ORAL ARGUMENT NOT YET SCHEDULED

No. 09-1318

United States Court of Appeals for the D.C. Circuit

ARKEMA INC.,

Petitioner,

v.

UNITED STATES ENVIRONMENTAL PROTECTION AGENCY,

Respondent.

JOINT BRIEF OF PETITIONERS ARKEMA INC.,

SOLVAY FLUORIDES, LLC, AND SOLVAY SOLEXIS, INC.

On Petition for Review from the United States

Environmental Protection Agency

Consolidated with No. 09-1335

David M. Williamson

Gia V. Cribbs

ANDREWS KURTH LLP

1350 I Street, N.W., Suite 1100

Washington, DC 20005

(202) 662-2700

Of Counsel:

Carlos R. Escobar

SOLVAY NORTH AMERICA, LLC

3333 Richmond Avenue

Houston, TX 77098

Counsel for Petitioners Solvay Fluorides, LLC and Solvay Solexis, Inc.

Dan Himmelfarb

John S. Hahn

Roger W. Patrick

Brian D. Netter

MAYER BROWN LLP

1999 K Street, N.W.

Washington, DC 20006

(202) 263-3000

Of Counsel:

William J. Hamel

ARKEMA INC.

2000 Market Street

Philadelphia, PA 19103

Counsel for Petitioner Arkema Inc.

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CERTIFICATE OF PARTIES, RULINGS UNDER REVIEW,

AND RELATED CASES PURSUANT TO CIRCUIT RULE 28(a)(1)

1. Parties. The parties to this proceeding are, in No. 09-1318,

petitioner Arkema Inc. (“Arkema”) and respondent United States Environmental Protection Agency (“EPA” or the “Agency”) and, in No. 09-

1335, petitioners Solvay Fluorides, LLC, and Solvay Solexis, Inc. (collectively, “Solvay”), and respondent EPA. Pursuant to Federal Rule of Appellate Procedure 26.1 and Circuit Rule 26.1, petitioner Arkema certifies that it is a wholly owned subsidiary of Arkema Delaware, Inc.

There are no publicly held companies that own 10% or more of the stock

of Arkema; however, Arkema is indirectly owned by Arkema, S.A., a

French public company. Petitioner Solvay Fluorides, LLC certifies that

it is a wholly owned subsidiary of Solvay Chemicals, Inc., and petitioner

Solvay Solexis, Inc. certifies that it is a wholly owned subsidiary of Ausimont Industries, Inc. No publicly held corporation owns 10% or more

of the membership interests of Solvay Fluorides, LLC or 10% or more of

the stock of Solvay Solexis, Inc.; however, Solvay Fluorides, LLC and

Solvay Solexis, Inc. are indirectly owned by Solvay, S.A., a Belgian public company.

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2. Rulings Under Review. The petition for review challenges

EPA’s final rule entitled “Protection of Stratospheric Ozone: Adjustments to the Allowance System for Controlling HCFC Production, Import, and Export,” which appears in the Federal Register at 74 Fed.

Reg. 66,412 (Dec. 15, 2009) (“Final Rule”).

3. Related Cases. Petitioners are unaware of any additional

cases that are related to the cases that have been consolidated.

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TABLE OF CONTENTS

Page

CERTIFICATE OF PARTIES, RULINGS UNDER REVIEW,

AND RELATED CASES PURSUANT TO CIRCUIT RULE

28(a)(1)..............................................................................................i

TABLE OF AUTHORITIES....................................................................vi

GLOSSARY OF ABBREVIATIONS ......................................................xii

JURISDICTIONAL STATEMENT.......................................................... 1

STATEMENT OF ISSUES....................................................................... 1

INTRODUCTION..................................................................................... 1

STATEMENT OF FACTS ........................................................................ 4

A. The Montreal Protocol............................................................ 4

B. The Clean Air Act................................................................... 5

C. The 2003 Rule ........................................................................ 7

D. Petitioners’ Inter-Pollutant Baseline Trades ...................... 13

E. Proceedings Before EPA ...................................................... 16

F. Effects Of The Final Rule .................................................... 21

STATUTES AND REGULATIONS ....................................................... 22

SUMMARY OF ARGUMENT ................................................................ 22

STANDING ............................................................................................ 27

ARGUMENT .......................................................................................... 27

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I. THE FINAL RULE MUST BE VACATED BECAUSE EPA

CHANGED ITS PRIOR PRACTICE WITHOUT

PROVIDING A REASONED ANALYSIS OR ADEQUATE

NOTICE......................................................................................... 28

A. The Agency Must Provide A Reasoned Analysis Of Its

Change In Position............................................................... 29

B. The Final Rule Changed EPA’s Position On InterPollutant Baseline Trades Without Addressing EPA’s

Past Practice......................................................................... 31

C. The Final Rule Abandoned EPA’s Reliance On InterPollutant Baseline Trades To Facilitate A WellFunctioning Market Without Addressing Its Past

Practice................................................................................. 44

II. THE FINAL RULE MUST BE VACATED BECAUSE EPA

MISTAKENLY CONCLUDED THAT ITS POSITION IS

COMPELLED BY THE CLEAN AIR ACT................................... 51

A. EPA Has Misinterpreted The Legislative History Of

CAA Section 607................................................................... 53

B. EPA Has Misinterpreted The Text Of CAA Section 607..... 56

III. THE FINAL RULE MUST BE VACATED BECAUSE IT IS

IMPERMISSIBLY RETROACTIVE. ............................................ 60

A. Legislative Rules Cannot Have A Retroactive Effect.......... 60

B. The Final Rule Has A Retroactive Effect. ........................... 61

CONCLUSION ....................................................................................... 65

CERTIFICATE OF COMPLIANCE....................................................... 66

CERTIFICATE OF SERVICE................................................................ 67

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STANDING ADDENDUM ................................................................. SA 1

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TABLE OF AUTHORITIES*

CASES Page

Action for Children’s Television v. FCC,

821 F.2d 741 (D.C. Cir. 1987).........................................................31

Alarm Indus. Commc’ns Comm. v. FCC,

131 F.3d 1066 (D.C. Cir. 1997).......................................................52

Ariz. Pub. Serv. Co. v. EPA,

211 F.3d 1280 (D.C. Cir. 2000).......................................................42

Ass’n of Accredited Cosmetology Schools v. Alexander,

979 F.2d 859 (D.C. Cir. 1992).........................................................61

Bowen v. Georgetown Univ. Hosp.,

488 U.S. 204 (1988) ........................................................................61

Bush-Quayle ’92 Primary Comm., Inc. v. FEC,

104 F.3d 448 (D.C. Cir. 1997).........................................................31

Chevron U.S.A. Inc. v. NRDC,

467 U.S. 837 (1984) ........................................................................52

CSX Transp., Inc. v. Surface Transp. Board,

584 F.3d 1076 (D.C. Cir. 2009).......................................................43

Eastern Enters. v. Apfel,

524 U.S. 498 (1998) ........................................................................60

Envtl. Integrity Project v. EPA,

425 F.3d 992 (D.C. Cir. 2005)................................................... 42, 43

FCC v. Fox Television Stations, Inc.,

129 S. Ct. 1800 (2009) .............................................................. 30, 38

Fertilizer Inst. v. EPA,

935 F.2d 1303 (D.C. Cir. 1991).......................................................43

*Greater Boston Television Corp. v. FCC,

444 F.2d 841 (D.C. Cir. 1970)................................................... 29, 31

* Authorities upon which we chiefly rely are marked with asterisks.

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Int’l Union, United Mine Workers of Am. v. Mine Safety &

Health Admin., 407 F.3d 1250 (D.C. Cir. 2005) ............................41

Kooritzky v. Reich,

17 F.3d 1509 (D.C. Cir. 1994).........................................................42

*Landgraf v. USI Film Products, Inc.,

511 U.S. 244 (1994) .................................................................. 60, 62

Lujan v. Defenders of Wildlife,

504 U.S. 555 (1992) ........................................................................27

Martin v. Hadix,

527 U.S. 343 (1999) ........................................................................62

*Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co.,

463 U.S. 29 (1983) .................................................................... 31, 52

Nat’l Mining Ass’n v. Dep’t of Labor,

292 F.3d 849 (D.C. Cir. 2002).........................................................62

Neild v. District of Columbia,

110 F.2d 246 (D.C. Cir. 1940).........................................................61

NRDC v. EPA,

464 F.3d 1 (D.C. Cir. 2006) ..............................................................4

Office of Commc’n of United Church of Christ v. FCC,

707 F.2d 1413 (D.C. Cir. 1983).......................................................30

PDK Labs. Inc. v. DEA,

362 F.3d 786 (D.C. Cir. 2004)................................................... 52, 59

*Peter Pan Bus Lines, Inc. v. Fed. Motor Carrier Safety Admin., 471 F.3d 1350 (D.C. Cir. 2006) ....................................... 52, 58

Plaut v. Spendthrift Farm, Inc.,

514 U.S. 211 (1995) ........................................................................64

SEC v. Chenery Corp.,

332 U.S. 194 (1947) .................................................................. 31, 52

Shell Oil Co. v. EPA,

950 F.2d 741 (D.C. Cir. 1991).........................................................42

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Sierra Club v. EPA,

292 F.3d 895 (D.C. Cir. 2002).........................................................27

Sierra Club v. Whitman,

285 F.3d 63 (D.C. Cir. 2002) ..........................................................61

Soc’y for Propagating the Gospel v. Wheeler,

22 F. Cas. 756 (C.C.D.N.H. 1814) ..................................................62

Transitional Hosps. Corp. v. Shalala,

222 F.3d 1019 (D.C. Cir. 2000).......................................................59

STATUTES AND REGULATIONS

Clean Air Act Amendments of 1990, Pub. L. No. 101-549,

104 Stat. 2399 (codified at 42 U.S.C. §§ 7671-7671q) .....................4

42 U.S.C. § 7607(b)(1)................................................................................1

42 U.S.C. § 7607(d)(3)..............................................................................41

42 U.S.C. § 7607(d)(9)..............................................................................61

42 U.S.C. § 7607(d)(9)(A).........................................................................27

42 U.S.C. § 7671(2).......................................................................... 6, 9, 51

42 U.S.C. § 7671(2)(A).............................................................................63

42 U.S.C. § 7671(2)(B).............................................................................63

42 U.S.C. § 7671(2)(C)(ii) ........................................................................63

42 U.S.C. § 7671d ......................................................................................1

42 U.S.C. § 7671d(b)(1)..............................................................................5

42 U.S.C. § 7671d(c) ..................................................................................5

42 U.S.C. § 7671e ......................................................................................1

42 U.S.C. § 7671e(a)(3)..............................................................................6

*42 U.S.C. § 7671f ......................................................... 1, 6, 53, 56, 57, 58

42 U.S.C. § 7671f(b)............................................................... 51, 57, 58, 59

42 U.S.C. § 7671f(b)(1) ..............................................................................6

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42 U.S.C. § 7671f(b)(3) ............................................................................59

42 U.S.C. § 7671f(b),..................................................................................6

42 U.S.C. § 7671f(c) ......................................................................... 6, 7, 58

42 U.S.C. § 7671f(d)...................................................................................7

40 C.F.R. § 82.3 ................................................................................... 9, 11

40 C.F.R. § 82.16(a) ...................................................................................8

40 C.F.R. § 82.16(b) ...................................................................................8

40 C.F.R. § 82.16(c) .................................................................................13

40 C.F.R. § 82.17 .....................................................................................17

40 C.F.R. § 82.19 .....................................................................................17

*40 C.F.R. § 82.23............................................................ 18, 32, 33, 36, 39

40 C.F.R. § 82.23(a) ..................................................................... 11, 32, 33

40 C.F.R. § 82.23(a)(i)(G).........................................................................12

40 C.F.R. § 82.23(b) ........................................................................... 11, 32

40 C.F.R. § 82.23(b)(3)(v).........................................................................12

40 C.F.R. § 82.23(c) .................................................................................11

40 C.F.R. § 82.23(d) ........................................................................... 11, 32

Advanced Notice of Proposed Rulemaking, Protection of

Stratospheric Ozone: Allowance System for Controlling

HCFC Production, Import and Export, 64 Fed. Reg.

16,373 (Apr. 5, 1999) ......................................................................47

Final Rule, Protection of Stratospheric Ozone,

53 Fed. Reg. 30,566 (Aug. 12, 1988)...............................................46

Final Rule, Protection of Stratospheric Ozone,

56 Fed. Reg. 49,548 (Sept. 30, 1991)..............................................46

Final Rule, Protection of Stratospheric Ozone,

58 Fed. Reg. 65,018 (Dec. 10, 1993) ........................................... 6, 13

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*Final Rule, Protection of Stratospheric Ozone: Adjustments

to the Allowance System for Controlling HCFC

Production, Import, and Export, 74 Fed. Reg. 66,412

(Dec. 15, 2009) .............................5, 20, 21, 38, 45, 50, 52, 53, 57, 59

*Final Rule, Protection of Stratospheric Ozone: Allowance

System for Controlling HCFC Production, Import and

Export, 68 Fed. Reg. 2820 (Jan. 21, 2003).............. 2, 7, 8, 9, 10, 12,

...............................................................13, 33, 35, 38, 39, 40, 47, 62

*Proposed Rule, Protection of Stratospheric Ozone:

Adjustments to the Allowance System for Controlling

HCFC Production, Import, and Export, 73 Fed. Reg.

78,680 (Dec. 23, 2008) .......................2, 16, 17, 18, 36, 41, 42, 43, 48

Proposed Rule, Protection of Stratospheric Ozone: Allowance

System for Controlling HCFC Production, Import and

Export, 66 Fed. Reg. 38,064 (July 21, 2001).......................... 8, 9, 63

Reporting and Recordkeeping Requirements of the HCFC

Allowance System, 70 Fed. Reg. 75,458 (Dec. 20, 2005) ......... 12, 34

Reporting and Recordkeeping Requirements of the HCFC

Allowance System, 71 Fed. Reg. 30,675 (May 30, 2006) ......... 12, 34

TREATIES

Montreal Protocol on Substances that Deplete the Ozone

Layer, Sept. 16, 1987, S. TREATY DOC. NO. 100-10,

1522 U.N.T.S. 29 .....................2, 4, 5, 7, 8, 16, 20, 44, 46, 54, 57, 63

Copenhagen Amendment (1992)......................................................5

London Amendment (1990)..............................................................5

OTHER AUTHORITIES

1 STAFF OF S. COMM. ON ENV’T & PUB. WORKS, 103D CONG., A

LEGISLATIVE HISTORY OF THE CLEAN AIR ACT

AMENDMENTS OF 1990 (Comm. Print 1993) ............................. 55, 56

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EPA, Guidance Document for the Stratospheric Ozone

Protection Program After January 1, 2005, available at

http://www.docstoc.com/docs/7832523/GuidanceDocument-for-the-Stratospheric-Ozone-ProtectionProgram.................................................................................... 13, 34

EPA, Guidance for the Stratospheric Ozone Protection

Program (July 1992).......................................................................12

S. 1630, 101st Cong. (as passed by House May 23, 1990),

reprinted in 2 STAFF OF S. COMM. ON ENV’T & PUB.

WORKS, 103D CONG., A LEGISLATIVE HISTORY OF THE

CLEAN AIR ACT AMENDMENTS OF 1990 (Comm. Print

1993) ...............................................................................................54

S. 1630, 101st Cong. (as passed by Senate Apr. 3, 1990),

reprinted in 3 STAFF OF S. COMM. ON ENV’T & PUB.

WORKS, 103D CONG., A LEGISLATIVE HISTORY OF THE

CLEAN AIR ACT AMENDMENTS OF 1990 (Comm. Print

1993) ...............................................................................................54

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GLOSSARY OF ABBREVIATIONS

CAA .....................................................................................Clean Air Act

CFC ............................................................................ chlorofluorocarbon

EPA ............................................U.S. Environmental Protection Agency

HCFC.................................................................. hydrochlorofluorocarbon

HCFC-22................................................................chlorodifluoromethane

HCFC-141b.....................................................1,1-dichloro-1-fluoroethane

HCFC-142b.....................................................1-chloro-1,1-difluoroethane

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JURISDICTIONAL STATEMENT

This is a petition for review of a final regulation promulgated by

EPA. EPA was authorized to conduct the rulemaking pursuant to sections 605 and 606 of the Clean Air Act, 42 U.S.C. §§ 7671d, 7671e. Because EPA’s rule has nationwide applicability, this Court has jurisdiction under 42 U.S.C. § 7607(b)(1).

STATEMENT OF ISSUES

1. Whether the Final Rule is arbitrary and capricious because

it reverses EPA’s prior policy of recognizing inter-pollutant trades of

baseline hydrochlorofluorocarbon production and consumption allowances without providing a reasoned analysis therefor.

2. Whether the Final Rule is contrary to law because EPA

wrongly based its action on the conclusion that Section 607 of the Clean

Air Act prohibits baseline inter-pollutant trades.

3. Whether the Final Rule is impermissibly retroactive because

it invalidates previously approved baseline inter-pollutant trades.

INTRODUCTION

In 2003, EPA established a cap-and-trade allowance system, pursuant to the Clean Air Act (“CAA” or the “Act”), to help fulfill the obligations of the United States under the Montreal Protocol on Substances

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that Deplete the Ozone Layer, Sept. 16, 1987, S. TREATY DOC. NO. 100-

10, 1522 U.N.T.S. 29 (“Montreal Protocol” or the “Protocol”). See Final

Rule, Protection of Stratospheric Ozone: Allowance System for Controlling HCFC Production, Import and Export, 68 Fed. Reg. 2820 (Jan. 21,

2003) (“2003 Rule”). That system capped hydrochlorofluorocarbon

(“HCFC”) production and consumption by making a one-time assignment of “baseline” allowances for certain HCFCs and authorizing allowance-holders to expend a fixed percentage of that baseline each year.

Consistent with the CAA, EPA allowed “trades of annual and permanent allowances between HCFCs and between companies.” JA 146

(emphasis added). In so doing, EPA emphasized that its system permitted trades with “maximum flexibility” to facilitate changes in the HCFC

marketplace. 2003 Rule, 68 Fed. Reg. at 2833.

Because the Montreal Protocol required a further step-down in

overall HCFC production and consumption effective January 1, 2010,

EPA initiated rulemaking proceedings in late 2008. See Proposed Rule,

Protection of Stratospheric Ozone: Adjustments to the Allowance System for Controlling HCFC Production, Import, and Export, 73 Fed. Reg.

78,680 (Dec. 23, 2008) (“Proposed Rule”). EPA proposed to continue the

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existing cap-and-trade system, meeting the step-down obligations by

reducing the caps pro rata. In the Final Rule, however, the Agency repudiated a key component of the existing cap-and-trade system. EPA

announced that the CAA prevented it from honoring Arkema’s and Solvay’s trades of permanent allowances between HCFCs that already had

taken place, notwithstanding the Agency’s previous written approvals of

those transfers and even though Arkema and Solvay had planned their

future businesses with the legitimate expectation that EPA’s approvals

were meaningful. Rather than try to justify this abrupt change of

course, EPA denied that it had changed its policy at all, even though the

Agency itself had explained to stakeholders that such trades were

available, had approved such trades, had provided for them in its regulations, and had proposed in the notice of proposed rulemaking to continue using baselines that reflected these trades. The result of this decision is to take allowances away from Arkema and Solvay and gift

those allowances (and the corresponding market share) to their competitors.

The Agency’s action violates fundamental principles of administrative law and must be vacated. The Final Rule is arbitrary and capriCase: 09-1318 Document: 1230210 Filed: 02/16/2010 Page: 16
4

cious because it represents a severe change of policy without even an

acknowledgment that a change was taking place, let alone sufficient notice or a suitable justification. In the process, EPA wrongly interpreted

the CAA as requiring the result. Further, legislative rules cannot work

a retroactive effect, but that is just what EPA has done by using the Final Rule to reject petitioners’ baseline allowance transfers after they already had been approved. As a consequence, EPA has dictated market

shares that bear no resemblance to underlying market realities.

STATEMENT OF FACTS

A. The Montreal Protocol

In the mid-1970s, scientists discovered that certain man-made

chemicals were contributing to the depletion of stratospheric ozone in

the Earth’s atmosphere. See NRDC v. EPA, 464 F.3d 1, 3 (D.C. Cir.

2006). As a result, the United States and other nations entered into the

Montreal Protocol, which was incorporated into domestic law through

the Clean Air Act Amendments of 1990, Pub. L. No. 101-549, tit. VI, 104

Stat. 2399, 2648 (codified at 42 U.S.C. §§ 7671-7671q).

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The Protocol, as amended, called for an end to the production and

consumption1 of ozone-depleting chlorofluorocarbons (“CFCs”) by 1996.

In 1990, the London Amendment to the Protocol identified a related

class of compounds, HCFCs, as “transitional substances” that could be

used in place of CFCs. Art. I, § B.3. Because HCFCs also deplete ozone

(albeit to a considerably lesser extent), the parties to the Protocol further agreed (as part of the 1992 Copenhagen Amendment) to cap HCFC

consumption and production in 1996 and to phase out HCFCs by 2030,

with intermediate step-downs set for 2004, 2010, 2015, and 2020. Art.

I, § G. Market allocations associated with the 2010 step-down are the

subject of this dispute.

B. The Clean Air Act

The CAA authorizes the Administrator of EPA to direct, within

the limits of her statutory authority, the program of stepping-down and

ultimately eliminating the production and consumption of HCFCs. 42

U.S.C. § 7671d(c).2 For both CFCs and HCFCs, the Act creates a cap1 Under the Protocol and the CAA, “consumption” means “production

plus imports minus exports.” Final Rule, 74 Fed. Reg. at 66,414.

2 The CAA limits HCFC production as of 2015, 42 U.S.C. § 7671d(b)(1),

but authorizes EPA to accelerate the schedule under various circumstances, including when the Montreal Protocol is modified, id. §

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and-trade system under which EPA issues production and consumption

allowances based on a “baseline year,” which for HCFCs is defined to

mean “a representative calendar year.” Id. § 7671(2).

Section 607 of the CAA, 42 U.S.C. § 7671f, governs the trading of

allowances. The Act expressly requires EPA to permit two types of

transfers—“[i]nterpollutant transfers” and “[t]rades with other persons.” Id. § 7671f(b), (c). An inter-pollutant transfer—sometimes called

an “intracompany transfer”—is a transfer by an allowance-holder from

one substance to another: “The rules under this section shall permit 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).3 A trade with another person—typically called an “inter-company transfer”—is a transfer

from an allowance-holder to another party:

7671e(a)(3). Following the adoption of the Copenhagen Amendments,

EPA invoked the acceleration authority as to the HCFCs at issue here.

Final Rule, Protection of Stratospheric Ozone, 58 Fed. Reg. 65,018,

65,025 (Dec. 10, 1993) (“1993 Rule”).

3 Some substances are more destructive of ozone than others. The relative amount of such degradation attributed to any substance is known

as its ozone depletion potential.

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The rules under this section shall permit 2 or

more persons to transfer production allowances

(including inter-pollutant transfers * * *) 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 * * *.

Id. § 7671f(c).4

C. The 2003 Rule

Using its CFC phase-out system adopted in the early 1990s as a

model, EPA established a cap-and-trade allowance system for HCFCs in

2003 to ensure that the United States would meet the January 1, 2004,

step-down under the Montreal Protocol. 2003 Rule, 68 Fed. Reg. 2820.

EPA determined that it could produce the necessary reductions by setting baseline levels for just three HCFCs, known as HCFC-141b, HCFC22, and HCFC-142b.

Although the Agency set a baseline for HCFC-141b,5 it essentially

banned its production effective January 1, 2003, “except for use in a

process resulting in its transformation or its destruction.” 40 C.F.R.

4 Pursuant to CAA § 607(d), 42 U.S.C. § 7671f(d), consumption allowances are traded on the same basis as production allowances.

5 HCFC-141b (1,1-dichloro-1-fluoroethane) had been used as a solvent

and foam-blowing agent.

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§ 82.16(b). The elimination of HCFC-141b was alone sufficient to reduce overall United States HCFC production and consumption, as required by the Protocol, so long as supplies of other HCFCs did not increase. See Proposed Rule, Protection of Stratospheric Ozone: Allowance System for Controlling HCFC Production, Import and Export, 66

Fed. Reg. 38,064, 38,070 (July 21, 2001) (“2001 Proposed Rule”).

Accordingly, EPA identified baseline levels for the two other widely used HCFCs—HCFC-226 and HCFC-142b7—and capped their annual

production and consumption at 100% of the baseline levels. 40 C.F.R.

§ 82.16(a). The baselines were set “on a one-time basis,” such that the

allowances would change only if “the percentage of baseline allowances

is reduced to ensure compliance with the Protocol cap” or if the baseline

itself was adjusted “through permanent transfers of allowances” undertaken at the election of market participants. 2003 Rule, 68 Fed. Reg. at

2823. Otherwise, the baseline would “remain the same from control pe6 HCFC-22 (chlorodifluoromethane) has been the refrigerant of choice

for a wide range of applications such as comfort air-conditioning systems used to cool homes and office buildings.

7 HCFC-142b (1-chloro-1,1-difluoroethane) is used in refrigerant blends

and traditionally has been used to make plastic foam products like insulation and food trays.

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riod to control period (one calendar year to the next).” Id. This approach was consistent with EPA’s stated goal of “providing certainty

and predictability to allowance holders.” 2001 Proposed Rule, 66 Fed.

Reg. at 38,064.

The preamble to the 2003 Rule emphasized that companies were

entitled to change their baseline mix of chemicals through interpollutant transfers of allowances. The initial baseline had been selected

by identifying a year, between 1994 and 1997, during which the company had consumed and produced the greatest amount of HCFCs on an

ozone-depletion-weighted basis.8 EPA then distributed baseline allowances on a chemical-by-chemical basis that reflected the company’s

priorities during that particular year. But EPA explained that “companies * * * wish[ing] to obtain allowances for different HCFCs [could]

take advantage of the transfer provisions.” 68 Fed. Reg. at 2832; accord

40 C.F.R. § 82.3 (“A person’s consumption allowances * * * are the total

of the allowances obtained under §§ 82.19 and 82.20, as may be modified under § 82.23.”). Likewise, by “incorporating a high degree of flex8 Pursuant to the CAA, EPA was required to identify a “representative

calendar year” as the HCFC baseline. CAA § 601(2), 42 U.S.C.

§ 7671(2).

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ibility in the transfers of allowances,” EPA was helping companies “in

responding to market decisions and trends.” 68 Fed. Reg. at 2832.

Commenters had contended that maximizing “flexibility was considered

imperative if tracking were done on the proposed chemical-by-chemical

basis,” as opposed to providing a total ozone-depletion allowance to each

company. Id. at 2833. EPA “agree[d]” with these commenters and announced that it was “establishing procedures for transfers with maximum flexibility within the constraints of the allowance system.” Id.

(emphasis added).

The Agency gave two examples of the baseline trades that it incorporated into its system. First, one company could transfer baseline

allowances to another company. Id. at 2835. Second, the preamble explained that “inter-pollutant transfers of * * * baseline allowances

would * * * be permitted.” Id. What distinguished inter-company and

inter-pollutant baseline trades from annual trades was that baseline

trades were “permanent.” See id. (“The permanent nature of the [baseline] transfer is what makes it different from the transfer of currentyear allowances.”).

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11

Accordingly, as the CAA mandated, the 2003 Rule established

regulations governing inter-company and inter-pollutant trades. In 40

C.F.R. § 82.3, the Agency defined “consumption allowances” and “production allowances” as each company’s baseline amount of allowances,

as modified through trading (and through other mechanisms for extra

allowances and exports, which are not at issue here). In § 82.23(a), EPA

set out the procedures for “[i]nter-company transfers.” The procedures

for “[i]nter-pollutant transfers” appear in § 82.23(b).9 Although an allowance holder cannot trade allowances from one year to another,

§ 82.23(d) of EPA’s regulation contemplates that baseline allowances—

i.e., the baseline levels from which calendar-year allowances are distributed each year—can be transferred on a permanent basis, in accordance with § 82.23(a), (b), or (c), in which case “[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 the phaseout schedules in this section.” Under the

9 Section 82.23(c) authorizes trades that are simultaneously intercompany and inter-pollutant.

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2003 Rule, EPA thus expressly allowed permanent inter-pollutant

trades of consumption allowances and production allowances.10

EPA’s authorization of permanent baseline transfers is confirmed

by its official form for reporting HCFC allowance transfers, which was

developed through notice and comment procedures. See Reporting and

Recordkeeping Requirements of the HCFC Allowance System, 71 Fed.

Reg. 30,675 (May 30, 2006); Reporting and Recordkeeping Requirements of the HCFC Allowance System, 70 Fed. Reg. 75,458 (Dec. 20,

2005).11 A company submitting a transfer claim to EPA is required to

designate the “Type of Allowance Transferred.” According to EPA’s official guidance for completing the form, “[a] transfer of current year allowances is only for the current control period[,while a] transfer of baseline allowances permanently reduces the number of allowances that the

10 The same document is used to report both inter-company and interpollutant trades. E.g., JA 4-6. In addition, to comport with the Act’s

requirement that trades reduce HCFC production and consumption, any

trades between substances would proceed on an ozone-depletionadjusted basis, and the amount traded would be reduced by a 0.1%

transfer offset. 40 C.F.R. § 82.23(a)(i)(G), (b)(3)(v).

11 The basic structure of the transfer form predates the HCFC cap-andtrade system. The 1993 form for transferring CFC allowances used

identical language to permit baseline inter-pollutant transfers. EPA,

Guidance for the Stratospheric Ozone Protection Program (July 1992).

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13

transferor will receive in future allocations,” and “[o]nly one box should

be checked.” EPA, Guidance Document for the Stratospheric Ozone

Protection Program After January 1, 2005, part 4, at 19, available at

http://www.docstoc.com/docs/7832523/Guidance-Document-for-theStratospheric-Ozone-Protection-Program (emphasis in original) [hereinafter Guidance Document].

Significantly, the 2003 Rule also confirmed that, in anticipation of

the 2010 step-down, production of HCFC-22 and HCFC-142b for domestic use in new equipment would be prohibited effective January 1, 2010.

40 C.F.R. § 82.16(c). That deadline had been established in 1993, see

1993 Rule, 58 Fed. Reg. at 65,025, so the refrigeration industry has long

understood that beginning in 2010 only aftermarket sales of HCFC-22

and HCFC-142b (i.e., sales for use in existing equipment) would be

permitted.

D. Petitioners’ Inter-Pollutant Baseline Trades

Arkema is a major participant in the market for HCFCs and employs more than 1900 people at 15 sites throughout the United States.

JA 154. Arkema has chosen to focus its business on supplying refrigerant needs in the aftermarket, where Arkema is the leading U.S. supCase: 09-1318 Document: 1230210 Filed: 02/16/2010 Page: 26
14

plier of HCFC-22. Id. In 2008, Arkema estimated its share of the U.S.

HCFC-22 aftermarket at 33%. Werkema Dec. ¶ 7.

As the January 1, 2010, ban on the use of HCFC-22 in new

equipment grew closer, Arkema decided that to maintain its pre-2010

position in the HCFC-22 aftermarket it needed to convert HCFC-142b

allowances to HCFC-22. Accordingly, on April 18, 2008, Arkema filed

with EPA Form 2014.03, through which Arkema elected to transfer

substantial quantities of “Baseline Year Allowances” from HCFC-142b

to HCFC-22. JA 26-32.12

EPA confirmed these baseline transfers at least three times.

First, immediately after Arkema filed Form 2014.03, EPA responded

with “non objection notices” authorizing Arkema to “proceed” with the

“baseline” transfers. JA 33-34. Second, in anticipation of the Proposed

Rule, EPA sent Arkema confirmation of its baseline allocations that reflected the 2008 transfers. JA 88-92. Third, in January 2009, EPA sent

12 In particular, Arkema filed applications to transfer 16,173 metric tons

of HCFC-142b consumption baseline allowances and 15,631 metric tons

of HCFC-142b production baseline allowances, which, after deduction of

the 0.1% transfer offsets and conversion based on ozone-depletion factors, resulted in a new HCFC-22 consumption baseline allocation of

19,113 metric tons and a new HCFC-22 production baseline allocation

of 18,473 metric tons.

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Arkema a letter informing it of its available 2009 allowance. JA 145.

That confirmation also reflected the 2008 baseline transfers, thereby

confirming, once again, that EPA was treating the transfers as permanent and having effect beyond the 2008 control period.

Solvay likewise is a producer, exporter, and importer of refrigerants, including HCFC-22 and HCFC-142b. JA 149. Soon after the

2003 Rule was promulgated, Solvay determined that its business interests required conversion of the majority of its HCFC-142b allowances to

HCFC-22. Magid Dec. ¶¶ 5-7. In 2006, for example, Solvay consumed

96% of its HCFC-142b allowances as HCFC-22, primarily to service the

refrigeration aftermarket. JA 197. After conducting annual trades

from 2004 to 2007, Solvay decided to make its transfer permanent in

2008. Accordingly, Solvay Solexis submitted a “transfer claim” to convert 2,852 metric tons of baseline HCFC-142b consumption into 3,368

metric tons of baseline HCFC-22 consumption, which were transferred

in turn to Solvay Fluorides. JA 3-6, 11-14. Like Arkema, Solvay specified its intent to complete a transfer of “Baseline Year Allowances” on

EPA Form 2014.03. Id. Similarly, EPA confirmed that Solvay had efCase: 09-1318 Document: 1230210 Filed: 02/16/2010 Page: 28
16

fected a baseline transfer in “non objection notices” authorizing Solvay

to proceed with a “baseline” transfer, JA 9-10, 24-25.

E. Proceedings Before EPA

In anticipation of the 2010 step-down, EPA solicited feedback from

major stakeholders and held a public meeting on June 16, 2008. At that

meeting, EPA explained the current system and introduced the options

moving forward. JA 35-75. In explaining the current system to stakeholders, EPA stated that “[t]rades of allowances” were “[a]llowed between entities [or] between HCFCs * * * [f]or baseline and calendar

year allowances.” JA 47. Arkema responded to the public meeting by

supporting the “known and proven methodology” of the existing capand-trade system. JA 87.

On December 23, 2008, EPA formally initiated a rulemaking proceeding for the promulgation of regulations necessary for the 2010

HCFC step-down, which required the United States to reduce HCFC

production and consumption to 25% of its national baseline under the

Montreal Protocol. See Proposed Rule, 73 Fed. Reg. 78,680.

The Proposed Rule’s “preferred” option for achieving that reduction was “to continue [EPA’s] past practice of apportioning companyCase: 09-1318 Document: 1230210 Filed: 02/16/2010 Page: 29
17

specific production and consumption baselines for individual HCFCs,

and granting a certain percent of that baseline as necessary to achieve

compliance with the cap.” Id. at 78,686. To that end, EPA proposed “to

apportion company-specific baselines in amounts that are equivalent to

those currently published at [40 C.F.R.] § 82.17 (for production) and

§ 82.19 (for consumption), adjusted as necessary to reflect permanent

transfers of baseline allowances.” Id. (emphasis added).

EPA said that it was “not proposing to revisit decisions made in

the 2003 allocation rule,” id. at 78,687; rather, it anticipated that “the

continued availability of inter-pollutant transfers w[ould] permit the

market to self-correct for unforeseen changes in demand and allow individuals to consider a range of options for their allowances,” id. at

78,689. Through the inter-pollutant transfer process, “EPA s[ought] to

avoid unnecessary disruptions in the marketplace,” consistent with its

goal “to promote a smooth transition for industry.” Id. EPA specifically

emphasized that “[b]oth inter-pollutant and inter-company transfers of

allowances are possible, either on a calendar-year or permanent basis.”

Id. at 78,701.

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Accordingly, EPA proposed company-specific baselines that “reflect adjustments resulting from approved inter-pollutant and/or intercompany transfers of baseline allowances (i.e., permanent rather than

calendar-year allowances) through the process described in [40 C.F.R.]

§ 82.23.” 73 Fed. Reg. at 78,693. The baseline production and consumption allowance allocations proposed by EPA appropriately reflected Arkema’s and Solvay’s 2008 permanent baseline transfers, which

EPA had already reviewed and approved. Id. at 78,694. EPA requested

public comments on the Proposed Rule (and five alternatives) by March

9, 2009. Id. at 78,680.

Shortly after the Proposed Rule was introduced, EPA released a

fact sheet explaining the proposal. With respect to baseline trades, the

fact sheet explained the Agency’s existing practices by saying that “EPA

ha[d] proposed to * * * continue to provide flexibility by allowing EPAapproved trades of annual and permanent allowances between HCFCs

and between companies.” JA 146 (emphasis added).

Arkema submitted comments endorsing the Proposed Rule because it (1) maintained EPA’s past treatment of allowance transfers;

(2) permitted market participants to adapt to changes in HCFC demand

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such that the allowance system reflected the market; (3) was consistent

with Arkema’s expectations when it paid an “offset” as a fee for completing the baseline transfer; and (4) avoided the pitfalls of alternatives,

chief of which was giving an increased share of the HCFC-22 aftermarket to companies that had chosen to sell to original equipment manufacturers rather than focus on the aftermarket. JA 154-62.

Solvay likewise endorsed the Proposed Rule. It explained that the

transfer mechanisms had “provided critical flexibility to meet marketplace demands” and that any change from the 2003 Rule would “undermine confidence in all future phaseout programs.” JA 149-51.

Moreover, Solvay explained that reverting to the 1994-1997 baseline allowance levels without recognizing already approved inter-pollutant

baseline transfers would “disrupt [Solvay’s] many years of sales to the

refrigerants aftermarket,” because Solvay had converted at least 95% of

HCFC-142b allowances to HCFC-22 for the past four years. JA 197.

Several commenters objected to the Proposed Rule’s recognition of

past transfers. For example, DuPont Fluoroproducts commented that,

under the Proposed Rule, “[o]nly two companies would receive increases

in HCFC-22 consumption baseline allowances * * *: Arkema and the

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Solvay Group.” JA 170. Meanwhile, “[t]hose increases would adversely

affect the nineteen other HCFC-22 allowance holders.” Id. Likewise,

Honeywell Specialty Materials (“Honeywell”) commented that the Proposed Rule would benefit “just two * * * companies, Arkema and Solvay.” JA 185. Honeywell advocated disregarding Arkema’s and Solvay’s baseline trades—which would result in an increase of its own and

DuPont’s market shares. For the very first time, some 19 years after

Congress enacted CAA § 607, Honeywell’s comments suggested a theory

that the Act somehow prohibited EPA from recognizing baseline interpollutant trades. JA 185-87. Such a legal theory appeared nowhere in

EPA’s Proposed Rule or in any of its prior regulatory actions on HCFCs

or CFCs.

EPA waited until December 15, 2009, just 17 days before the stepdown date required by the Montreal Protocol, to publish its Final Rule.

The Final Rule completely reversed EPA’s prior position on permanent

baseline transfers. See 74 Fed. Reg. at 66,419. Contrary to its existing

HCFC allowance system rules, EPA adopted Honeywell’s unprecedented theory that EPA was prohibited from allowing permanent baseline

transfers because “section 607(b) [of the CAA] is best read as permitting

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only year-by-year inter-pollutant transfers.” Id. at 66,421. Rather than

acknowledge that this was a new interpretation of its CAA authority,

EPA claimed that its past statements were “consistent with this interpretation.” Id. at 66,422. In response to Arkema’s objection that neither EPA nor any commenter had ever before taken the position that

Section 607 of the CAA limited the availability of baseline interpollutant transfers, EPA asserted that it “disagree[d] that it has been

interpreting the Clean Air Act as allowing permanent inter-pollutant

baseline trades.” JA 259. Instead, EPA claimed that in its past practice

it “ha[d] allowed for permanent inter-company transfers but noted that

any inter-pollutant transfers are not carried forward into the future.”

Id.

F. Effects Of The Final Rule

If permitted to remain in force, the Final Rule will dramatically

and arbitrarily rearrange the U.S. refrigerant marketplace. Rather

than honoring the original baselines (as modified by approved transfers), market participants will be assigned artificial market shares for

the HCFC-22 aftermarket equal to their 1994-1997 market shares for

the total HCFC-22 market, which then included sales for manufacturCase: 09-1318 Document: 1230210 Filed: 02/16/2010 Page: 34
22

ing original equipment. This action ignores the fundamental shift in

the market since 1997 and overrides the resulting changes in business

strategy that Arkema and Solvay took in response. For petitioners, the

Proposed Rule would have provided aggregate allowances for HCFC-22

consistent with their pre-2010 shares of the HCFC-22 aftermarket. In

short, by canceling Arkema’s and Solvay’s past transfers, EPA unwound

market decisions and awarded non-representative market shares unrelated to business practices—all in contravention of its own cap-andtrade system.

STATUTES AND REGULATIONS

Pursuant to Circuit Rule 28(a)(5), relevant statutes and regulations are printed in a separately bound addendum, which has been filed

alongside this brief.

SUMMARY OF ARGUMENT

The Final Rule promulgated by EPA is unsustainable for three independent reasons.

I. When an agency reverses a previous position or policy, it

must acknowledge the change of course and supply a reasoned analysis

explaining its deviation from precedent. Any reversal of policy without

such a reasoned analysis is arbitrary and capricious. The Final Rule

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promulgated by EPA contains two sharp breaks with past Agency practice, but EPA did not provide a reasoned analysis for the departure from

precedent in either case.

First, the Final Rule invalidates inter-pollutant trades of baseline

HCFC allowances, even though EPA previously had authorized and approved such transfers. In providing for baseline transfers, the 2003

regulations did not distinguish between inter-pollutant and intercompany transfers. To the contrary, EPA imposed materially indistinguishable criteria on the two kinds of transfers and structured the regulations such that the baseline transfer provision applied to both interpollutant and inter-company trades. In implementing those regulations, EPA promulgated a regulatory form, through notice-and-comment

procedures, that allowed companies to request and receive authorization for baseline inter-pollutant transfers. Arkema and Solvay filed this

form and requested baseline inter-pollutant transfers. Those requests

were approved and EPA confirmed twice more that those baseline

transfers had taken place. EPA recognized this past practice in a meeting with stakeholders before the publication of the Proposed Rule; in

the Proposed Rule itself, in which the Agency proposed to honor these

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baseline inter-pollutant trades; and in a fact sheet explaining the Proposed Rule. Ignoring these contradictions, EPA nevertheless claimed in

the Final Rule that baseline inter-pollutant trades were unavailable

under the Act and had, in fact, never been authorized. Past practice

demonstrates otherwise, and EPA’s failure to acknowledge its past

practice renders the Final Rule arbitrary and capricious. Moreover, because the Final Rule rested on a novel interpretation of the Act, EPA

was required to subject the theory to notice and comment. Its failure to

do so independently requires that the Final Rule be vacated.

Second, the Final Rule abandons EPA’s longstanding recognition

that competitive forces must be permitted to govern the market for

HCFCs. In previous rulemakings, EPA insisted that promoting the

market was necessary and that inter-pollutant transfers were essential

to achieving that end because they facilitated companies’ responses to

market conditions. The Final Rule silently abandons those practices,

replacing market-based allowances with fiat allocations that arbitrarily

give market share to certain companies at the expense of others.

II. Agency action must be vacated when the agency wrongly

concludes that its conduct is mandated by statute. In the Final Rule,

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EPA concluded that the legislative history and text of the CAA prohibit

baseline inter-pollutant transfers; however, neither imposes any such

limitation.

EPA’s reliance on the CAA’s legislative history is misplaced. EPA

apparently decided that Congress did not intend to permit baseline inter-pollutant transfers because neither the House bill nor the Senate

bill contemplated them. EPA overlooked the fact that the Conference

Committee endorsed a third approach that neither Chamber had proposed. Given that baseline inter-pollutant transfers would have served

no function in either of the unenacted bills, it was illogical for EPA to

rely upon those bills as evidence of what the House and Senate intended

in their Conference Committee compromise.

Likewise, EPA’s construction of the statutory text is incorrect.

EPA concluded that Congress intended to permit baseline transfers between companies but to prohibit baseline transfers between HCFCs.

The provision relied upon by EPA, however, merely states that allowances cannot be transferred from one year to a different year. And the

inference employed by EPA to conclude that inter-pollutant transfers

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can only be annual would apply equally to inter-company transfers,

which indisputably can be permanent.

III. An agency is not permitted to engage in retroactive rulemaking unless Congress has explicitly so authorized. In the case of the

CAA, this Court has held that EPA lacks the authority to regulate retroactively. Yet the Final Rule operates retroactively to cancel interpollutant trades that EPA already approved.

A regulation is retroactive if it changes the legal consequences of a

past action. Here, EPA established a cap-and-trade system in 2003 that

was designed to survive all subsequent step-downs until the phase-out

of HCFCs was complete. Baselines were set on a one-time basis, and allocations could change only through permanent transfers of those baselines or percentage reductions during HCFC step-downs. In the Final

Rule, EPA left the cap-and-trade system intact in all respects except for

recalculating Arkema’s and Solvay’s baselines to reverse their baseline

inter-pollutant trades. Although the Agency approved those trades in

2008, it now insists that they never existed. EPA cannot use a rulemaking proceeding to change its past decisions in such an ongoing system.

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STANDING

Arkema and Solvay have standing to challenge the Final Rule because they are “object[s] of the action * * * at issue.” Sierra Club v.

EPA, 292 F.3d 895, 900 (D.C. Cir. 2002) (quoting Lujan v. Defenders of

Wildlife, 504 U.S. 555, 560 (1992)). The Proposed Rule would have provided Arkema and Solvay with larger HCFC production and consumption allowances than the Final Rule. The loss of those marketable allowances has resulted in serious economic consequences for both companies. See Werkema Dec. ¶ 10; Magid Dec. ¶ 18.13 Accordingly, Arkema and Solvay are aggrieved by the Final Rule. Their injuries can be

redressed by an order vacating the Final Rule and directing EPA to

promulgate a new rule consistent with its legal obligations.

ARGUMENT

The Final Rule must be vacated because it is “arbitrary, capricious, an abuse of discretion or otherwise not in accordance with law.”

CAA § 307(d)(9)(A), 42 U.S.C. § 7607(d)(9)(A). This Court’s precedents

require vacatur when an agency changes course without so acknowledging, when it operates under the mistaken belief that a certain conclu13 The declarations of Thomas Werkema and Sheldon B. Magid appear

in the Standing Addendum, infra.

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sion is required by statute, or when it promulgates regulations that

reach into the past to change the legal effect of completed acts. Each of

those fundamental flaws is present in the Final Rule, which rearranges

the HCFC marketplace in a manner that contravenes, rather than reinforces, the existing market. Any of these reasons is sufficient for granting the petition for review.

I. THE FINAL RULE MUST BE VACATED BECAUSE EPA

CHANGED ITS PRIOR PRACTICE WITHOUT PROVIDING

A REASONED ANALYSIS OR ADEQUATE NOTICE.

When an agency reverses its past practice without providing a

reasoned basis therefor, the agency action is arbitrary and capricious

and must be vacated. Here, EPA’s Final Rule reversed its approach on

two matters of crucial importance. First, EPA repudiated its previous

approval—and endorsement—of inter-pollutant baseline transfers. But

rather than explain its deviation from precedent, EPA denied its past

practices. Moreover, although a change in statutory interpretation

must be preceded by notice and comment, EPA impermissibly announced its interpretation of the CAA for the first time in the Final

Rule. The lack of sufficient notice is an alternative basis for vacating

the Final Rule. Second, notwithstanding decades of emphasizing the

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importance of facilitating a well-functioning market for HCFCs and repeatedly recognizing that inter-pollutant transfers are necessary to allow the market to self-correct, EPA has now abandoned these core market principles without a rational explanation for the change. As a result, the HCFC allowances in the Final Rule are neither a product of

competitive forces nor a reasonable representation of the marketplace.

They are, instead, a function of regulatory grace. Because EPA failed

even to acknowledge that it was changing its practices with respect to

baseline inter-pollutant transfers and the importance of relying upon

market forces, the Final Rule is unsustainable.

A. The Agency Must Provide A Reasoned Analysis Of Its

Change In Position.

Although an agency is free to change its policies and statutory interpretations, it must first “supply a reasoned analysis indicating that

prior policies and standards are being deliberately changed, not casually ignored.” Greater Boston Television Corp. v. FCC, 444 F.2d 841, 852

(D.C. Cir. 1970). Absent such scrutiny by the agency, “abrupt shifts in

policy * * * constitute ‘danger signals’ that the [agency] may be acting

inconsistently with its statutory mandate” and constitute arbitrary and

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capricious rulemaking. Office of Commc’n of United Church of Christ v.

FCC, 707 F.2d 1413, 1425 (D.C. Cir. 1983).

To satisfy the “reasoned analysis” standard, an agency first must

“display awareness that it is changing position.” FCC v. Fox Television

Stations, Inc., 129 S. Ct. 1800, 1811 (2009) (emphasis in original). “An

agency may not, for example, depart from a prior policy sub silentio or

simply disregard rules that are still on the books.” Id. Otherwise, it

will have no ability to grapple with the past policy to determine whether a course correction is authorized and appropriate. This Court must

enforce the agency’s obligation to change course only “conscious[ly]” and

must ensure that the agency has addressed the “serious reliance interests that must be taken into account” when an agency is not creating its

policies “on a blank slate.” Id.

An agency’s obligation to supply a reasoned analysis for upsetting

its past practices applies regardless of whether the practice is codified

in regulations. This Court has enforced the “reasoned analysis” requirement whenever an agency changes its “policies,” “standards,” and

“precedents,” and has applied the requirement to a range of past agency

conduct. See, e.g., Bush-Quayle ’92 Primary Comm., Inc. v. FEC, 104

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F.3d 448, 453 (D.C. Cir. 1997) (requiring consistency with audit report

from previous election); Action for Children’s Television v. FCC, 821

F.2d 741, 743-46 (D.C. Cir. 1987) (requiring consistency with agency report).

Once the agency has identified a conflicting past practice, it must

suitably justify any deviation. “[I]f an agency glosses over or swerves

from prior precedents without discussion it may cross the line from the

tolerably terse to the intolerably mute.” Greater Boston Television

Corp., 444 F.2d at 852. If an agency fails to supply its own “reasoned

analysis” to justify its action, the separation of powers prevents this

Court from developing one independently. See Motor Vehicle Mfrs.

Ass’n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983); SEC v.

Chenery Corp., 332 U.S. 194, 196 (1947).

B. The Final Rule Changed EPA’s Position On InterPollutant Baseline Trades Without Addressing EPA’s

Past Practice.

1. EPA’s position on inter-pollutant transfers of baseline allowances changed in the Final Rule. Whereas EPA previously had acknowledged that baseline inter-pollutant transfers were available and

had approved such transfers for Arkema and Solvay, the Final Rule arCase: 09-1318 Document: 1230210 Filed: 02/16/2010 Page: 44
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ticulated a conflicting policy forbidding those same transfers. The previous policy is evident from the 2003 regulations; from EPA’s practice in

applying those regulations, including the forms it promulgated thereunder; from the way EPA explained its past practice, in plain language,

in publications issued before and after the Proposed Rule; and from the

Proposed Rule itself.

a. The 2003 regulations set forth explicit procedures for transferring allowances in 40 C.F.R. § 82.23. Subsection (b) governed all inter-pollutant transfers: “a person (transferor) may convert consumption

allowances or production allowances for one [HCFC] to the same type of

allowance for another [HCFC].” In a similar fashion, subsection (a) authorized inter-company transfers and subsection (c) authorized transfers that are simultaneously inter-company and inter-pollutant. Under

these regulations, the procedures for inter-company and inter-pollutant

transfers under 40 C.F.R. § 82.23 were materially indistinguishable.

Baseline transfers were explicitly referenced by subsection (d),

which provided that after such a transfer, any adjustment at the time of

an eventual phaseout would be made from the transferee’s account. On

its face, § 82.23(d) made no distinction between inter-pollutant transCase: 09-1318 Document: 1230210 Filed: 02/16/2010 Page: 45
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fers and inter-company transfers and thus applied equally to both types

of trades.

Notwithstanding this regulatory framework, EPA now asserts

that baseline trades are merely a subset of inter-company trades and

that baseline inter-pollutant trades do not exist. However, the structure of § 82.23 compels the contrary conclusion. If baseline trades were

a subset just of inter-company trades, then the discussion of baseline

trades would have been placed in § 82.23(a), the subsection dealing exclusively with inter-company trading. At the very least, the provision

addressing baseline trades would have indicated that it applied only to

the inter-company trades authorized by § 82.23(a). But the 2003 Rule

did no such thing because EPA intended to facilitate baseline trades

both between companies and between chemicals. Indeed, the preamble

to the 2003 Rule specifically recognized that baseline trades could result

in “a lasting shift of a company’s allowances to another company” and

that “inter-pollutant transfers of * * * baseline allowances would also be

permitted.” 68 Fed. Reg. at 2835.

b. Consistent with the 2003 regulations, EPA created an administrative system in which inter-pollutant and inter-company transCase: 09-1318 Document: 1230210 Filed: 02/16/2010 Page: 46
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fers are treated identically. Indeed, employing notice-and-comment

procedures, EPA promulgated a form for use in completing interpollutant and inter-company baseline transfers. See 71 Fed. Reg.

30,675; 70 Fed. Reg. 75,458. The same form is used for each type of

transfer and requires a company completing a transfer to specify

whether its trade is for “Current Year Allowances” or “Baseline Year Allowances.” E.g., JA 5, 13, 28. Transferors are admonished that “[o]nly

one box should be checked,” with no distinction drawn between interpollutant and inter-company transfers. Guidance Document, supra,

part 4, at 19. Consistent with this approach, the instructions for this

official form explain that “[a] transfer of current year allowances is only

for the current control period[, while a] transfer of baseline allowances

permanently reduces the number of allowances that the transferor will

receive in future allocations.” Id. (emphasis in original). As with the

regulatory language, no distinction is made between inter-pollutant and

inter-company trades.

In administering the cap-and-trade system under the 2003 regulations and the accompanying forms, EPA confirmed the existence of

permanent baseline inter-pollutant transfers by approving such transCase: 09-1318 Document: 1230210 Filed: 02/16/2010 Page: 47
35

actions. Both Arkema and Solvay filed EPA’s regulatory claim notice

form to transfer consumption and production baseline allowances from

HCFC-142b to HCFC-22 in 2008. JA 3-6, 11-14, 26-32. EPA approved

these transfers and unambiguously confirmed that it was approving

permanent, baseline transfers in the process. First, EPA sent “non objection notices” to each petitioner instructing the companies to “proceed”

with their “baseline” transfers. JA 9-10, 24-25, 33-34.14 Second, in anticipation of the rulemaking proceedings now at issue, EPA sent petitioners confirmations of their baseline allowances that reflected the

2008 baseline trades. E.g., JA 88-92. Third, after single-year transfers

for 2008 would have expired, EPA sent petitioners confirmations of

their 2009 allowance balances that reflected the 2008 baseline transfers. E.g., JA 145. EPA’s conduct thus consistently and unambiguously

reinforced the Agency’s practice of approving baseline inter-pollutant

transfers.

14 There can be no doubt that a “baseline” transfer and a permanent

transfer are synonymous. In the 2003 Rule, EPA explained that “[t]he

permanent nature of the [baseline] transfer is what makes it different

from the transfer of current-year allowances.” 68 Fed. Reg. at 2835.

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c. If there were any doubt that EPA believed that market participants could complete inter-pollutant baseline trades, the Agency

dispelled it by explicitly and repeatedly stating that they could. In a

meeting with stakeholders before the Proposed Rule was issued, for example, EPA described the system in place “[t]oday” as allowing “[t]rades

of allowances” that could be “[f]or baseline and calendar-year allowances” and that were “[a]llowed between entities [and] between

HCFCs.” JA 47.

EPA confirmed this policy in the Proposed Rule itself. As the

Agency explained, “[b]oth inter-pollutant and inter-company transfers

of allowances are possible, either on a calendar-year or permanent basis.” 73 Fed. Reg. at 78,701. Accordingly, under EPA’s preferred approach for implementing the 2010 stepdown, “[t]he proposed companyspecific baselines * * * reflect[ed] adjustments resulting from approved

inter-pollutant and/or inter-company transfers of baseline allowances

(i.e., permanent rather than calendar-year allowances) through the

process described in § 82.23.” Id. at 78,693.

In describing the proposal in a fact sheet released the next month,

EPA explained once more that its proposal was merely to “continue to

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provide flexibility by allowing EPA-approved trades of annual and permanent allowances between HCFCs and between companies.” JA 146

(emphasis added).15 This repetition of EPA’s understanding of its practices forecloses the possibility that EPA forbade inter-pollutant transfers of baseline allowances before the Final Rule—let alone that EPA

interpreted the CAA as requiring that result. Yet EPA insisted in the

Final Rule that its position was unwavering.

2. Notwithstanding the Agency’s regulations authorizing baseline inter-pollutant trades, its forms for recording such trades, its explicit pronouncements that such trades were available, and its past approvals of such trades, EPA failed in its Final Rule to provide a “reasoned analysis” for its new interpretation of the legal requirements. To

the contrary, EPA announced that it “disagree[d] that it ha[d] been interpreting the Clean Air Act as allowing permanent inter-pollutant

baseline trades.” JA 259. Accordingly, EPA made no attempt to recon15 An internal communication between EPA and the Office of Management and Budget also revealed the Agency’s understanding that interpollutant baseline transfers were possible until the issuance of the Final Rule. EPA wrote that “Solvay’s allowance of [HCFC-]22 [had]

changed because the final rule does not account for permanent interpollutant trades (whereas the proposal did * * *).” Docket No. 150.14.

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cile the Final Rule with its past approvals of baseline inter-pollutant

transfers or to assess whether it was appropriate to upset petitioners’

reliance on those approvals. Because EPA failed to supply the required

reasoned analysis for changing its position, it acted arbitrarily and capriciously. See Fox Television Stations, 129 S. Ct. at 1811.

In defense of its claim that it had not changed position, EPA insisted in the Final Rule that it “ha[d] made past statements that are

consistent with [its] interpretation.” 74 Fed. Reg. at 66,422. In particular, EPA cited three statements from the preamble to the 2003 Rule.

But those supposedly consistent statements do not withstand scrutiny,

and they could not, in any event, override EPA’s actual practices in administering the HCFC cap-and-trade system.

First, EPA relies upon the preamble’s statement that “[t]he permanent transfer of baseline allowances is a lasting shift of a company’s

allowances to another company.” 68 Fed. Reg. at 2835. In context, EPA

was merely providing an example of a permanent transfer, not imposing

an implicit limitation. This must be so, because in the same paragraph

EPA noted that “[s]ubsequent inter-pollutant transfers of these baseline

allowances would also be permitted.” Id. Because a baseline transfer

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is, by its very definition, permanent, see id. (“The permanent nature of

the [baseline] transfer is what makes it different from the transfer of

current-year allowances.”), this concession undermines any claim that

only inter-company trades are permanent. As discussed above, the

structure and language of the 2003 regulations reinforce this conclusion, because they authorize inter-company and inter-pollutant transfers of baseline allowances on the same terms without imposing any expiration date on inter-pollutant trades. See 40 C.F.R. § 82.23.

Second, EPA cites the preamble’s comment that “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.” 68 Fed. Reg. at 2835.

This statement has no bearing on the propriety of inter-pollutant transfers. Petitioners do not dispute that their transferred baseline allowances are subject to the stepdown or that baseline allowances could be

set to zero when a substance is phased out, as was done for HCFC-141b.

Thus, EPA’s statement simply describes the functioning of the allowance system as both EPA and petitioners understood it prior to the Final Rule.

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Third, EPA relies on the preamble’s observation that EPA would

‘‘allow permanent transfers of baseline allowances with those allowances disappearing at the phaseout date for the specific HCFC, regardless of what inter-pollutant transfers had taken place.” Id. Again, because no “phaseout” of HCFC-22 or HCFC-142b has taken place, this

assertion does not bear on the propriety of inter-pollutant baseline

transfers. EPA defined a “phaseout” as when “the consumption and

production allowances for a specific HCFC disappear.” Id. at 2833.

That plainly has not happened for HCFC-22 or HCFC-142b.

Thus, none of EPA’s prior statements—particularly when considered in light of its consistent pattern of conduct—justifies the Agency’s

claim that it was merely following its past practice. Because EPA failed

to provide a “reasoned analysis” for changing its approach—indeed, because it failed even to acknowledge that it had changed its approach—

the Agency acted arbitrarily and capriciously. The Final Rule must be

vacated and the matter remanded.

3. EPA’s failure to provide a reasoned analysis is compounded

by its failure to subject its new interpretation of the CAA to the procedures of notice and comment.

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The CAA sets forth strict notice requirements that require EPA to

identify the “basis and purpose” of a proposed rule, including “the major

legal interpretations and policy considerations underlying the proposed

rule.” 42 U.S.C. § 7607(d)(3). Providing public notice serves three essential purposes:

(1) to ensure that agency regulations are tested

via exposure to diverse public comment, (2) to ensure fairness to affected parties, and (3) to give

affected parties an opportunity to develop evidence in the record to support their objections to

the rule and thereby enhance the quality of judicial review.

Int’l Union, United Mine Workers of Am. v. Mine Safety & Health Admin., 407 F.3d 1250, 1259 (D.C. Cir. 2005). Here, those purposes were

skirted by EPA’s failure to provide any notice that it was considering

reinterpreting the CAA to forbid baseline inter-pollutant transfers.

In the Proposed Rule, EPA indicated its preference to continue using the existing baselines, which reflected inter-pollutant trades. 73

Fed. Reg. at 78,687. The Agency said that it was “not proposing to revisit decisions made in the 2003 allocation rule,” id., because “the continued availability of inter-pollutant transfers w[ould] permit the market

to self-correct for unforeseen changes in demand and allow individuals

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to consider a range of options for their allowances,” id. at 78,689. Although the Agency invited comment on five regulatory options, which

included setting baselines “with or without considering any permanent

baseline transfers and/or inter-pollutant transfers,” id. at 78,687, it nowhere hinted that it might view the CAA as requiring it to disregard inter-pollutant transfers that had already been finalized.

The leap from soliciting comments on a policy choice to reinterpreting the authorizing statute to require the ultimate result is substantial. But a final rule must be the “logical outgrowth” of an agency’s

proposals. Shell Oil Co. v. EPA, 950 F.2d 741, 750-51 (D.C. Cir. 1991).

As this Court has explained, “[s]omething is not a logical outgrowth of

nothing,” Kooritzky v. Reich, 17 F.3d 1509, 1513 (D.C. Cir. 1994), and

interested parties cannot be expected to “divine the EPA’s unspoken

thoughts,” Ariz. Pub. Serv. Co. v. EPA, 211 F.3d 1280, 1299 (D.C. Cir.

2000) (quoting Shell Oil, 950 F.2d at 751). This is especially crucial

where an agency has an established policy, proposes to maintain its policy, and then “repudiate[s] its proposed interpretation and adopt[s] its

inverse” in the final rule. Such was the case in Environmental Integrity

Project v. EPA, 425 F.3d 992 (D.C. Cir. 2005), where this Court vacated

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a final rule that would have changed an existing policy because “an interpretation of a legislative rule cannot be modified without the notice

and comment procedures that would be required to change the underlying regulation.” Id. at 997.

Here, EPA’s ultimate legal interpretation represented an aboutface from the Agency’s past policies, which EPA announced it was “not

proposing to revisit.” Proposed Rule, 73 Fed. Reg. at 78,687. Its interpretive approach appeared nowhere in the Proposed Rule because it

was invented by commenter Honeywell, which advanced its theory on

the last day of the comment period. JA 185-87. An agency “cannot

bootstrap notice from comment.” Fertilizer Inst. v. EPA, 935 F.2d 1303,

1312 (D.C. Cir. 1991). Neither Arkema nor Solvay had the opportunity

to develop evidence or legal arguments in response (although Arkema

submitted a comment after the comments period had closed urging EPA

not to consider Honeywell’s novel interpretation of the CAA, JA 194-96).

This procedural shortcoming deprived petitioners of an effort to “persuade” the agency that its interpretation was misguided and inequitable. CSX Transp., Inc. v. Surface Transp. Board, 584 F.3d 1076, 1083

(D.C. Cir. 2009) (holding, in a case addressing baselines for setting railCase: 09-1318 Document: 1230210 Filed: 02/16/2010 Page: 56
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road rates, that the “mere mention” of an issue in the proposed rule was

insufficient notice that the agency was considering a different approach

to that issue to invite comments).

Before EPA announced a major new legal interpretation, it was

required to subject that interpretation to a full course of notice and

comment. Its failure to do so requires the Final Rule to be vacated.

C. The Final Rule Abandoned EPA’s Reliance On InterPollutant Baseline Trades To Facilitate A WellFunctioning Market Without Addressing Its Past

Practice.

On a broader level, EPA’s cancellation of baseline inter-pollutant

transfers reflects a repudiation of the engine EPA has used to drive the

cap-and-trade programs under the Montreal Protocol for decades. EPA

has long insisted that its cap-and-trade system should facilitate a wellfunctioning market and that inter-pollutant trades are essential to

achieving that end. In displacing inter-pollutant trades, EPA has failed

to explain either why the goal of facilitating an efficient market is no

longer important or why inter-pollutant trades are no longer needed to

achieve that objective. Accordingly, this change of course is a further,

independent, ground for vacating the Final Rule.

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EPA’s departure from market principles is particularly damaging.

Despite its past understanding that market mechanisms must govern

corporate decisions about which chemicals to produce and sell, and in

which quantities, EPA has replaced that competition with market

shares devised by regulatory fiat that bear no resemblance to the evolving market for HCFCs. This edict bequeaths additional market share to

some companies at the expense of others, for no apparent reason. The

consequences of this caprice are particularly significant here, where

EPA has taken market share from companies that specialized in the

HCFC-22 aftermarket—the only market that now survives—and gifted

it to those that did not.16 Because EPA has abandoned, without explanation, its position that transfers are necessary to allow a market to

evolve naturally, its rule must be vacated.

1. EPA has long maintained that allowance transfers are necessary to maintain the proper relationship between cap-and-trade al16 Indeed, EPA acknowledged that, by changing course, it was choosing

to favor certain market participants who had not taken advantage of

trading opportunities by “negatively affect[ing]” companies, such as Arkema and Solvay, that did exercise such rights. 74 Fed. Reg. at 66,421.

For Solvay, which consistently utilized inter-pollutant transfers under

the 2003 Rule to participate in the HCFC-22 market, the Final Rule

strips virtually all of its market share.

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lowances and market conditions. Soon after the Montreal Protocol was

signed (and before Congress amended the CAA to incorporate Title VI),

EPA implemented an “allocated quota” system that “grandfather[ed]

past market shares” for CFCs. Final Rule, Protection of Stratospheric

Ozone, 53 Fed. Reg. 30,566, 30,586 (Aug. 12, 1988). To allow market

shares to remain dynamic, however, the rule permitted the trading of

allowances. Id. After the CAA was amended to incorporate Title VI,

EPA recognized that “Congress provided for trading primarily to afford

industry flexibility in meeting the required reduction requirements.”

Final Rule, Protection of Stratospheric Ozone, 56 Fed. Reg. 49,548,

49,561 (Sept. 30, 1991).

In particular, EPA emphasized that “inter-pollutant trades are vital if companies, assigned [CFC] allowances according to their 1986

production mix, are to reallocate allowances among chemicals to reflect

changes in market demand for individual chemicals based on technological developments in substitutes for each listed chemical.” Id. EPA

considered inter-pollutant trading to be the primary means by which allowance holders could “shift among themselves the production and import of various chemicals as the market demands.” Id. at 49,562.

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When HCFCs were added to the Title VI cap-and-trade program,

EPA heeded the CAA and continued to rely on inter-pollutant trades to

keep the system up to date. EPA considered, and rejected, a “rolling

baseline” that “would essentially move the baseline forward in time so

that the baseline would always be the most accurate reflection of the

current HCFC market.” Advanced Notice of Proposed Rulemaking, Protection of Stratospheric Ozone: Allowance System for Controlling HCFC

Production, Import and Export, 64 Fed. Reg. 16,373, 16,377 (Apr. 5,

1999). According to EPA, inter-pollutant trading made a rolling baseline unnecessary: “[I]f the regulatory system includes smooth procedures for trading allowances, shifts in demand and changes in market

share could be addressed by individual companies, thus obviating the

need to re-allocate allowances.” Id. The flexible trading system was

specifically designed to “assist in responding to market decisions and

trends.” 2003 Rule, 68 Fed. Reg. at 2832.

EPA’s 2008 Proposed Rule continued to recognize the importance

of inter-pollutant trades to its HCFC allowance system. EPA explained

that the “continued availability of inter-pollutant transfers will permit

the market to self-correct for unforeseen changes in demand and allow

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individuals to consider a range of options for their allowances.” 73 Fed.

Reg. at 78,689. EPA deemed such an approach essential “to avoid unnecessary disruptions in the marketplace” and “to promote a smooth

transition for industry.” Id.

Arkema’s comments on the Proposed Rule highlighted the importance of maintaining a baseline that was representative of the HCFC

market. In supporting EPA’s preferred approach, which recognized

baseline inter-pollutant transfers, Arkema noted the benefits of

“[m]arket adjustment through allowance trading” and cautioned EPA

that “[h]aving created a highly successful system in 2003, the Agency

should avoid any temptation to switch horses in mid-stream.” JA 156,

158. Arkema stressed that “it would make no sense to unwind or to ignore those market activities [reflected in allowance trades] over the

past five years,” JA 158, and pointed out that “[r]etaining the existing

baselines, with full recognition of trades, is the surest way for the final

rule to maintain market continuity and satisfy market expectations,”

JA 159. Likewise, Solvay explained that the “transfer mechanism has

become an important medium for trade and meeting marketplace deCase: 09-1318 Document: 1230210 Filed: 02/16/2010 Page: 61
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mands,” JA 198, and that it “provide[s] critical flexibility * * * and allow[s] appropriate responses to shifts in marketplace demand,” JA 150.

In evaluating EPA’s other proposed options, Arkema noted that

the crucial criterion was whether an approach “could result in a representative baseline.” JA 87, 160. Both Arkema and Solvay warned that

an allowance system that failed to account for the ban on use of HCFC22 and HCFC-142b in new equipment would fail to be “representative”

if it gave business after 2010 to entities that had been supplying refrigerant for use in new equipment as opposed to the aftermarket.

With the Final Rule, EPA acknowledged the need to “reflect[] the

changes in the marketplace that have occurred since the last time EPA

addressed these baselines.” JA 258. Further, EPA recognized that

while it was not the only goal, “trying to most closely match the aftermarket” was a goal of the final rule. JA 260; see also JA 269 (rejecting a

system based on sales because EPA was “not convinced that 2004-2006

sales data would more accurately reflect the marketplace in 2010 than

the original 1994-1997 baselines” given that “[s]tarting in 2010, the only

use of virgin HCFC-22 will be for servicing existing equipment.”); JA

271 (rejecting a system that capped companies’ total ozone depletion poCase: 09-1318 Document: 1230210 Filed: 02/16/2010 Page: 62
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tential because it would “not reflect the market decisions made between

2003 and 2009”).17

2. Notwithstanding EPA’s past dedication to maintaining an efficient marketplace for HCFCs and petitioners’ comments emphasizing

the importance of an effective market, the Final Rule is divorced from

current market realities. The bottom line is that after years of encouraging market participants to adapt to changes in relative demand

among HCFCs by trading allowances between pollutants, and professing concern about “prevent[ing] disruption” to market demand, JA 272,

EPA has triggered a reset button that returns the market to how it appeared in the years 1994-1997. But the market has changed significantly in the ensuing 13 years—not the least because only the HCFC-22

aftermarket survives. By pegging 2010 aftermarket allowances to 1994-

1997 market shares, and by willfully ignoring the decisions of market

participants to adjust their focus in the interim, EPA has abandoned its

17 In setting baselines for new HCFCs that came on the market after

2003, EPA “us[ed] recent data,” thereby “ensur[ing] that the baseline

reflects the current market as closely as possible.” 74 Fed. Reg. at

66,432. The Agency further noted that if additional amounts are

needed, “inter-pollutant transfers could be used to make adjustments.”

Id. at 66,433.

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past insistence that market reliance is imperative.18 The legal infirmity

in the Final Rule is that EPA has articulated no rational justification

for this policy, which results in an allocation scheme that is arbitrary in

the purest sense of the term.

EPA nowhere addressed its past statements regarding the importance of allowing HCFC allocations to be determined by market forces

and inter-pollutant transfers to reflect changes in the HCFC marketplace. EPA thus could not have supplied a reasoned analysis for its departure from precedent. The Final Rule must therefore be vacated and

the matter remanded for further consideration.

II. THE FINAL RULE MUST BE VACATED BECAUSE EPA

MISTAKENLY CONCLUDED THAT ITS POSITION IS

COMPELLED BY THE CLEAN AIR ACT.

Even if EPA had not changed its interpretation of the CAA without acknowledging its past interpretation, the Final Rule still would be

unsustainable. The Final Rule expresses EPA’s opinion that “[CAA]

section 607(b) is best read as permitting only year-by-year interpollutant transfers,” rather than permitting baseline inter-pollutant

18 Moreover, EPA has failed to demonstrate how its new system of a

baseline without inter-pollutant trading satisfies the Act’s requirement

that the baseline reflect a “representative calendar year.” CAA

§ 601(2)(C), 42 U.S.C. § 7671(2)(C).

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transfers. 74 Fed. Reg. at 66,421. The CAA imposes no such limitation,

however, and EPA erred in deciding it was so bound.

Although this Court must defer to an agency’s policy-driven interpretation of an ambiguous statute under Chevron U.S.A. Inc. v. NRDC,

467 U.S. 837 (1984), the Court does not defer “when the agency wrongly

believes that interpretation is compelled by Congress,” Peter Pan Bus

Lines, Inc. v. Fed. Motor Carrier Safety Admin., 471 F.3d 1350, 1354

(D.C. Cir. 2006) (internal quotation marks omitted). In such a circumstance, the Court cannot “choose between competing meanings,” Alarm

Indus. Commc’ns Comm. v. FCC, 131 F.3d 1066, 1072 (D.C. Cir. 1997),

and remand is necessary so that the agency can “bring its experience

and expertise to bear in light of competing interests at stake,” PDK

Labs. Inc. v. DEA, 362 F.3d 786, 797-98 (D.C. Cir. 2004).

While the interpretation of ambiguous statutes falls within the

discretionary powers of executive agencies, judicial review is limited to

the interpretive justifications actually provided by the agency. See

State Farm, 463 U.S. at 43; Chenery, 332 U.S. at 196. Thus, this

Court’s role is limited to considering whether EPA was correct in concluding that “the language of section 607 and the legislative history”

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compelled the treatment of inter-pollutant transfers in the Final Rule.

74 Fed. Reg. at 66,421. Because neither the legislative history nor the

statutory text supports EPA’s interpretation, the Court must vacate the

Final Rule and remand the matter to EPA for further proceedings.

A. EPA Has Misinterpreted The Legislative History Of

CAA Section 607.

EPA’s reliance on the legislative history of CAA § 607 to distinguish between inter-pollutant and inter-company transfers is misplaced. Although EPA never before had relied upon the legislative history of the Act to interpret Section 607 and never indicated in its Proposed Rule that it was considering such an approach, the Final Rule

apparently adopts the interpretation advanced by Honeywell at the

close of the comment period. See JA 185-87, 263-64. EPA concluded

that the legislative history foreclosed the possibility of baseline interpollutant transfers because “neither the House nor the Senate bill contemplated permanent inter-pollutant transfers.” JA 264. But this reading is incorrect in light of how Section 607 came to be.

The House and Senate initially passed very different bills. The

Senate bill took a “basket” approach that provided each company with a

cap on its chemical production and consumption measured in ozoneCase: 09-1318 Document: 1230210 Filed: 02/16/2010 Page: 66
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depleting potential. Under the Senate approach, a market participant

was free to decide which chemicals to produce, and to switch freely between different chemicals, so long as the “combined ozone depletion

weighted amount of such substances” did not exceed the maximum allotted to that company. S. 1630, 101st Cong. § 702 (proposed CAA

§ 506) (as passed by Senate Apr. 3, 1990), reprinted in 3 STAFF OF S.

COMM. ON ENV’T & PUB. WORKS, 103D CONG., A LEGISLATIVE HISTORY OF

THE CLEAN AIR ACT AMENDMENTS OF 1990, at 4119, 4760 (Comm. Print

1993) [hereinafter LEGISLATIVE HISTORY]. As a necessary aspect of such

a program, any company could increase its consumption of one chemical

if it offset that increase by a proportionate decrease in another ozonedepleting substance. Because the Senate bill thus built inter-pollutant

transfers into the system, there was no need for separate chemicalspecific baselines.

The House amendment would have ensured compliance with the

Montreal Protocol by employing a “worst-first” phase-out that eliminated chemicals one by one. S. 1630, 101st Cong. § 711 (proposed CAA

§ 154) (as passed by House May 23, 1990), reprinted in 2 LEGISLATIVE

HISTORY, supra, at 1809, 2389. The House’s approach would have

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created distinct cap-and-trade systems for each ozone-depleting substance, and because the House bill did not permit trading of allowances

between substances, it did not incorporate any provision for baseline inter-pollutant transfers. See, e.g., Chafee-Baucus Statement of Senate

Managers, 1 LEGISLATIVE HISTORY, supra, at 731, 880, 927.

The Conference Committee melded key aspects of each bill to produce CAA § 607. Baselines were to be set on a chemical-by-chemical

basis, as per the House bill. See id. At the same time, the final legislation permitted free transfers of allowances between chemicals, following

the approach of the Senate bill, in order to maximize industry flexibility. See id. (explaining that the Conference bill directed EPA “to promulgate regulations that will authorize inter-pollutant transfers, as in

the Senate bill, and trades with other persons, as in the House amendment”). Nothing in the subsequent debates on the Conference bill suggested that inter-pollutant transfers were subject to additional restrictions. See, e.g., 1 id. at 1334.

EPA erred by relying upon the Chambers’ pre-Conference bills to

conclude that both Chambers intended to prohibit such transfers in the

final legislation reflecting the Conference compromise. Although the

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House bill did not contemplate inter-pollutant trading, the House ultimately agreed to the Senate’s approach. See 1 id. at 927. Free trading

of HCFCs was inherent in that approach, under which market participants could decide how to allocate a cumulative HCFC allowance. See

id. Under the Senate’s approach, a market participant plainly could

have shifted its priorities between 1997 and 2010 without having its actions nullified when a step-down occurred.

In short, because the Senate view on inter-pollutant flexibility

prevailed, the relevant legislative history shows that Congress understood that inter-pollutant transfers would be allowed freely. EPA thus

erred in uncritically adopting Honeywell’s misguided view of the legislative history as the foundation for its newly announced interpretation of

Section 607.

B. EPA Has Misinterpreted The Text Of CAA Section 607.

Likewise, EPA’s construction of the statute itself is mistaken. The

Final Rule takes the position that Congress unambiguously intended to

prohibit baseline transfers between pollutants, because it authorized “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

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ozone depletion weighted basis.” CAA § 607(b), 42 U.S.C. § 7671f(b)

(emphasis added); see 74 Fed. Reg. at 66,421. In EPA’s view, “[t]his

language emphasizes the year-by-year nature of such transactions,”

whereas the CAA’s provision governing inter-company transfers has no

such language.

EPA’s construction of the statute is incorrect. Section 607(b) prohibits only the transfer of an allowance for a particular control period to

a different control period. The reasons for such a requirement track the

Montreal Protocol, which imposes annual limits; if market participants

were allowed to transfer allowances from one control period to a different control period, then the United States could exceed its maximum allocation in years to which allowances were transferred. Baseline transfers introduce no such concern, as allowances are distributed each year

on the basis of the baseline (as adjusted through inter-pollutant transfers), and the allowances thus distributed can only be used during that

calendar year.19

19 To the contrary, a baseline inter-pollutant trade differs from a singleyear inter-pollutant trade in that the former survives from control period to control period. Thus, in the year following a baseline trade, the

allowances for that year will reflect the prior transfer. But such a meCase: 09-1318 Document: 1230210 Filed: 02/16/2010 Page: 70
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Nor can the inter-company provisions of Section 607(c) be used to

limit the inter-pollutant provisions of Section 607(b). Section 607(c)

permits inter-company transfers of baseline allowances, but requires

“an enforceable and quantifiable reduction in annual production which

* * * exceeds the reduction otherwise applicable to the transferor.”

Thus, if Congress had intended to prohibit permanent, inter-pollutant

transfers by emphasizing the annual nature of such trades, it likewise

emphasized the annual nature of inter-company trades. But EPA acknowledges that Congress authorized baseline inter-company trades.

Accordingly, EPA’s construction requires similar language within the

same statutory provision to take on different meanings. Because that

result has no basis in the statutory text, EPA misconstrued Congress’s

intent.

Because EPA wrongly believed that CAA § 607 forbids it from recognizing inter-pollutant baseline trades, its interpretation warrants no

Chevron deference. See Peter Pan Bus Lines, 471 F.3d at 1354

(“[D]eference to an agency’s interpretation of a statute is not approprichanism does nothing to move allowances from one year into another, so

baseline trades are entirely consistent with CAA § 607(b).

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ate when the agency wrongly believes that interpretation is compelled

by Congress.”) (internal quotation marks omitted); accord Transitional

Hosps. Corp. v. Shalala, 222 F.3d 1019, 1029 (D.C. Cir. 2000) (“While

the Secretary has discretion * * *, that discretion must be exercised

through the eyes of one who realizes she possesses it.”). The matter

must be remanded so that EPA can interpret the statute anew.20

20 While EPA relied on the CAA to conclude that it was prohibited from

recognizing permanent inter-pollutant trades, 74 Fed. Reg. at 66,421-

22, it also adverted to a number of policy justifications for that conclusion that were offered by commenters, id. at 66,421. But even if EPA

had issued the Final Rule on the basis of those policy justifications rather than its flawed statutory interpretation, remand would still be required. Before an agency may exercise its policymaking discretion, “it

necessarily ha[s] to decide what [the statute] mean[s].” PDK Labs., 362

F.3d at 798.

In any event, none of the supposed justifications for dishonoring

past baseline transfers holds water. For example, some commenters

stated that inter-pollutant transfers “could create incentives for future

manipulation of the allocation system in anticipation of the future control periods.” 74 Fed. Reg. at 66,421. But EPA did not consider any

evidence of manipulation, nor does it appear to have considered the

simple expedient of creating future subclasses of HCFCs between which

allowances could not be transferred. See CAA § 607(b)(3), 42 U.S.C.

§ 7671f(b)(3). Commenters also suggested that inter-pollutant trades

would result in a system based on capping total ozone depletion potential, rather than the chemical-by-chemical phaseout adopted in 1993.

74 Fed. Reg. at 66,421. However, inter-pollutant trades adjust only the

relative market shares of chemicals that have not been phased out and

do not have the potential to revive chemicals that have already been retired. In any event, CAA § 607(b), 42 U.S.C. § 7671f(b), specifically conCase: 09-1318 Document: 1230210 Filed: 02/16/2010 Page: 72
60

III. THE FINAL RULE MUST BE VACATED BECAUSE IT IS

IMPERMISSIBLY RETROACTIVE.

Although EPA is authorized to promulgate rules under the CAA,

it may not issue a regulation that is retroactive. But that is what it has

done here. The Final Rule must be vacated, and the matter remanded,

because the Final Rule has an impermissible retroactive effect.

A. Legislative Rules Cannot Have A Retroactive Effect.

Retroactivity is “disfavored in the law,” Eastern Enters. v. Apfel,

524 U.S. 498, 532 (1998) (plurality op.), because “[e]lementary considerations of fairness dictate that individuals should have an opportunity to

know what the law is and to conform their conduct accordingly,”

Landgraf v. USI Film Products, Inc., 511 U.S. 244, 265 (1994). Retroactive laws are particularly problematic because of the possibility that a

legislature or agency will “sweep away settled expectations suddenly

and without individualized consideration.” Landgraf, 511 U.S. at 266.

Retroactive actions raise concerns that a decisionmaker is responding to

“political pressures” to make decisions adversely affecting “unpopular

groups or individuals.” Id.

templates the transfer of allowances “on an ozone depletion weighted

basis,” so this concern is misplaced.

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An agency’s “power to promulgate legislative regulations is limited

to the authority delegated by Congress,” Bowen v. Georgetown Univ.

Hosp., 488 U.S. 204, 208 (1988); accordingly, regulations cannot be retrospective “unless that power is conveyed by Congress in express

terms,” id. As this Court has explained, “[t]he relevant provisions of the

Clean Air Act contain no language suggesting that Congress intended to

give EPA the unusual ability to implement rules retroactively.” Sierra

Club v. Whitman, 285 F.3d 63, 68 (D.C. Cir. 2002). Thus, if the Final

Rule has a retroactive effect, it cannot be sustained.21

B. The Final Rule Has A Retroactive Effect.

1. To determine whether a legislative rule is retroactive, this

Court examines whether the regulation “takes away or impairs vested

rights acquired under existing law, or creates a new obligation, imposes

a new duty, or attaches a new disability in respect to transactions or

considerations already past.” Ass’n of Accredited Cosmetology Schools v.

Alexander, 979 F.2d 859, 864 (D.C. Cir. 1992) (quoting Neild v. District

of Columbia, 110 F.2d 246, 254 (D.C. Cir. 1940), in turn quoting Soc’y

for Propagating the Gospel v. Wheeler, 22 F. Cas. 756, 767 (C.C.D.N.H.

21 This Court’s authority to vacate a rule issued without proper statutory authority stems from CAA § 307(d)(9), 42 U.S.C. § 7607(d)(9).

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1814) (Story, J.)). This inquiry “is not always a simple or mechanical

task,” Landgraf, 511 U.S. at 268, because the Court must engage in a

“commonsense, functional judgment about ‘whether the new provision

attaches new legal consequences to events completed before its enactment,’” Martin v. Hadix, 527 U.S. 343, 357-58 (1999) (quoting Landgraf,

511 U.S. at 270).

In the regulatory context, the same standard governs whether a

rule is retroactive. See Nat’l Mining Ass’n v. Dep’t of Labor, 292 F.3d

849, 859-60 (D.C. Cir. 2002). In the course of this inquiry, “[t]he critical

question is whether a challenged rule establishes an interpretation that

‘changes the legal landscape.’” Id. (quoting Health Ins. Ass'n of Am.,

Inc. v. Shalala, 23 F.3d 412, 423 (D.C. Cir. 1994)). Thus, an agency

cannot use a rulemaking to change the rules of a game already in

progress.

2. The Final Rule has just such a retroactive effect. When EPA

created the cap-and-trade system for HCFCs in 2003, it set a baseline

for each market participant “on a one-time basis.” 68 Fed. Reg. at

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2823.22 The Agency announced that the baseline could change, but only

through baseline transfers of allowances and that “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.” Id. Such a system was necessary to effectuate the Agency’s goal of “providing certainty and predictability to allowance holders.”

2001 Proposed Rule, 66 Fed. Reg. at 38,064.

Based on those representations, market participants such as Arkema and Solvay planned their HCFC operations and production investment decisions on the understanding that allocations could change

only through baseline transfers and percentage reductions. In 2008,

both Arkema and Solvay elected to pay a fee—the required allowance

22 Congress intended the starting baseline to be determined on a onetime basis. The statute defines “baseline year” to mean “a representative calendar year” for HCFCs, which did not have a developed market

when the CAA was amended. CAA § 601(2)(C)(ii), 42 U.S.C.

§ 7671(2)(C)(ii). For CFCs, which did have a developed market, Congress chose a particular year—either 1986 or 1989, depending on the

substance. CAA § 601(2)(A), (B), 42 U.S.C. § 7671(2)(A), (B). The fixing

of a single year for CFCs implies the same intent for HCFCs, and prevents EPA from scrapping the baseline system it selected in 2003 as

long as it is representative.

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offset that accompanies a transfer—to obtain the benefits they foresaw

in transferring their allowances.

The cap-and-trade system created in 2003 remains ongoing. Just

as EPA announced it would do at the outset, the Final Rule carries forward baseline allowances from the 2003 cap-and-trade system already

in place. However, notwithstanding the Agency’s prior position that limited the ways in which baselines could be changed, EPA reached back

into the past to change the effect of Arkema’s and Solvay’s baseline

transfers, even though the Agency previously had confirmed—on at

least three occasions—that the inter-pollutant trades had changed Arkema’s and Solvay’s baseline allowances. See supra pp. 14-16.

This is precisely the type of retroactivity that cannot be accomplished through rulemaking. EPA cannot use a legislative rule to “prescribe[] what the law was at an earlier time.” Plaut v. Spendthrift

Farm, Inc., 514 U.S. 211, 225 (1995). Although the cap-and-trade system continues and all other transfers continue to be recognized, EPA

now seeks to change the terms of the transactions it authorized for Arkema and Solvay. Because the Final Rule cannot permissibly change

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the legal consequences of actions that took place in 2008 and were approved by the Agency at that time, the Final Rule must be vacated.

CONCLUSION

For the above-stated reasons, the petition for review should be

granted, the Final Rule vacated, and the matter remanded to the EPA.

Dated: February 16, 2010

/s/ David M. Williamson

(with permission)

David M. Williamson

Gia V. Cribbs

ANDREWS KURTH LLP

1350 I Street, N.W., Suite 1100

Washington, DC 20005

(202) 662-2700

Of Counsel:

Carlos R. Escobar

SOLVAY NORTH AMERICA, LLC

3333 Richmond Avenue

Houston, TX 77098

Counsel for Petitioners Solvay

Fluorides, LLC and Solvay Solexis, Inc.

Respectfully submitted.

/s/ Brian D. Netter

Dan Himmelfarb

John S. Hahn

Roger W. Patrick

Brian D. Netter

MAYER BROWN LLP

1999 K Street, N.W.

Washington, DC 20006

(202) 263-3000

Of Counsel:

William J. Hamel

ARKEMA INC.

2000 Market Street

Philadelphia, PA 19103

Counsel for Petitioners Arkema Inc.

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CERTIFICATE OF COMPLIANCE

I hereby certify, pursuant to Fed. R. App. P. 32(a)(5) and (7)(B),

that the foregoing brief was prepared in 14-point Century Schoolbook

font, and contains 12,336 words, excluding the parts exempted by Fed.

R. App. P. 32(a)(7)(B)(iii) and Cir. R. 32(a)(1).

Dated: February 16, 2010 /s/ Brian D. Netter

Brian D. Netter

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67

CERTIFICATE OF SERVICE

I hereby certify, pursuant to Fed. R. App. P. 25(c), that on February 16, 2010, the foregoing was electronically filed with the Clerk of the

Court using the CM/ECF system, which will send a notification to the

attorneys of record in this matter, who are registered with the Court’s

CM/ECF system.

Dated: February 16, 2010 /s/ Brian D. Netter

Brian D. Netter

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STANDING ADDENDUM

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SA 1

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SA 2

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SA 3

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SA 4

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SA 5

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SA 6

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SA 7

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SA 8

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SA 9

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SA 10

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SA 11

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SA 12

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SA 13

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SA 14

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