, 421 U.S. 60 (1975) (“The Act gives the Agency no authority to question the wisdom of a State’s choices of 

emission limitations if they are part of a plan which satisfies the standards of § 110(a)(2)”).

25 EPA, Roadmap for Incorporating Energy Efficiency/Renewable Energy Policies and Programs into State 

Implementation Plans/Tribal Implementation Plans (2011); EPA, Guidance on SIP Credits for Emissions Reductions from 

Electric-Sector Energy Efficiency and Renewable Energy Measures (2004). This guidance has been applied successfully in 

Texas, Shreveport, Louisiana, and the D.C. Region, all of which altered their SIPs to receive credit for reductions achieved 

through energy efficiency and renewable energy efforts. Id.

26 Pew Ctr. on Global Climate Change, GHG New Source Performance Standards for the Power Sector: Options for EPA and 

the States 10 (2011).

27 For some different perspectives, see Nathan Richardson, Greenhouse Gas Emissions under the Clean Air Act: Does 

Chevron Set the EPA Free?, 29 STAN. ENV. L. J. 283 (2010) (arguing that courts could interpret the CAA to require EPA to set 

a NAAQS for GHGs based on its endangerment finding); Nathan Richardson, Dallas Burtraw, and Art Fraas, Resources for 

the Future, Greenhouse Gas Regulation Under the Clean Air Act: Structure, Effects, and Implications of a Knowable Pathway, 

41 ENV. L.NEWS & ANALYSIS 10098 (2011) (noting EPA will not want to waste resources creating complex regulations under 

§ 111 if they may eventually fail when NAAQS are triggered); Jonas Monast et al., supra note 16 (suggesting that § 111 

regulations, if designed right, might be portable into the NAAQS system); and Chettiar & Schwartz, supra note 12

(discussing whether NAAQS are discretionary and the workability of market-based programs under NAAQS). EPA has 

been petitioned to adopt NAAQS for greenhouse gases, and the issue may be resolved independently in litigation before 

the D.C. Circuit Court of Appeals.

28 See CAA § 111(d)(1)(A) (limiting § 111(d) standards to those pollutants not regulated under §§ 110 or 112 of the Act).

29 Note that § 111(c) only allows states to step into EPA’s shoes and help regulate new sources; it does not transport their 

§ 111(d)-type authority into the arena of new sources controls.

30 See supra note 12 and accompanying text.

31 See Chettiar & Schwartz, supra note 12, at 89.

32 In other words, new sources could exceed minimum emissions reductions and generate tradable credits, but could not 

enter the program as net buyers of credits. See CAMR, 70 Fed. Reg. 28,606.

33 See Brief for Respondent, New Jersey v. EPA, 517 F.3d 574 (D.C. Cir. 2007) (No. 05-1097).

34 See supra note 15.

35 See Nat’l Cable & Telecomm. Assoc. v. Brand X Internet Services, 545 U.S. 967 (2005). 

36 See supra note 14 and accompanying text.

37 Monast et al., supra note 16; Chettiar & Schwartz, supra note 12.

38 Richardson, Burtraw, & Fraas, supra note 27; Pew Ctr. on Global Climate Change, supra note 26.

39 See EPA, Air Quality Management, http://www.epa.gov/apti/course422/apc4d.html (explaining NSPS sets a national 

baseline, which NSR allows state authorities to apply more stringent controls on a case-by-case basis).

40 See CAA § 111(b)(2).

41 Lignite Energy Council v. EPA, 198 F.3d 930, 933 (D.C. Cir. 1999).

42 Chettiar & Schwartz, supra note 12.

43 Litz, Bianco, Gerrard, & Wannier, supra note 1; Richardson, Burtraw, & Fraas, supra note 27; Pew Ctr., supra note 26.

44 Cf. Endangerment and Cause or Contribute Findings for Greenhouse Gases under Section 202 of the Clean Air Act, 74 

Fed. Reg. 66,496 (Dec. 15, 2009).

45 See North Carolina v. EPA, 531 F.3d 896 (D.C. Cir. 2008); compare CAA § 110(a)(2)(D) with CAA § 111.

46 CAA § 111(a)(3).

47 Chettiar & Schwartz, supra note 12.

48 Id.
14

 49 Coalition for Emission Reduction Policy, supra note 1.

50 Correspondence with Kyle Danish, Van Ness Feldman P.C. (July 7, 2011).

51 Richardson, Burtraw, & Fraas, supra note 27.

52 Id.; Litz, Bianco, Gerrard, & Wannier, supra note 1.

53 See Molly Macauley & Nathan Richardson, Seeing the Forest and the Trees: Technological and Regulatory Impediments for 

Global Carbon Monitoring, BERKELEY J. L.& TECH. (forthcoming 2011).

54 Id.

55 Some scholars have identified potential constitutional issues if states attempt to include international carbon offsets. 

See Douglas A. Kysar & Bernadette A. Meyler, Like a Nation State, 55 UCLA L. REV. 1621 (2008); Erwin Chermerinsky et al., 

California, Climate Change, and Constitution, 37 ELR 10,653 (2007). These could arise under the Compacts Clause or other 

doctrines restricting states’ interference with federal foreign affairs powers. While the outcome of any such 

constitutional challenges is of course uncertain, many scholars appear to believe that they would be relatively unlikely to 

succeed. See, e.g., Litz, Bianco, Gerrard, & Wannier, supra note 1.

56 See Litz, Bianco, Gerrard, & Wannier, supra note 1.

57 U.S. CONST. Art. I § 10.

58 But see Curtis A. Bradley, The Treaty Power and American Federalism, 97 MICH. L. REV. 390, 461 (quoting Virginia v. 

Tennessee, 148 U.S. 503, 519 (1893)).

59 Pew Ctr. on Global Climate Change, supra note 26.

60 Note that while there may some legal limits on the ability of EPA or states to exempt biomass from coverage or apply 

different performance standards to them, such limitations do not affect states’ ability to distribute their permits as they 

see fit.

61 Compare Richardson, Burtraw, & Fraas, supra note 27 (rejecting EPA authority to auction permits) with Chetiar & 

Schwartz, supra note 12 (supporting EPA authority to auction permits).

62 See Miscellaneous Receipts Act, 31 U.S.C. § 3302 (2010).

63 Cf. Publication of Guidance Documents, Emission Guidelines, and Final Compliance Times, 40 C.F.R. § 60.22 (2010).

64 For example, California’s RECLAIM program for NOx emissions, implemented under its §110 SIP, allowed limited 

borrowing by establishing overlapping compliance periods. See Dallas Burtraw & Sarah Jo Szambelan, U.S. Emissions 

Trading Markets for SO2 and NOx, in PERMIT TRADING IN DIFFERENT APPLICATIONS 29 (Bernd Hansjürgens ed. 2010).

65 40 C.F.R. § 60.22.

66 CAA § 111(d).

67 Under the definition of performance standard, EPA must “tak[e] into account the cost.” CAA § 111(a).

68 Portland Cement Ass’n v. Ruckelshaus, 486 F.2d 375, 391 (D.C. Cir. 1973).

69 Essex Chemical Corp. v. Ruckelshaus, 486 F.2d 427 (D.C. Cir. 1973).

70 Weyerhaeuser Co. v. Costle, 590 F.2d 1011, 1054 n.70 (D.C. Cir. 1978); Essex, 486 F.2d 427.

71 See supra note 67.

72 See supra note 20 and accompanying text.

73 CAA § 110(a)(2)(A).