ORAL ARGUMENT NOT YET SCHEDULED IN THE UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT
ARKEMA INC., et al Petitioners,

v. UNITED STATES ENVIRONMENTAL PROTECTION AGENCY, Respondent. Nos. 09

- 1 318 and 09

- 1 335 (Consolidated)

_________________________________________________________________ Petition s for Review Of Final Administrative Acti on Of The United States Environmental Protection Agency

__________________________________________________________________ BRIEF OF RESPONDENT ENVIRONMENTAL PROTECTION AGENCY

__________________________________________________________________ OF COUNSEL: DIANE E. McCONKEY Office of General Counsel U.S. Environmental Protection Agency Ariel Rios Building, 1200 Pennsylvania Avenue, N.W. Mail Code: 2344A Washington, D.C. 20460 Tel: (202) 564

- 5588

DATE: March 30 , 20 10 IGNACIA S. MORENO A ssistant Attorney General Environment & Natural Resources Div. PERRY M. ROSEN United States Department of Justice Environment & Natural Resources Div. Environmental Defense Section P.O. Box 23986 Washington D.C. 20026

- 3986 Tel: (202 ) 353

- 7792 Counsel for Respondent EPA Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 1ii CERTIFICATE AS TO PARTIES, RULINGS, AND RELATED CASES Pursuant to Circuit Rule 28(a)(1), counsel for Respondent United States Environmental Protection Agency (“EPA”) acknowledges that Petitioner’s Brief correctly s ets out the parties, rulings and related cases. References to the Ruling at issue appear in the brief for the Petitioner.

Respondent EPA is a governmental entity for which a corporate disclosure statement is not required. CORPRATE DISCLOUSRE STATEMENT

So certified this 30 th day of March, 2010 , by
Perry M. Rosen /s/ Perry M. Rosen Counsel for Respondent EPA Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 2iii TABLE OF CONTENTS TABLE OF AUTHORITIES................................................................v GLOSSARY ........................................................................... ......xi STATEMENT OF THE ISSUES

................................ ................................ ............... 1 STATUTES AND REGULATIONS

................................ ................................ ......... 1 STATEMENT OF THE CASE

................................ ................................ .................. 2 STATEMENT OF FACTS

................................ ................................ ........................ 5
I. STATUTORY BACKGROUND

................................ ................................ .... 5 A. The Montreal Protocol

................................ ................................ ........... 6
B. Title VI of the Clean Air Act

................................ ................................ 7
II. REGULATORY BACKGROUND

................................ ............................... 11 A. The 1993 Regulation: Governing the 1994

- 2002 Regulatory Period

................................ ................................ ................................ ... 12
B. The 2003 Regulation: Governing the 2003

- 2009 Regulatory Period

................................ ................................ ................................ ... 13 C. The 2010 Regulation: Governing the 2010

- 2014 Regulatory Period

................................ ................................ ................................ ... 15 SUMMARY OF ARGUMENT

................................ ................................ ............... 19 ARGUMENT

................................ ................................ ................................ ........... 22
I

. STANDARD OF REVIEW

................................ ................................ ........... 22
II. THE 2010 REGULATION DOES NOT REVERSE EPA’S PURPORTED PRIOR INTERPRETATION OF THE CLEAN AIR ACT WITHOUT A REASONED EXPLANATION

............................ 24 Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 3iv A. EPA Maintained No Policy Which Called for Inter

- Pollutant Tra n sfers to be Carried Forward to the 2010

- 2014 Regulatory Period

................................ ................................ ................................ ... 25
B. EPA Adequately Explained its Bases for Not Recognizing Prior Inter

- Pollutant Transfers in the New Regulatory Period

................................ ................................ ................................ ... 29 C. EPA Fully Explained its Consideration of Market Fac tors in Promulgating the 2010 Regulations

................................ .................... 37
D. Petitioners Availed Themselves of the Opportunity to Comment on Whether Title VI Allows Permanent Inter

- Pollutant Transfers Allowances, Comments Which EPA Fully Considered

...................... 42
III. EPA’S INTERPRETA TION OF THE CAA WAS A RATIONAL INTERPRETATION OF THE STATUTE

................................ ................... 47
IV. THE 2010 REGULATION IS NOT IMPERMISSIBLY RETROACTIVE

................................ ................................ ............................ 57 CONCLUSION

................................ ................................ ................................ ........ 60 Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 4v TABLE OF AUTHORITIES CASES Action for Children's Television v. FCC , 821 F.2d 741 (D. C. Cir. 1987)

.............. 36 America Farm Bureau Fed’ n v. EPA , 559 F.3d 512 (D.C. Cir. 2009)

.............. 23, 48 America Fed’ n of State, County & Municipal Employees v. FLRA 395 F.3d 443 (D.C. Cir. 2005)

................................ ................................ .............. 29 ,
American Iron & Steel Inst. v. EPA , 886 F.3d 390 (D.C. Cir. 2004)

...................... 46 Biovail Corp. v. U.S. Food & Drug Admin

. 519 F. Supp. 2d 39 (D.D.C. 2007)

................................ ................................ ........ 35 ,
Bluewater Network v. EPA , 372 F.3d 404 (D.C. Cir. 2004)

................................ ... 23 Bush Quayle v. FEC , 104 F.3d 448 (D.C. Cir. 1997)

................................ .............. 36 CSX Tra nsp. Inc. v. Surface Transp. B d

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

............ 46 C hemical Mfrs. Ass’ n v. NRDC, Inc. , 470 U.S. 116 (1985)

................................ ... 23 Chemical Waste Mgm t

. , Inc. v. EPA , 869 F.2d 1526 (D.C. Cir. 1989)

.................. 59

* Chevron U.S.A. Inc. v. NRDC, Inc. , 467 U.S. 837 (1984)

............................. 22, 47 City of Portland v. EPA , 507 F.3d 706 (D. C. Cir. 2007)

................................ ........ 46 Covad Commc'ns Co. v. FCC , 450 F.3d 528 (D.C. Cir. 2006)

............................... 46 DirecTV, Inc. v. FCC , 110 F.3d 816 (D.C. Cir. 1997)

................................ ............ 60 Environmental Integrity Project v. EPA , 425 F.3d 992 (D.C. Cir. 2005)

............... 46

* FCC v. Fox Television Stations, Inc.

________________________ , 129 S. C t. 1800 (2009)

............ 22 , 29, 35, 36 * Authorities upon which EPA chiefly relies are marked with asterisks. Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 5vi Fertilizer Inst. v. EPA , 935 F.2d 1303 (D.C. Cir. 1991)

................................ .......... 46 Honeywell Int’ l, Inc. v. EPA , 374 F.3d 1363 (D.C. Cir. 2004)

................................ . 7 Huls America Inc. v. Browner , 83 F.3d 445 (D.C. Cir. 1996)

.......................... 23, 4 8 Long Island Care at Home, Ltd. v. Coke , 551 U.S. 158 (2007)

.............................. 47 Mobile Relay Assoc s . v. FCC , 457 F.3d 1 (D.C. Cir. 2006)

................................ ... 59 Motor Vehicle Mf rs . Ass ’ n v. State Farm Mut. Auto. Ins. Co. 463 U.S. 29 (1983)

................................ ................................ .......................... 22, 30 ,

NRDC v. EPA , 464 F.3d 1 (D.C. Cir. 2006)

................................ ......................... 5, 6 NRDC v. EPA , 571 F.3d 1245 (D.C. Cir. 2009)

................................ ..................... 23 Nat’l Cable & Telecomm s . Ass ’ n v. Brand X Internet Services 545 U.S. 967 (2005)

................................ ................................ .............................. 30 ,
In re Permian Basin Area Rate Cases , 390 U.S. 747 (1968)

................................ ... 30 Public Citizen, Inc. v. FAA , 988 F.2d 186 (D.C. Cir. 1993)

................................ ... 35 Sinclair Broadcast Group, Inc. v. FCC , 284 F.3d 148 (D.C. Cir. 2002)

................. 59 Smiley v. Citibank , 517 U.S. 735 (1996)

................................ ................................ . 26 Tourus Records, Inc. v. DEA , 259 F.3d 731 (D.C. Cir. 2001)

................................ 35
U nited States v. Mead Corp. , 533 U.S. 218 (2001)

................................ ................. 23 STATUTES Clean Air Act, 42 U.S.C. §§7401

- 7671q (“CAA”): Section 307(d)(3), 4 2 U.S.C. § 7607(d)(3)

................................ ............................... 43

* Section 307(d)(8), 42 U.S.C. §7607(d)(8)

................................ ....................... 23, 44 Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 6vii Section 307(d)(9), 42 U.S.C. §7607(d)(9)

................................ ............................... 22 Secti ons 601

- 608, 42 U.S.C. §§7671

- 7671q ( Title VI )

................................ ........ 2 , 7 Section 601(2), 42 U.S.C. §7671(2)

................................ ................................ ........ 13 Sections 601(6), (11), 42 U.S.C. §§7671(6), (11)

................................ ..................... 2 Section 602, 42 U.S.C. §7671a

................................ ................................ .................. 7 Section 605, 42 U.S.C. §7671d

................................ ................................ .................. 7 Section 605(d), 42 U.S.C. §7671d(d)

................................ ................................ ...... 39 Secti on 606(a), 42 U.S.C. §7671e(a)

................................ ................................ ......... 7

* Section 607, 42 U.S.C. §7671f

................................ ................................ ............ 4, 7 Section 607(a), 42 U.S.C. §7671f(a)

................................ ................................ .......... 8 Section 607(b), 42 U.S.C. §7671f(b)

................................ ................................ ... 9 , 48 Section 607(b)(1), 42 U.S.C. §7671f(b)(1)

................................ .............................. 11 Section 607(c), 42 U.S.C. §7671f(c)

................................ ................................ .... 9 , 11 Section 607(d) , 42 U.S.C. §7671f(d)

................................ ................................ ....... 11 Section 608(a)(3), 42 U.S.C. §7671g(a)(3)

................................ ............................. 33 REGULATIONS 40 C.F.R. §82.3

................................ ................................ ................................ ........ 58 40 C.F.R. § 82.15

................................ ................................ ................................ ...... 27 40 C.F.R. §82.23

................................ ................................ ................................ ...... 55 40 C.F.R. §82.23(d)

................................ ................................ ................................ . 55 Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 7viii FEDERAL REGISTER 56 Fed. Reg. 49,548, 49,561 (Sept. 30, 1991)

................................ ......................... 41 58 Fed. Reg. 65, 018, 65,026 (Dec. 10, 1993)

................................ .......................... 11 58 Fed. Reg. at 65,025

................................ ................................ ............................. 12 58 Fed. Reg. at 65,026

................................ ................................ ........................... 12 59 Fed. Reg. 13,044 (Mar. 18, 1994)

................................ ................................ ......... 6 65 Fed. Reg. 42,653 (July 11, 2000)

................................ ................................ .......... 6 65 Fed. Reg. at 42,655

................................ ................................ ............................... 6

* 68 Fed. Reg. 2820, 2821 (Jan. 21, 2003)

................................ ................................ . 6 68 Fed. Reg. at 2821

................................ ................................ ................................ 13 68 Fed. Reg. at 2822

................................ ................................ ................................ .. 8 68 Fed. Reg. at 2824, 2832

................................ ................................ ...................... 13 68 Fed. Reg. at 2827

................................ ................................ ................................ 12 68 Fed. Reg. at 2831

- 32

................................ ................................ ........................... 14 68 Fed. Reg. at 2831

- 33

................................ ................................ ........................... 13 68 Fed. Reg. at 2833

................................ ................................ .......................... 10 , 14 68 Fed. Reg. at 2833

- 34

................................ ................................ ........................... 14 68 Fed. Reg. at 2835

................................ ................................ .......................... 14, 49 68 Fed. Reg. at 2849

................................ ................................ ............................ 13 Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 8ix 73 Fed. Reg. 78,680 (Dec. 23, 2008) ("Proposed Rule")

................................ ........ 16 73 Fed. Reg. at 78,703

................................ ................................ ............................. 50

* 74 Fed. Reg. 66,412 (Dec. 15, 2009) (“2010 Regulation”)

................................ . 2 , 6 74 Fed. Reg. at 66,413

- 16

................................ ................................ ........................ 11 74 Fed. Reg. at 66,414

................................ ................................ ............................... 7 74 Fed. Reg. at 66,415

................................ ................................ ....................... 13 , 28 74 Fed. Reg. at 66,41 6

................................ ................................ ......................... 7, 40 74 Fed. Reg. at 66,418

................................ ................................ ............................. 58 74 Fed. Reg. at 66,419

................................ ................................ ................. 18 , 40, 41 74 Fed. Reg. at 66,419

- 20

................................ ................................ .................. 18 , 19 74 Fed. Reg. at 66,419

- 21

................................ ................................ .................. 42 , 59 74 Fed. Reg. at 66,420

................................ ................................ ......... 17, 18, 41, 43 74 Fed. Reg. at 66,420

- 21

................................ ................................ ...... 30, 31, 34, 39 74 Fed. Reg. at 66,420

- 22

................................ ................................ ........................ 40 74 F ed. Reg. at 66,421

................................ ................................ ... 31, 32, 34, 41 , 50 74 Fed. Reg. at 66,421

- 22

................................ ................................ ............ 44 , 49, 57 74 Fed. Reg. at 66,422

................................ ................................ ........................... 49
7 4 Fed. Reg. at 66,422

- 27

................................ ................................ ........................ 33 74 Fed. Reg. at 66,423

................................ ................................ ....................... 32 , 33 74 Fed. Reg. at 66,424

................................ ................................ ....................... 15, 16 Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 9x 74 Fed. Reg. at 66,430

- 33

................................ ................................ ........................ 39 74 Fed. Reg. at 66,434

................................ ................................ ............................. 32 74 Fed. Reg. at 66,446

................................ ................................ ............................. 50 74 Fed. Reg. at 66,446

- 47

................................ ................................ ........................ 19 LEGISLATIVE MATERIALS Chaffee

- Baucus Statement of Senate Managers, reprinted in 1 A Legislative History of the Clean Air Act Amendments of 1990 (Comm. Print 1993) at 927

................................ ................................ ................................ .......... 53 , 54 Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 10xi AR Administrative Record GLOSSARY

CAA Clean Air Act, 42 U.S.C. §§ 7401

- 7671q
CFCs C hlor o flu o rocarbons
EPA United States Environmental Protection Agency
HCFCs H ydrochlor o flu o rocarbons
JA Joint Appendix Proposed Rule 73 Fed. Reg. 78,680 (Dec. 23, 2008)
Protocol Montreal Protocol on Substances that Deplete the Ozone Layer 1993 Regulation 58 Fed. Reg. 65,018 (Dec. 10, 1993) 2003 Regulation 68 Fed. Reg. 2820, 2821 (Jan. 21, 2003) 2010 Regulation 74 Fed. Reg. 66,412 (Dec. 15, 2009) Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 111. In allocating a limited and ever

- diminishing number of allowances to produce ozone

- depleting substances, did EPA adequately explain why it chose not to recognize past inter

- pollutant allowance transfers in setting baselines for the new 2010

- 2014 regulatory step

- down period? STATEMENT OF THE ISSUES

2. Did EPA rationally interpret Title VI of the Clean Air Act , which declares that allowances for one type of ozone - depleting substance may be transferred for allowances of a different substance “for the sam e year , ” as not providing for such inter

- pollutant transfers to be given effect in subsequent regulatory periods ? 3. Is EPA’s regulation governing allocation of ozone depletion allowances for the 2010

- 2014 regulatory step

- down period , which does not gove rn actions that occurred prior to 2010, impermissibly retroactive because it purportedly interfered with Petitioners’ unilateral business expectations ?

Pertinent statutes and regulations are contained in the statutory addendum to Petitioners’ brief. STATUTES AND REGULATIONS Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 122 Arkema Inc. (“Arkema”) , Solvay Fluorides, LLC , and Solvay Solexis, Inc. (“Solvay”) (collectively “Petitioners”) , filed th ese consolidated actions challeng ing a regulation issued by Respondent United States En vironmental Protection Agency (“EPA”) en titled “Protection of Stratospheric Ozone: Adjustments to the Allowance System for Controlling HCFC Production, Import, and Export,” 74 Fed. Reg. 66,412 (Dec. 15, 2009) , which became effective on January 1, 2010 (the

“ 2010 Regulation”). Th is R egulation is one in a series issued by EPA since 1990 , promulgated to effectuat e a mandate of the Clean Air Act to phase out ozone depleting substances , which are destroying the stratospheric ozone layer in our atmosphere. STATEMENT OF THE CASE

Pu rsuant to Title VI of the Clean Air Act (“ CAA ”), 42 U.S.C. §§7671

- 7671 q , EPA has implemented the phase

- o ut of ozone - depleting substances primarily through the grant of “allowances” to those companies that historically produce d and “consumed” these substances

. 1

1 “Production” refers to the manufacture of a covered substance. “Consumption” means production, plus imports and minus exports. 42 U.S.C. §7671(6), (11). Although Petitioners’ arguments apply equally to both production and consumption allowances, for ease of reference EPA describes the program in the cont ext of production allowances and differentiates between the two types of allowances where relevant. A llowance s , which act as a cap on production, permit companies to produce a designated percentage ( established by EPA for each regulatory “step

- down” period ) of each individual company’s Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 133 baseline production of specific ozone - depleting substances

. The baseline s for the

ozone - depleting substance s at issue in this case, hydrochlor o flu o rocarbons (“HCFCs”) , w ere established by EPA in 2003 and are measured by each company’s maximum annual production of HCFCs in any year between 1994 and 19 97. During the prior regulatory step

- down period of 2003

- 2009, companies were permi tted to conduct both inter

- company and inter

- pollutant tra nsfers of HCFC allowances

. “ Inter

- company ” transfers permit one company to transfer (sell) allowances for a single HCFC to another company

. In contrast , “ i nter

- pollutant ” transfers generally permi t a single company to convert its own allowances allocated for one HCFC into allowances for a different HCFC which is in greater demand

. Under th is 2003

- 2009 regulatory regime, t ransfers of allowances were to occur within the same control period (i.e., the same year), but companies could, under certain circumstances, trade baseline allowances, which would effectively increase (for the transferee) or decrease (for the transferor) their baseline apportionment for the remainder of the regulatory period

. Tr ansfer s of baseline allowances were, however, designed to be limited to inter

- company, single

pollutant transfers , to ensure that the overall baseline associated with each chemical was not altered

. Additionally , to the extent inter

- pollutant baseline Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 144 tran sfers occurred, they had no defined status past the applicable regulatory period, which expired on December 31, 2009. Petitioners are HCFC manufacturers and importers that previously availed themselves of the opportunity to convert allowances of one chemi cal (HCFC

142b), for which there was diminishing market demand, into allowances of another chemical (HCFC

- 22), for which there was higher demand , i.e., inter

- pollutant transfers

. In the 2010 Regulation, EPA determined that it would not recognize inter

- pol lutant transfers conducted between 2003 and 2009 in setting the baselines for the 2010

- 2014 regulatory period , because recognition of such transfers would, inter alia

Petitioners do not challenge the substan tive bases for EPA’s decision

. Instead, Petitioners assert merely that EPA failed to adequately explain why it chose not to recognize past inter

- pollutant trades in setting baselines for the 2010

- : facilitate potential manipulation of the market; significantly impact customers and user s of HCFCs; require EPA to significantly reduce the allowances of every other HCFC producer in order to achieve the same degree of environmental protection ; and significantly hinder EPA’s “worst

- first” regulatory regime, which eliminates HCFCs by first tar geting the specific chemicals with the highest ozone

- depletion potential. EPA also found that recognizing inter

- pollutant transfers in a subsequent regulatory period was not generally supported by the statute that provided for the transfer of allowances, 42 U.S.C. §7671f. Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 155 2014 regulatory period and further f ailed to give noti ce in the Proposed Rule that EPA might conclude that Title VI of the CAA does not support the perpetual recognition of inter

- pollutant transfers . Petitioners separately assert that the 2010 Regulation is impermissibly retroactive , even though it expressly applies solely to actions taken on or after January 1, 2010.
EPA’s establishment of the 2010

- 20 14 baseline s scrupulously adheres to Congress’ mandate to eliminat e HCFCs at least as fast as required by the international treaty upon which that mandate is based , is founded up on extensive market analysis , applies to Petitioners in exactly the same manner as it applies to every other covered entity, and applies only prospectively

. Because EPA explained in great detail , after extensive comment from Petitioners, both the bases for its conclusions re lating to the establishment of baselines and the manner in which Title VI should be interpreted, and because t he 2010 Regulation has no application to inter

- pollut ant transfers which occurred prior to its promulgation , there exists no legal basis to grant the Petition s for Review

.

I. STATEMENT OF FACTS

In the 1970s , scientists determined that certain man

- made chemicals were destroying the lay er of stratospheric ozone, which absorbs ultraviolet radiation. STATUTORY BACKGROUND

NRDC v. EPA , 464 F.3d 1, 3 (D.C. Cir. 200 6 ). Increased exposure to ultraviolet Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 166 radiation can result in skin cancer and a host of other ailments. Id.

A. The offending chemicals, which are use d as refrigerants and for other industrial purposes , include chlorofluorocarbons (“CFCs”) and hydrochlor o flu o rocarbons (“HCFCs”)

. The Montreal Protocol In 1987, the United States signed the Montreal Protocol on Substances that Deplete the Ozone Lay er (the “Protocol”), which sought “ to limit or eliminate the production and/or consumption of ozone

- depleting substances in a stepwise fashion over time , ” 65 Fed. Reg. 42,653, 42,655 (July 11, 2000) , with an initial focus on CFCs

. 59 Fed . Reg. 13,044 (March 18, 1994)

. In June 1 990, the parties amended the Protocol to accelerate the phase

- out schedule for CFCs , and identif ied “HCFCs as transitional substitutes for chlorofluorocarbons (CFCs) and other more destructive ozone

- depleting subs tances, but agreed to phase out HCFCs because of their significant potential to destroy stratospheric ozone as well.” 65 Fed. Reg. at 42,655. HCFCs , like CFCs before them, are to be phased out in a “stepwise fashion,” under which ever

- reduci ng caps on these chemicals take effect on specific dates. 74 Fed. Reg. at 66,412. Under the terms of the Protocol , the United States was required to phase out 35% of its historic HCFC production (measured by 1989 levels) by 2004 . 68 Fed. Reg. 2820, 2821 (Jan. 21, 2003). This “National Cap” Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 177 requires the United States to reduce its 1989 HCFC production levels by 75% by 2010 , 90% by 2015 , 99.5% by 2020 and 100% by 2030

. 74 Fed. Reg. at 66,41 4

. B. In 1990, Congress enacted T itle VI (Sections 601

- 618) of the Clean Air Act (“ CAA ”) , Title VI of the Clean Air Act

42 U.S.C. §§7671

- 7671q , to protect the stratospheric ozone layer consistent with the Protocol. Honeywell Int ’l , Inc. v. EPA

42 U.S.C. §7671a , 374 F.3d 1363, 1364 (D.C. Cir. 2004). Title VI divides ozone

- depleting substances into Class I , consist ing in part o f CFCs , and Class II, con sist ing wholly of HCFCs.

. Under CAA §605, 42 U.S.C. §7671d , Congress directed EPA to promulgate regulations phasing out the production of HCFCs pursuant to a specific schedule

. 42 U.S.C. §7671d. EPA was to accelerate that schedule if any of a number of criteria, such a s amendment of the Protocol step

- down period s, occurred. CAA § 606(a), 42 U.S.C. § 7671e(a). All of the established criteria for acceleration have been met and so EPA has issued an accelerated phase

- out schedule for United States producers

. 74 Fed. Reg. at 66,416. To effectuate the phase

- out of these substances, Congress directed EPA to promulgate rules that would create and manage allowances , which affirmatively limit the amount of Class II substances a manufacturer /importer ma y produce and

consume . C AA §607, 42 U.S.C. §7671f. Th is provision does not direct EPA to Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 188 use any specific system for determining : (a) the underlying nature of allowances (e.g., whether they are based on specific chemicals or the overall ozone

- depletion potential of a basket of c hemicals ) ; (b) the method of measuring the allowances (e.g., whether the allowances wou ld be based on gross tonnage or a percentage of a defined baseline ); or (c) the method of allocating the allowances (e.g., whether they will be auctioned to the highest bidder, allocated based on historical production , or adjusted to reflect changes in the marketplace )

. Instead, in directing EPA to promulgate regulations to create and manage allowances, and in particular the rules governing the t ransfer of allowances, Congress gave EPA a single, clear directive: “Such rules shall insure that the [transfer] transactions under the authority of this section will result in greater total reductions in the production in each year of class I and class II substances than would occur in that year in the absence of such transactions.” 42 U.S.C. §7671f(a) (emphasis added). See also

Pursuant to the broad authority it was granted , EPA promulgated regulations that , JA 194, wherein Petitioner Arkema notes this as the only constraint on what is otherwise the “Agency[’s] broad discretion to fashion th o se regulations . . . .”

inter alia , allocated allowances on a chemical

- by

- chemical basis , rather than based on the ozone - depleting potential of a basket of chemicals, the system used by some other countries subject to the Protocol . 68 Fed. Reg. at 2822. Under the Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 199 “basket” concept, manufacturers can continue to produce all types of HCFCs so long as the aggregate ozone - depletion potential of the entire basket of HCFCs does not exceed the overall cap set by the administering agency. In contrast, the chemical

- by

- chemical approach, which EPA found considerably easier to administer for both EPA and regulated entities , focuses on reaching the same overall cap by initially eliminating those HCF Cs with the highest ozone - depletion potential , the so

- called “worst

- first” approach

. In addition to authorizing EPA to allocate allowances, CAA § 607 provides for two types of allowance transfers. Subsection (c) , entitled “Trades with other Persons,” pe rmits a company to tra nsfer its allowances to another company (“inter

company” transfers)

. 42 U.S.C. §7671f(c). Thus, a company that has excess allowances of HCFC

- 22 may transfer (sell) some of those allowances to another
company. When such a single

- pol lutant transfer occurs , the ultimate number of allowances for a particular HCFC to be potentially utilized by all U.S. producers and importers does not increase , since they are merely shifted to another entity

. Subsection (b) of CAA §607 allows for “ i nter

- pollutant” transfers. 42 U.S.C. §7671f(b). Under this provision , a company t hat had , for example, expanded its market for HCFC

- 22 , could convert its own unused allowances for a less popular chemical, such as HCFC

- 142b , to HCFC

- 22 allowances

. In contras t to inter

- company , single

- pollutant transfers, a n inter

- pollutant transfer does result Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 2010 in greater use and emissions of a specific HCFC, because it increases the allowances for a specific HCFC without a corresponding reduction of allowances for that same c hemical at some other company

. 2
When inter

- pollutant transfers are conducted on an annual basis within a given regulatory period , they provide market flexibility without having significant effect on EPA’s chemical

- by

- chemical approach to the gradual elim ination of HCFCs. If, however, past inter

- pollutant transfers are allowed to impact future regulatory period s (e.g., through permanent increases to a company’s baseline for production of a more desired HCFC ) , such transfers threaten the ability of EPA to use its worst

- first approach to ensure that the U nited States will be able to meet the step

- down requirements of the Protocol , since the caps set by EPA for that HCFC will be exceeded absent the promulgation of offsets (taken from other companies or from a llotments designated for recycling and reclamation ) to compensate for such exceede nces . Congress took special care to explain that inter

- pollutant transfers were to be effective only for a given year: “The rules under this section [labeled ‘Inter

pollu tant transfers’] shall permit a production allowance for a substance for any

2 Although i nter

- pollutant transfers can occur between different companies, e.g., where one company trades HCFC

- 142b allowances in exchange for another com pany’s HCFC

- 22 allowances , in practice such transfers are unusual . T hus , inter

- pollutant transfers are often referred to as “intra

- company” transfers. 68 Fed. Reg. at 2833

. Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 2111 year to be transferred for a production allowance for another substance for the
same year on an ozone depletion weighted basis.” 42 U.S.C. §7671f(b)(1) (emphasis added). See als o 42 U.S.C. §7671f(d), applying the same rule to consumption allowances. There is no similar cautionary “same year” language in the subsection governing inter

- company transfers. See
II. 42 U.S.C. §7671f(c).

From the outset, E PA est ablished “ regulatory period s ” that would match the step

- down time periods for ozone

- depleting substances contained in the Protocol. REGULATORY BACKGROUND

See , e.g. , 58 Fed. Reg. 65,018, 65,02 6 (Dec. 10, 1993), explaining that EPA’s regulations contain “specific timetables for the phase

- outs of each compound that EPA expects will result in full compliance with the phased reductions called for by the Protocol Amendment.” Regulating for specific time periods also allowed EPA to rework its regulatory framework as the Protocol was amended over the years to institute new treaty requirements, some of them reflecting substantial changes to the original Protocol. See e.g. , 74 Fed. Reg. at 66,413

- 16 , explaining the changes to the Protocol instituted under the London Amendment of 1990, t he Copenhagen Amendment of 1992, the Beijing Amendment of 1999, and the Montreal Amendments of 2007. Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 2212 A. In response to the Copenhagen Amendment of 1992, i n 1 993 E PA established its chemica l

- by

- chemical phase

- out approach for HCFCs to implement the step

- down periods under the Protocol

. 58 Fed. Reg. 65,018, 65,025 (Dec. 10, 1993) (the “1993 Regulation”). As part of this approach , EPA restrict ed the production of particular HCFCs to specifi ed uses at the beginning of certain step

down periods. The 1993 Regulation : Governing the 199 4
- 2002 Regulatory Period

Id.

Although an allowance system for HCFCs would ultimately need to be implemented to reach t he phase

- out levels for 2010 and subsequent step

- downs, EPA determined in the 1993 Regulation that it was premature to establish baselines for these chemicals during the 1994

- 2002 regulatory period. 58 Fed. Reg. at 65,025. As EPA explained, the prudent a pproach to determining the appropriate baseline and allowances was for EPA to “continue to monitor the production and consumption of these chemicals [HCFCs] to determine the appropriate baseline to ensure that the requirements of the Copenhagen Amendments and the Clean Air Act are met.” at 65,026. For the two HCFCs at issue in this case, HCFC

- 22 and HCFC

- 142b, the 1993 R egulation prohibited production in 2010 and thereafter for all domestic uses , with a n exemption allowing produ ction until 2020 for the servicing of air

- conditioning and refrigeration equipment manufactured before January 1, 2010 (the “after

- market”)

. 68 Fed. Reg. at 242 7

.

Id. Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 2313 B. In 2003 , EPA set the baseline s for the production and consumption of three HCFCs ( HCFC

- 141b, HCFC

- 22, and HCFC

- 142b ) and established the allowances f

or each company that would apply through December 31, 2009 . 68 Fed. Reg. at 2831

- 33 (the “2003 R egulation ”)

. Specifically, EPA determined that each company could produce 100% of its baseline of HCFC

- 22 and HCFC

- 142b in 2003

- 2009. The 2003 Regulation : Governing the 2003
- 2009 Regulatory Period

Id.

In the 200 3 Regulation EPA also determined that for HCFC

- 22 and HCFC

142b, the baseline year, defined in Title VI as “a representative calendar year selected by the Administrator,” 42 U.S.C. §7671(2), would be the year between 1994 and 1997 when each company produced and consumed its highest level of HCFCs. 68 Fed. Reg. at 2824, 2832. Thus, allowances ( defined as a set at 2849. This is b ecause, using its “worst

- first” approach, EPA achieved the initial phase

- out levels of HCFCs required by the Protocol through a total ban of HCFC

- 141b, which had a higher ozone depletion potential than either HCFC

- 22 or HCFC

- 142b. 74 Fed. Reg. at 66,415. Identifying the two chemicals at issue in this case as next on the “worst

- first” list, EPA warned in the 2003 Regulation that prior to 2010 it would be issuing a new regulation to implement the 2010 step

- down reduction s for HCFC

- 22 and HCFC

- 142b , a perio d which would require the United States to move from 35% below 19 89 HCFC levels to 6 5% (later changed to 75%) below 19 89 levels

. 68 Fed. Reg. at 282 1

. Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 2414 percentage of a company’s baseline) would be based on each company’s maximum historical output

. 3
T he 2003 R egulation also spoke directly to the transfer of allowances

. 68 Fed. Reg. at 2833

- 34. EPA explained that while companies might choose to “conduct inter

- pollutant transfers over the short term . . . , the opportunities for
inter

- pollutant transfers will decrease over time .” Id. at 2833 (emphasis added)

. The 2003 Regulation also included a specific section labeled “Permanent Trans fers of Baseline Allowances , ” in which EPA expressly defined a “ p ermanent ” t ransfer of b aseline a llowances as one that occur s , not through intra

- company , inter

pollutant transfers , but rather between companies: “The permanent transfer of ba se line allowance s is a lasting shift of some quantity of a company’s allowances to another company .” Id. at 2835 (emphasis added)

. 4

3 EPA identified 1994

- 1997 because by 1998 companies had become aware of EPA’s i ntention to restrict HCFCs based on a company’s historic output and so could manipulate their output to generate a larger baseline. 68 Fed. Reg. at 2831

- 32. In their Motion for a Stay filed in this case (D kt . 1222488 , hereinafter “Stay Brief”) , Petitione rs contended that EPA violated 42 U.S.C. §7671(2) by the manner in which it defined the “representative calendar year.” T his argument lack s merit for at least five different reasons, including the fact that it was not raised during the administrative proc ess. See EPA Brief, D kt

. 1226037 at 21

- 24. Although Petitioners continue to complain about EPA’s designation of the representative calendar year (Pet. Br. 51, n.18), their brief on the merits does not contest the 2010 Regulation on this basis. According ly, EPA will not address that point herein.
4 Petitioners assert that this statement was meant only to be an example of a permanent transfer, Pet. Br. 38, but that clearly is not the case. The express language of this statement, its position as the first sentence under the heading Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 2515 C. The 2010 Regulation : Governing the 2010
- 2014 Regulatory Period
W hatever inter

- company or inter

- pollutant trades may have occurr ed between 2003 and 2009, all allowances of all entities expired on December 31, 2009

. As EPA explained to Petitioners and other s in 2008 , unless EPA issued a new regulation establishing new allowances, as of January 1, 2010 , no company would be permitted to produce or consume any of the HCFCs at issue

. See e.g.

Because of the pending expiration of allowances on December 31, 2009, EPA initiated early steps to evaluat e how to structure and operate an allowanc e

s ystem in the next regulatory period. In or around 200 5 , EPA commissioned a

“ S ervicing T ail R eport , ” designed to analyze market needs for continuing use of HCFCs after January 1, 2010. 74 Fed. Reg. at 66,424. EPA used its Vintaging Model tool to form the basis for quantitative estimates of projected HCFC demand and published a Notice of Data Availability in November 2005. , JA 80 (“EPA noted that until a [new] rule is finalized, there are no allowances after 2009 for HCFC

- 22 or HCFC

- 142b production or import.”); JA 63 ( “No allowances exist after 2009 without [a new] rulemaking, [which] means no HCFC

- 22 or HCFC

- 142b production or import unless the rule is complete

. ” ).

Id.

“Permanent Transfers of Baseline Allowances,” and the context of the rest of that section, makes clear that EPA told stakeholders in 2003 that permanent transfers of baseline allowances were those that occurred between companies

. Between 2005 Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 2616 and 2008, EPA updated its Servicing Tail R eport several times to reflect the 2007 Montreal Protocol amendments, c onsider more recent production data, and address more recent trends in the air conditioning and refrigeration sectors. Id. In addition to assessing how best to address the market’s needs for continued use of HCFCs while they were gradually being e limin ated , EPA retained outside consultants to help it analy ze its “regulatory options for a llocating HCFC allowances after 2009.” JA 15

- 23, March 2008 draft report of ICF International. This report outlined various regulatory options, describing the benefits and drawbacks of each. Id. Even at this early stage, Petitioners were aware that EPA might establish baselines in the new regulation that would not recognize prior baseline transfers. See , e .g.

On December 23, 2008, EPA issued its Proposed Rule. 73 Fed. Reg. 78,680 (“Proposed Rule”) . In proposing as one alternative the possible continued use of the baselines it had used for the 200 3

- 2009 regulatory period, EPA explained that although the P roposed R ule contained a table that reflected adjustments resulting from past inter

- pollutant transfers as well as inter

- company baseline transfers , EPA , JA 86 ( a June 2008 stakeholders’ meeting where Petitione rs assert ed that EPA had previously allowed for the alteration of baselines “through permanent transfers of allowances” and offered their support for the continue d use of a baseline concept “as long as . . . trading of allowances continues to be recognized ” ). Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 2717 was considering “establish[ing] a percentage of baseline allowances for each HCFC ‘with or without cons idering any permanent baseline transfers and/or inter

pollutant transfers that resulted in a different amount of production or consumption for a specific HCFC.’” 74 Fed. Reg. at 66,420 (emphasis added)

. Written comments on the Proposed Rule were submit ted between March and May, 2009. Arkema and Solvay submitted a total of five sets of comments strenuously urging recognition of pre

- 2010 inter

- pollutant baseline transfers in setting companies’ baselines for the next 5

- year step

- down period. JA 149

- 62;
1 94

- 201

. B y Arkema’s own calculation, granting it the allowances it asserts it is entitled to based on its past inter

- pollutant tra n s fers, would add more than 4,6 00 metric tons of HCFCs to the atmosphere due t o its 2010 production alone . Arkema Stay B r. 10, n.3. In studying the accommodation that would need to be made to compensate for such increased production , EPA determined that if Petitioners’ prior inter

- pollutant transfer s were carried forward into the new regulatory period, EPA would have to re duce the allowances for the 19 other companies producing or importing HCFCs by nearly 16% below the allowances each would otherwise be allocated based on the designated percentage of their historical output

. JA 262

- 63. On December 15, 2009, EPA issued the 2010 Regulation as a final rule

. As EPA explained, for the period 2010

- 2014 , it was not wedded

– and certainly not Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 2818 obligated

– to use any system that continued the baselines established in the 2003 rule, let alone a system that gave permanent effect t o inter

- pollutant transfers that occurred during 2004

- 2009

. Indeed, EPA considered five options for reducing HCFCs during the 2010

- 2014 timeframe , including an auction system a s well as allocating allowances based on recent chemical sales and use data. 7 4 Fed. Reg. at 66,419. EPA explained that f our of the five options “would require the Agency to disregard the existing baseline in its entirety and rely on another basis for allocati ng production and consumption allowances.” Id.
In cons idering the options, EPA recognized that every alternative it considered and virtually every manner in which it could apply different alternatives

w ould benefit some entities at the expense of others. 74 Fed. Reg. at 66,419. That simply is the nature of a process under which EPA adopts methods for allocating a limited and diminishing number of allowances. For example, Arkema, Solvay and fellow existing importers and producers are advantaged over new market entrants, who receive no allocation of allowance s under the 2010 Regulation but instead must purchase them from existing importers or producers . 74 Fed. Reg. at 66,419

- 20. at 66,419

- 20

.

In the end, the 2010 Regulation implements an allocation system similar to that utilized in the prior step

- down period. Id. at 66,419

- 20. For the reasons detailed infra , EPA ultimately chose not to reflect past inter

- pollutant baseline Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 2919 transfers in the baselines for 2010

- 2014. Id

. Nevertheless, u nder the final 2010 Regulation, both Arkema and Solvay were granted the identical baseline s each received in the 2003 regulation, which were themselves based on each company’s highest consumption and production year s and are based on the same metric applied to all other regulated companies

. 74 Fed. Reg. at 66,446

- 47. Additionally,
Pet itioners remain free under the 2010 Reg ulation to continue to conduct inter

pollutant transfers of different HCFC allowances to address changes in market demand , so long as they do so on an annual basis

. Finally, b oth companies also
may engage in inter

- co mpany transfers in an effort to utilize allowances in excess of their baseline s . Thus, from a regulatory standpoint , Petitioners remain on the
exact same footing as all other HCFC manufacturers and importers

.

Although Petitioners as sert that EPA’s promulgation of the 2010 Regulation was arbitrary and capricious, they do not challenge the substantive bases EPA provided for choosing not to recogniz e prior inter

- pollutant transfers in setting the baselines for the new 2010

- 2014 regulato ry period. Instead, Petitioners’ central argument is that EPA merely failed to fully explain its actions. SUMMARY OF ARGUMENT

Petitioners pursue this argument by simply ignoring the express statements EPA made in the Preamble to the 2010 Regulation and in the a dministrati ve r ecord regarding each of the topics Petitioners assert EPA ignored

. W ith blinders firmly in Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 3020 place, Petitioners contend that although EPA admittedly had broad authority to alter its past policies, it could not possibly have provided an adequate explanat ion for doing so here because EPA: (a) refused to admit it had a prior policy allowing for the recognition of inter

- pollutant transfers in perpetuity; (b) refused to adopt Petitioners’ own subjective view of how the marketplace should be analyzed when dete rmining how to allocate allowances for a new regulatory period ; and ( c ) failed
to announce in its Proposed Rule it s eventual interpretation of Title VI of the CAA. First, EPA never maintain ed any policy allow ing for the recognition of inter

pollutant tran sfers in perpetuity. Indeed, Petitioners themselves admitted that their

own inter

- pollutant transfer s of allowances executed in 2008

- 20 09, which they now assert EPA is required to recognize in the new regulatory period that began on January 1, 2010, laste d only until the end of the prior regulatory period, which expired on December 31, 2009. As to the issue of adequate notice, the response is quite simple: EPA discussed at great length each of the points Pet itioners contend EPA ignored. Thus, while Pet itioners may disagree with EPA’s conclusions on each of these points

– although they do not challenge those conclusions here

– it cannot be said that EPA failed to adequately explain the bas es for its conclusions

. As part of its analysis, EPA found that P etitioners’ reading of Title VI, which Petitioners assert requires EPA to recognize inter

- pollutant transfers in perpetuity, Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 3121 is no t supported by the statute. EPA did not , as Petitioners contend , declare that it

was expressly prohibited by the statute from recognizing such transfers. Instead,
EPA concluded that the “better reading” of the transfer provision of Title VI , when considered in context and in light of the legislative history, i s that the transfer provision

-- which never even mentions the terms “baseline” or “permanent”

-- does not sanction permanent inter

- pollutant baseline transfers

. This agency reading of an ambiguous statute , which Petitioners had ample opportunity to comment on, must be upheld unless it is irrational. Finally, Petitioners contend that the 2010 Regulation is impermissibly retroactive because Petitioners relied upon their own expectation that EPA’s approval of certain baseline allowance transfers during the prior regulatory period would be carried forward into subsequent regu latory periods. This expectation is contradicted by Petitioners’ own admissions. Moreover, d ashed hopes, expectations , and even reasonable business judgments do not transform a regulation that on its face is only applicable to events occurring during a n ew regulatory period , into impermissible retroactive agency action. The 2010 Regulation, which makes no attempt whatsoever to assign new consequences to any past inter

- pollutant transfers, is not retroactive in any sense of the word. Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 3222 I. ARGUMENT STANDAR D OF REVIEW
T he applicable standard of review with regard to Petitioners’ challenge is set forth in CAA §307(d) (9) , 42 U.S.C. §7607(d)(9). Under that standard, EPA’s action in promulgating the 2010 Regulation can be overturned only if it is

“ arbitrary, capricious , an abuse of discretion or otherwise not in accordance with law ” or in excess of EPA's "statutory jurisdiction, authority, or limitations." Id.

“ T he scope of review under the ‘ arbitrary and capricious ’ standard is narrow and a court is no t to substitute its judgment for that of the agency. ” Motor Vehicle
M frs. Ass'n v. State Farm Mut

. Auto. Ins. Co. , 463 U.S. 29 , 43 (1983)

. See also
F CC v . Fox Television Stations, Inc. Because Petitioners assert that EPA misinterpreted the Clean Air Act, the standards announced in , 129 S. Ct. 1800, 1810 (2009).

Chevron U.S.A. Inc. v. NRDC , Inc. , 467 U.S. 837 (1984) , apply. Under Chevron , the Court first inquires whether Congress “ has directly spoken to the precise question at issue, ” in which case the Court “ must give effect to the unambiguously expressed intent of Congress. ” Id. at 842

- 43 . If the statute is "silent or ambiguous with respect to the specific issue," the Court moves to Chevron's second step and must defer to the agency's interpretation so long as it is "based on a permissible construction of the statute." Id. Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 3323 Particular deference is to be given to an agency’s interpretation of a statute it administers when the statute is complex and within the agency’s expertise

. United States v. Mea d Corp. , 533 U.S. 218, 227

- 31 (2001)

. The CAA is precisely this type of statute. NRDC v. EPA , 571 F.3d 1245, 1251 (D.C. Cir. 2009) ; Bluewater Network v. EPA , 372 F.3d 404, 410 (D.C. Cir. 2004). W hen an agency's action relies on scientific or technical i nformation touching upon the agency's area of expertise, a court applies “ an extreme degree of deference .” Huls Am. Inc. v.
Browner

. , 83 F.3d 445, 452 (D.C. Cir. 1996) See also Am

. Farm Bureau Fed ’ n v. EPA , 559 F.3d 512, 519 (D.C. Cir. 2009)

. Thus, the Court need only find "that EPA's understanding of this very 'complex statute' is a sufficiently rational one to preclude a court from substituting its judgment for that of EPA." Chemical Mfrs. Ass’n v. NRDC , Inc. Finally, to the extent EPA is alleged to have committed any procedural errors in issuing its final rule, “the court may invalidate the rule only if the errors were so serious and related to matters of such central relevance to the rule that there is a substantial likelihood that the rule would have been significantly changed if such errors had not been made.” 42 U.S.C. §7607(d)(8)

. , 470 U.S. 116, 125 (198 5)

. Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 3424 II. THE 2010 R EGULATION DOES NOT REVERSE EPA’S PURPORTED PRIOR INTERPRETATION OF THE CLEAN AIR ACT WITHOUT A REASO NED E XPLANATION Petitioners assert that the 2010 Regulation must be overturned because EPA had an established policy of allowing inter

- pollutant transfer s on a “permanent” basis and, although EPA was admittedly free to alter this “policy” for the 2010

- 20 14 regulatory period, it did not adequately explain why it chose to do so. Pet

. Br. 28

- 40

. First, there simply existed no policy as Petitioners describe . While EPA provided for the transfer of baseline allowances for a single pollutant between compani es, it did not express any policy sanctioning the conversion of baseline allowances for one pollutant into baseline allowances for a different pollutant.
More over , even if EPA forms allowing companies to characterize inter

- pollutant transfers as “baseline ” transfers could be read as an implicit p olicy permitting such transfers, EPA never represented that inter

- pollutant baseline transfers conducted within a given regulatory period would be incorporated into baselines assigned in subsequent regulatory step

- down periods

. Even more importantly given the nature of Petitioners’ claim , in considering various alternatives for allocating allowances for the 2010

- 2014 regulatory period,
EPA affirmatively considered an alternative that would incorporate past inter

pollutant transfers into newly established baselines and, for a plethora of reasons Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 3525 detailed in the Rulemaking and the Admin i str a tive Record, rejected this alternative. Accordingly, even if EPA had formerly maintain ed a policy of allowing inter

- pollutant baseline transfers during the 2003

- 2009 regulatory period , it provided ample explanation why that policy w ould not be carried forward into the new regulatory step

- down period

. A. EPA Maintained No Policy Which Called for Inter - Pollutant Tra nsfers to be Carried Forward t o the 2010
- 2014 Regulatory Period Petitioners exert considerable effort in piecing together various EPA statements that use the words “baseline,” “i nter

- pollutant ” or “permanent” to try to manufacture a conclusion that EPA ha d est ablished a policy to recognize prior inter

- pollutan t transfers in subsequent regulatory periods

. Notwithstanding these efforts to assign meanings to various partial statements , EPA has never declared that inter

- pollutant transfers of HCFC allowance s occur ring between 2003 and 2009 would be recognized in subsequent step

- down regulations enacted by the Agency. There simply is no such statement , and Petitioners cite to none

. In the absence of any express statements sanctioning the recognition of inter

po llutant allowance transfers in subsequent regulatory periods, Petitioners point to the ir several inter

- pollutant trades that EPA approved in 2008

- 20 09 as evidence of a policy (or at least a practice) of allowing such transfers to be carried forward in
perp etuity. Specifically, Petitioners assert that such a “policy” is reflected in the Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 3626 government form they completed seeking approval of an inter

- pollutant transfer and the associated one - page letter from EPA approving that request. Pet. Br. 14

- 16, 33

- 35

. An agency policy is evidenced by its express statements, not by divin in g the agency’s purported thought process es from check boxes on forms. Cf

. , Smiley v. Citibank , 517 U.S. 735, 742

- 43 (1996) (letters from the Comptroller of the Currency to the Presid ent and an Opinion letter from the Deputy Chief Counsel do not establish a policy of that agency). In any event, the form s Petitioners rely upon contain nothing more than a check

- mark in the box labeled “Baseline Year Allowances , ” and the letter s they rel y upon merely label the allowance type as

“ baseline .” JA 24

- 34

. Nothing on the form or accompanying letters describes these transfers as applying in perpetuity

. To the contrary , the letter s Petitioners rely upon , which specifically address Petitioners’ inter

- pollutant transfers labeled as “baseline , ” expressly state: “Please note that production allowances and consumption allowances may only be expended during the twelve

- month control period (January 1, 2008 to December 31, 2008) in which they were rece ived.” JA 24, 34

. This is hardly an EPA policy statement that inter

- pollutant transfers marked as “baseline” will be treated as permanent transfers of a company’s baseline allowances, let alone transfers that must be recognized in baselines established i n future step

- down period s . Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 3727 In addition to the forms and accompanying letter s , Petitioners rely on two other documents that do nothing more than show that Petitioners’ prior inter

pollutant transfers were reflected in the proposed baselines for the 2010

- 2 014 period, Pet. Br. 35, citing JA 88

- 92, 145

. As stated, EPA originally proposed to reflect inter

- pollutant trades in the baselines for 2010

- 2014 , but it ultimately chose
not to do so . Thus, these documents and corresponding statements in the Proposed
R ulemaking relied upon by Petitioners ( see

Absent any express statements setting forth a policy to recognize inter

pollutant transfers in perpetuity, Petitioners cite to every reference they can find to the word “permanent” and argue that the use of this word establishes that EPA’s approval of inter

- pollutant transfer s in 2008

- 20 09 effected a reallocation of baseline allowances that EPA is required to apply in perpetuity. This assertion, however, is belied by the nature of the regulations at issue and by Petitioners’ own admissions. Pet. Br. 36

- 37) merely reflect a rejected proposal that was never implemented , not an established policy.

As EPA explained in the 2010 Regulation: Prior to this rulemaking, EPA had not allocated any HCFC allowances for year 2010 or beyond. The regulations at 40 C.F.R. 82.15(a) and (b) only permitted the production and import of HCFC

- 22 and HCFC

142b for the years 2003

- 2009. . . . Absent the grant of calendar

year allowances, §82.15 would prohibit their production and i mport after December 31, 2009. Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 3828 74 Fed. Reg. at 66,415. See also

As outlined above, EPA considered five alternatives for the allocation system to be implemented for 201 0

- 2014, some of which (e.g., an auction system , allocat ion of allowances based on recent sales) would clearly apply completely different concepts of a baseline . Certainly, Petitioners’ concept of “permanent” adjustments to their baseline could not , by ope ration of law , carry forward to the 2010

- 2014 period if EPA was not required to even use the same criteria for baseline allo cations for the 2010

- 2014 regulatory period

. J A 63 ( “No allowances exist after 2009 without [a new] rulemaking

. . . . ” ); JA 80

.

Indeed, it is quite eviden t that Petitioners knew that any reference to a “permanent” transfer of baseline allowances was meant to apply only to the existing step

- down period, and not to future step

- down periods for which allowances did not yet exist. I n submitting the form s on which Petitioners now rel y for the purported EPA policy that inter

- pollutant transfers must be carried forward to the 2010

- 2014 regulatory period, Petitioner Solvay declared: “[T]his transfer is for Baseline Year Allowances and therefore is being done on a permanent basis (i.e., multi

- year transfer for 2008 and 200 9 ).” JA 3 ( latter emphasis added). Accordingly, t he most that can be said about EPA’s approval of Petitioners’ inter

- pollutant transfers in 2008 and 2009 is that it was a practice that , in Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 3929 Petitioners’ view, should be carried forward to the next regula tory period

. Understandably, Petitioners strenuously argue d for just such a policy in their five sets of comments to EPA on the proposed rule for the 2010

- 2014 regulatory period . Those comments, however, rather than supporting Petit i oners’ arguments, dem onstrate that Petitioners underst ood that EPA ’s decision as to whether to recognize inter

- pollutant transfers in allocating allowances for 2010

- 2014 was a n unsettled policy decision, not a requirement of some statute or regulation. As detailed below, EPA set forth in considerable detail why recognizing prior inter

pollutant transfers in the new 2010

- 2014 regulatory period was not prudent policy.
B . E PA Adequately Explained its Bas es for Not Recognizing Prior Inter - Pollutant Transfers in the New R egu latory Period
Even if EPA had established a practice o r even an express policy that called for the recognition of inter

- pollutant baseline transfers in subsequent regulatory periods, Petitioners concede that EPA was free to alter that purported policy wh en it promulgated the 2010 Regulation , so long as it supplied a reasoned basis for making the change

. Pet

. Br. 28

- 31. See also , Am. Fed’n of State, County & Mun. Employees v. FLRA , 395 F.3d 443, 449 (D.C. Cir. 2005) ; FCC v. Fox Television Stations, Inc. , 129 S. Ct. at 1810 . As the Supreme Court explained, virtually no agency interpretation or application of a statute or regulation is immune from being altered or even reversed if circumstances warrant it: Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 4030 “ An initial agency interpretation is not instantl y carved in stone. O n the contrary, the agency

. . . must consider varying interpretations and the wisdom of its policy on a continuing basis,” Chevron , supra at 863

- 864 [], for example, in response to change d factual circumstances, or a change in admi nistrations. That is no doub t why in Chevron itself, this Court deferred to an agenc y interpretation that was a recent reversal of agency policy. Nat ’l Cable & Telecomm s. Ass’n v. Brand X Internet Servs

. , 545 U.S. 967, 981

- 82 (2005) (internal citation omi tted). See also Motor Vehicle Mfrs. Ass’n v. S tate Farm Mut. Auto Ins. Co. , 463 U.S. 29, 42 (1983) (“ [R] egulatory agencies do not establish rules of conduct to last forever

. ” ); In re Permian Basin Area Rate Cases , 390 U.S. 747, 784 (196 8)

It is abundantly clear that EPA adequately explained the reasons for choosing not to recognize past inter

- pollutant transfers in es tablishing baselines for the new regulatory period. First, EPA explained that while recognition of inter

company transfers of allowances for a specific pollutant provides a mechanism for new entrants to join or expand their role in the HCFC market, inter

- pollutant transfers d o not have a similar beneficial effect. 74 Fed. Reg. at 66,420

- 21. A s EPA further detailed, recognition of past inter

- pollutant transfers in setting the baseline for the new step

- down period could likely: ( agenc ies must be given ample latitude to “adapt their rules and policies to the demands of changing circumstances”).

**•** C reate incentives for manip ulation of the allocation system . JA 261

- 63; 74 Fed. Reg. at 66,420

- 21

. Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 4131 **•** E ffectively transform EPA’s chemical

- by

- chemical, “worst

- first” phase

- out system into one based instead on ozone depletion potential aggregated over a basket of chemicals, the syste m EPA rejected in 2003 and again as one of the alternatives in the 20 10 Regulation. 74 Fed. Reg. at 66,420

- 21 ; JA 265

- 66.

**•** Have an outsize d impact on small companies involved in the production of HCFCs

. JA 264.

**•** Interfere with market expectations, since “ EPA agrees that it did not signal in the 2003 Allocation rule that companies could increase their relative percentage of the baseline by conducting intra

- company, inter

- pollutant transfers.” JA 264.

**•** Impact not only manufacture r s and importers of HCFCs but also distributors and customers , due to market distortion and the inability of covered entities to comply with contract commitments. JA 265.

**•** Disrupt the entire market in 2010, encourage disruption in future control periods, and reduce

– not increase, a s Petitioners assert

– market flexibility. 74 Fed. Reg. at 66,421.

**•** Require 19 of the 21 companies originally granted baselines and allowances in 2003 to relinquish nearly 16% of their allowances in 2010 to compensate for Arkema and Solvay being awarded ba selines 38% and 912% above their Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 4232 original baselines (which already were based on Arkema’s and Solvay’s maximum historical production and use) , a n action that could significantly impact the market for HCFCs. 74 Fed. Reg. at 66,421; JA 262

- 63. As to this l ast point (offsets required to be taken from other producers ), Petit io ners argued in their Motion for a Stay in this action (but not in their merits brief) that EPA would not have to promulgate corresponding reductio ns of all other companies’ baselines bec ause the 2010 Regulation allocates only 80% of the United States’ National Cap for 2010. Petitioners Stay Reply Br. (D kt . 1226443) at 14

- 15 . In other words, Petitioners contended there is room for increased emissions of HCFCs. In fact, there is no roo m for extra emissions because EPA made an express determination that it was necessary to set limits for U.S. production lower than those required to meet the Protocol’s 2010 phase

- down step specifically to encourage the recycling and reclamation industry , so as to be able to meet 2015 step

- down requirements

. 74 Fed. Reg. at 66,42 3. See also 74 Fed. Reg. at 66,434 (“EPA does not intend to allocate the extra amount under the cap, except under unforeseen extraordinary circumstances, because it is important to promote greater Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 4333 use of recycled and reclaimed material in anticipation of the next phase

- down step.”). 5 First, EPA is required to promulgate regulations designed to “maximize the recapture and recycling” of HCFCs

. 42 U.S.C. §7671g(a)(3). Moreover, as EPA explained, the development of the reclamation and recycling segment of the industry is critical if the United States is to meet the more stringent Protocol limits that apply beginning in 2015. 74 Fed. Reg. at 66,423. As EPA explained, b y allocat ing fewer allowances than are available to the United States under the Protocol’s caps for 2010

- 2014, “economic constraints for recovery and reclamation will therefore loosen and more recovered material being held in inventory may be reclaimed. EPA believ es that encouraging the market for recovered material in this way will be the most effective and appropriate mechanism that this current rulemaking can take to increase recovery and reclamation.” Id. Indeed, even Petitioners concede that EPA should not a llocate all of the allowances that might be available under the Protocol in order to promote reclamation

. See

5 “Recycling” is the process where HCFCs are rec overed and charged back into equipment with the same ownership, while “reclamation” directs rec overed HCFCs into the marketplace. Damage to the stratospheric ozone layer occurs generally when HCFCs are released through leakage or disposal of the operating unit (e.g., air conditioner) that utilizes the substance , not through the unit’s normal operation. Thus, reclaiming or recycling HCFCs is an integral part of the phasing out of these substances. 74 F ed. Reg. at 66,422

- 27. JA 155, Arkema’s comments on the Proposed Rule: “The Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 4434 Agency also made the right choice in not allocating 100% of the available allowances of HCFC

- 22 and HCFC

- 142b, which will further encourage reclamation.” The multiple bases outlined above for EPA ’s rejection of the proposal to recognize past inter

- pollutant trades in setting baselines for the 2010

- 2014 regulatory period are so substantial , tha t Petitioners do not even attempt to asse r t that EPA’s reasoning was arbitrary , capricious or beyond its authority. 6 Indeed, Petitioners’ comments make clear that EPA’s concerns are legitimate. See , e.g.

6 Petitioners’ only reference to the many bases provided by EPA for rejecting the proposal appears in a single paragraph in a footnote at the end of their brief, in which they state that “none of the supposed justifications for dish onoring past baseline transfers holds water.” Pet. Br. 59 n.20. Petitioners’ footnote criticize s only two of the many factors relied upon by EPA , and even those criticisms clearly ignore the record developed by EPA. For example, Petitioners assert that although EPA was concerned about how “inter

- pollutant transfers ‘could create incentives for future market manipulation of the allocation system in anticipation of future control periods, 74 Fed. Reg. at 66,421, [ ] EPA did not consider any evidence of man ipulation . . . .” Pet. Br. 59 n.20. Quite to the contrary, EPA set forth several detailed examples explaining precisely how market manipulation could occur as a result of allowing inter

- pollutant transfers of baselines

. See JA 261

- 63; 74 Fed. Reg. at 6 6,420

- 21

. See also p p . 51

- 52 , infra , describing one such example. , JA 159, where Arkema urges EPA to recognize inter

- pollutant baseline transfers precisely because it “approximates the results of an ODP [ozone

- depletion potential basket of chemicals ] system”

– the very system EPA rejected in 2003 and again in 2010 in favor of its chemical

- by

- chemical, “ worst

- first ” regu latory regime

. Instead, ignoring all of the reasons expressly stated by EPA, Petitioners Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 4535 simply assert that EPA could not possibly have provided an adequate explanation for changing its purported policy because EPA refused to admit it had such a policy. Pet. Br. 30

- 32. EPA’s obligation to explain the bases for its polic ies or interpretation s “is not particularly demanding.” Biovail Corp. v. U.S. Food & Drug Admin. , 519 F. Supp. 2d 39, 45 (D.D.C. 2007). Nothing more than a brief statement is necessary, as long as the agency explains its actions. Tourus Records , Inc. v. DEA , 259 F.3d 731, 737 (D.C. Cir. 2001); Pub

. Citizen , Inc. v. FAA

Petitioners argue that more is required when the agency fails to acknowledge
t hat a past policy existed. They cite , 988 F.2d 186, 197 (D.C. Cir. 1993).

FCC v. Fox Television Stations, Inc. , 129 S. Ct. at 1811 , for the proposition that “[a]n agency may not, for example, depart from prior policy sub silentio or simply disregard rules that are still on the books.”
Pet. Br. 30. Actually, i n Fox Television the Supreme Court expressly rejected the past view of several c ourts that required a “ more substantial explanation for agency action that changes prior policy.” Id

. at 1810. Referring to a requirement for a

more searc hing review in such cases, the Court stated: “The Act [APA] mentions no such heightened standard. And our opinion in State Farm neither held nor implied that every agency action representing a policy change must be justified by Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 4636 reasons more substantial th an those required to adopt a policy in the first instance.”

The Court then went on to simply state the obvious

-- that in order to provide

some explanation of why an a gency changed its policy, that agency necessarily has to address the policy at issu e and explain why certain changes were made, i.e., i t cannot change an established policy Id.

sub silent i o But it need not demonstrate to a court’s satisfaction that the reasons for the new policy are better than the reasons for the old one; it suffices that the new policy is permissible under the statute, that there are good reasons for it, and that the agency believes it to be better, which the conscious change of course adequately indicates

. :

Id. at 1811 ( third emphasis added ). And, w hile t he Court ackn owledged that some additional explanation may be necessary “when its prior policy has engendered serious reliance interest that must be taken into account . . ., [i] n such cases it is not that further justification is demanded by the mere fact of policy ch ange; but that a reasoned explanation is needed for disregarding facts and circumstances that underlay or were engendered by the prior policy.” Id. 7

7 The Circuit Court cases cited by Petitioners were decided years before FCC v. Fox Television , which rejected the view that a reversal of policy required a heighten ed standard of explanat ion. In any event, these cases merely stated the same rule as the Supreme Court, that an agency may not silently alter a long

established policy. See e.g. , Bush Quayle v. FEC , 104 F.3d 448 , 449

- 51 (D.C. Cir

. 1997); Action for Children’s Television v. FCC , 821 F.2d 741 , 745

- 46 (D.C. Cir. 1987). Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 4737 A s outlined above, EPA was anything but silent about a policy designed to reflect prior inter

- pollutant transfers in companies’ baselines for 2010

- 2014. EPA expressly proposed just such a policy for the new regulatory period. It then performed a reasoned analysis and detailed all of the bases for its decision to “consciously reject” the very policy that P etitioners assert EPA failed to acknowle d ge . Whether labeled a rejection of a regulatory option or a past (purported) policy, EPA’s explanation for consciously rejecting this policy for the 2010

- 2014 regulatory period clearly is sufficient. C . EPA Fully Explained its Consideration of Market F actors in Promulgating the 2010 Regulation In a related but separate argument, Petitioners assert that EPA expressed a “longstanding recognition that competitive forces must be permitted to govern the market for HCFCs,” that EPA abandoned that practice in the 2010 Regulation , and that “this change of course is a further, independent, ground for vacating the Final Rule,” because EPA was required to explain why it abandoned this principle , and failed to do so. Pet. Br. 44

- 45. S pecifically, Petitioners assert that in the 2010 Regulation EPA allocated allowances by regulatory fiat that bear [s] no resemblance to the evolving market for HCFCs . . . , [t]his edict bequeaths additional market share to some companies at t he expense of others, for no apparent reason . . . , [and] 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. Because EPA has abandoned, without Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 4838 explanation, its position that transfers are necessary to allow a market to evolve naturally, its rule must be vacated. Id. First, Petitioners ’ argument is based on a n u nsupportable premise : that EPA was required to base its regulation for the new regulatory period on market factors as Petitioners describe them

. at 45. Petitioners’ assertions are baseless in every respect.

8

C ongress, of course, could have directed EPA to protect existing producers, reward entities for servicing various aspe c ts of the market, or make other market

oriented adjustments when establishing and allocating allowances. Indeed, where Petitioners cite several statements referencing market flexibility in support of this proposition. Pet. Br. 45

- 4 8

. Those statemen ts

– none of which refer s to trading of baseline allowances or “permanent” transfers

– merely make the point that trading allowances can help companies reallocate resources to address changes in the market. None of these statement s even suggests that in p romulgating regulations under Title VI, EPA is required to eliminate offending chemicals in a manner that either promotes maximum market flexibility for affected companies or rewards companies for their past service to particular segments of the market

.

8 Petitioners refer to the market concept that EPA purportedly ignored with different labels, including a “well

- functioning market,” “competitive forces,” a “reasonable representation of the marketplace,” “facilita ting an efficient market,” “market principals,” “market realities,” and “market demand.” Pet. Br. 29, 44

- 50. For ease of reference, EPA refers to these concepts collectively as “market factors.” Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 4939 Congress deemed pa rticular market segments to be important, that is precisely what it did. See

Petitioners’ second incorrect premise is that the 2010 Regulation “bequeat hs additional market share to some companies at the expense of others.” First, i t is undisputed in this case that , with some minor adjustments, the 2010 Regulation grants Arkema, Solvay and the other 19 other producers the same baseline each of them ha s h ad since 2003. 42 U.S.C. §7671d(d), granting EPA authority to create a special exemption from the elimination of HCFCs for manufacturers of medical devi c es. In contrast, Petitioners identify n o provision in the statute which requires EPA to give them special solicitud e or to base its regulatory decisions on the specific market factors Petitioners identify as important.

See 74 Fed. Reg. at 66,430

- 33

. 9

9 Those adjustments are made to reflect changes in companie s’ identities since 2003, make minor data corrections, and reflect inter

- company, single

- pollutant transfers, which EPA determined should be carried forward to the new regulatory period. 74 Fed. Reg. at 66,420

- 21

. Moreover , it is the adoption of Petitioners’ position that would result in the very calamity they predict. Because EPA would have to issue new regulations to reduce the allowances of all other companies to compensate for the corresponding increase of Petitioners’ baselines well above the ir historic maximum production, EPA would be required to “bequeath” to Petitioner s market share “at the expense of [all] others

. ” Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 5040 Setting aside the infirmities of the under lying premises of Petitioners’ argument, Petitioners’ assertion that EPA abandoned its consideration of market
f

actors in issuing the 2010 Regulation is markedly incorrect. A s outlined above, EPA not only considered market factors, it commissioned outside studies to assess market factors and to analyze how different regulatory alternative s would impact the market. See , e.g.

Indeed, EPA analyzed the very market conce pts that Petitioners assert EPA ignored. For instance, Petitioners assert that EPA should award allowances based
on a compan y’s historic servicing of different subsets of the market

-- which would automatically advantage Petitioners because they typically sold to the after

- market , which is the only HCFC

- 22 market remaining as of January 1, 2010

. Pet. Br. 49

. As EPA explained, t h is alternative was rejected because, , JA 15

- 23 , 202

- 49. As the Agency explained , “EPA has monitored the market to estimate servicing needs and market adjustments in the use of HCFCs . . . .” 74 Fed. Reg. at 66,416. In fact , EPA specifically stated that

“ [t] he allocations for HCFC

- 22, HCFC

- 142b reflect EPA’s analysis of market data for these chemicals.” 74 Fed. Reg. at 66,419

.

inter alia , it would have been inconsistent with EPA’s past practices which the industry r elied upon , would be difficult to accurately assess, and would reward past actions that may have been taken to manipulate future baselines. 74 Fed. Reg. at 66,420

- 22 ; JA 19, 260

- 65

. Indeed, Petitioner Solvay stated that i t would “not endorse” an allocat ion system Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 5141 based on whether a producer had been servicing original manufacturers of equipment or the after

- market, because these markets were so intermingled that many companies did not have reliable data upon which such differentiations could be made with any level of “ integrity. ” JA 151. As reflected in the many reasons outlined above, EPA chose to maintain essentially the same baselines originally granted in the 2003 regulation based in significant part on its analysis of market f actors

. See 74 Fed. Reg. at 66,419 ( reallocating the original baselines without Petition e rs’ desired adjustments would be “the least disruptive to the current mark et and best ensures a continued smooth transition away f ro m ozone - depleting substances” ) ; id. at 66,420 (the opti on adopted seeks “to minimize unanticipated changes and prevent market disruptions”); id.

As Petitioners point out, to the extent Congress had concerns regarding market forces, EPA addressed those concerns by seeking to eliminate these damaging chemicals while, to the extent possible, “afford[ing] indus try flexibility.” Pet. Br. 46 ( quoting 56 Fed. Reg. 49,548, 49 ,561 (Sept. 30, 1991) ) (emphasis added). The 201 0 Regulation serves that goal by e nsuring that the entire industry does not have to disrupt market expectations to compensate for allowances handed at 66,421 ( the option adopted “reflects the changes in the marketplace that have occurred since the last time EPA addressed these baselines”)

. Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 5242 to just two entities, while allowing all companies the flex ibility to make both inter

company and also inter

- pollutant transfers on a n annual basis

. See 74 Fed. Reg. at 66,419

- 421

. Although Petitioners are free to disagree with EPA’s conclusions, it is overwhelmingly clear that EPA considered and explained how m arket factors influenced its decision on how to allocate baselines and allowances for 2010

- 2014. 10
D . Petitioners Availed Themselves of the Opportunity to Comment on Whether Title VI Allows Permanent Inter
- Pollutant Transfers of Allowances , Comments Which E PA Fully Considered
In their final argument relating to a purported lack of explanation, Petitioners assert that “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.” Pet. Br. 40. They contend that EPA violated CAA

10 Amici, who emphasize the importance of market stability in a cap and trade program, ignore the above

- described impacts to industry flexibility and the marketplace , focusing instead on the purported expectations of only the two Petitioners . While certainty of business expectations is a conside ration in generating regulations, it is important to consider the expectations of all regulated entities. Here, the 19 other HCFC producers and importers conducted their business es based on the expectation that they would be allocated a baseline undiminis hed by the effect of other companies’ inter

- pollutant trades. 74 Fed. Reg. at 66,419

- 21. Further, EPA’s approach to inter

- pollutant transfers in the 2010 Regulation is based on the context and history of the HCFC phase

- out program under CAA §607 ; it does not address the legality or appropriateness of such transfers in the context of other statutes or cap and trade programs

. In any event, the arguments made by Amici are policy arguments that should have been made during the administrative process. Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 5343 § 307(d)(3) , which requires that EPA include in a proposed rule subject to section 307(d) a statement of the “major legal interpretations and policy considerations underlying the propos ed rule,” 42 U.S.C. § 7607(d)(3)

. Specifically, Petitioners contend that because one of the many bases EPA provided for deciding not to recognize past inter

- pollutant trades in the baselines for 2010

- 2014 was that Title VI of the CAA did not tend to suppo rt such a position, the 2010 Regulation is invalid because EPA should have set forth in its Proposed Rule its interpretation of the transfer provision of Title VI , CAA §607

. Pet

. B r . 40

- 44. As noted above, EPA expressly stated in the Proposed Rule that it was considering “establish[ing] a percentage of baseline allowances for each HCFC ‘with or without considering any permanent baseline transfers and/or inter

pollutant transfers that resulted in a different amount of production or consumption for a spec ific HCFC.’” 74 Fed. Reg. at 66,420. This statement is a clear indication that EPA would be considering both “legal interpretations and policy considerations” on the issue of the permanence of inter

- pollutant transfers. Of course, EPA could not have set forth in the Proposed Rule how it would ultimately interpret CAA §607 , since it had not yet gone through th e comment and analysis process. As evidence d by its equivocal statement quoted above, EPA specifically invited public comments on the issue of the permanence of inter

pollutant trades. While CAA §307(d)(3) does require some type of notice of a Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 5444 legal interpretation EPA intends to apply, s ection 307(d) (6)(A) specifically contemplates the situation where EPA cannot announce its legal interpretations be cause that is part of the comment and analy s is process. Under this latter provision, EPA can take a position different than that set forth in the proposed rule (as EPA suggested it might in the Proposed Rule ), so long as it explains its reasons for doing so, which EPA quite obviously did. See pp. 30

- 32 , supra . See also

In any case, section 307(d) states that with regard to purported procedural errors such as the lack of notice in a p roposed r ule of EPA’s statutory interpre t ation , “the court may invalidate the rule only if the errors were so serious and related to matters of such central relevance to the rule that there is a substantial likelihood that the rule would have been signi ficantly changed if such errors had not been made.” CAA §307(d)(8), 42 U.S.C. §7607(d)(8) (emphasis added). Such a finding would be misplaced here since any “error” associated with not announcing potential legal interpretations of CAA §607 in the Propose d Rule clearly was cured during the rulemaking process. 74 Fed. Reg. 66,421

- 22, explaining EPA’s interpretation of section 607

.

Claiming that EPA’s interpretation of Title VI of the CAA is a novel interpretation suggested by Honeywell Corporation, Petitioners are forced to admit that “Arkema submitted a comment . . . urging EPA not to consider Honeywell’s novel interpretation of the CAA, JA 194

- 96.” Pet. Br. 43. Indeed, one full set of Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 5545 Arkema’s comments is devoted almost exclusively to the argument that EPA is required by CAA §607 to recognize inter

- pollutant baseline trade s in setting the baselines for the new regulatory period. JA 194

- 96. Petitioners assert that this comment was submitted “after the comments period had closed,” seeking to leave the impression that it was ignored by EPA.
Pet

. Br. 43. To the contrary, th ese comments were included in the Docket and Administrative Record in this case and were fully considered by EPA. Indeed, referring to Arkema’s “supplemental comments,” EPA expressly addressed Arkema’s argument that CAA §607 required EPA to recognize past inter

- pollutant baseline transfers. JA 258

- 62. Thus, applying the highly deferential standard set forth in CAA §307(d)(8) for overturning a rulemaking based on a procedural error, one cannot conclude that there is any likelihood, let alone a “substantia l” likelihood, that the final rule would be different if EPA had detailed its ultimate interpretation of section 607 in the preamble to the Proposed Rule, because EPA already has fully addressed and considered all comments and arguments that might have bee n made had it outlined that interpretation in the preamble of the Proposed Rule

. Petitioners nevertheless argue that EPA ’s interpretation of Title VI of the CAA contained in the 2010 Regulation was not a “logical outgrowth” of the Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 5646 Proposed Rule. Pet. Br. 42

- 43. This is a clear misapplication of the “logical outgrowth” doctrine. As this Court has stated: “[A]n agency may issue rules that do not exactly coincide with the proposed rule as long as the final rule is the ‘logical outgrowth’ of the proposed ru le.” Fertilizer Inst. v. EPA , 935 F. 2 d 1303, 1311 (D.C. Cir. 1991). “Under the ‘logical outgrowth’ test . . . , the key question is whether commenters ‘should have anticipated’ that EPA might” issue the final rule it did. City of Portland v. EPA , 507 F.3 d 706, 715 (D.C. Cir. 2007) ( c itations omitted)

. See also CSX Transp

. Inc. v. Surface Transp

. Bd

. , 584 F.3d 1076, 1079

- 80 (D.C. Cir. 2009) (“A final rule qualifies as a logical outgrowth ‘if interested parties “should have anticipated” that the change was possible, and thus reasonably should have filed their comments on the subject during the notice

- and

- comment period.’ [citations omitted].”); Covad Comm c’ns Co. v. FCC

Petitioners cannot claim that they were “lured in” to some type of legislative complacency by the fact that the Proposed Rule recognized inter

- pollutant baseline
tra n s fers . It is always a possi ble outcome, and therefore a logical outgrowth of a proposed rule , that the agency will not, in fact, adopt the rule or some portion thereof. , 450 F.3d 528, 548 (D.C. Cir. 2006). As noted, Petitioners did file comments that spec ifically addressed the legal interpretation of section 607.

See , e.g. , Env tl. Integrity Project v. EPA , 425 F.3d 992, 997 (D.C. Cir. 2005) (“Of course, there is nothing obje ctionable in the Agency’s refusal to adopt its proposed amendments . . . .” ); American Iron & Steel Inst

. v . EPA , 886 F.3d Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 5747 390, 400 ( D.C. Cir. 2004 ) (“One logical outgrowth of a proposal is surely, as EPA says, to refrain from taking the proposed step.”). And the agency may reject the proposed rule precisely because it is not supported by the underlying statute. See
e.g. , Long Island Care at Home, Ltd. v . Coke

I n the end, any party is free in the Court of Appeals to argue that a regulation is not sup ported by the underlying statute , and it may present past agency interpretations, legislative history, and other interpretations of the statute at issue in its brief to the Court . Indeed, that is precisely what Petitioners have done here. , 551 U.S. 158, 174

- 75 (2007) (finding that an agency’s decision not to adopt the proposal it had set forth in its Proposed Rule because rejecting the proposal “is more consistent with the statutory language,” was a “logical outgrowth” of the proposed rule).

See discussion, infra

III. EPA’S INTERPRETATION OF THE CAA WAS A . Petitioners fail to identify what they could argue regarding statutory interpretation in a remand to the Agency that they have not already argued to EPA in their comments and to this Court in their brief s .

RAT IO NAL INTEPRETAT IO N OF THE STATUTE As outlined supra , where a statute clearly states on its face Congress’ directive, it must be applied by the agency and the Court. Where, however, the statute is "silent or ambiguous with respect to the specific issue," the Court must defer to the agency's interpretation so long as it is "based on a permissible construction of the statute." Chevron , 467 U.S. at 842

- 43

. Indeed, EPA’s Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 5848 interpretation is to be accorded “ an extreme degree of deference ,” Huls Am. Inc. v.
Browner , and should not be overturned unless it is not at least one of several rational interpretations

. , 83 F.3d at 452
Am

. Farm Bureau Fed ’ n v. EPA

It is quite evident that CAA § 607, the provision dealing wi th transfers of allowances, does not expressly address whether inter

- pollutant transfers characterized as “baseline” are to be deemed “ permanent ” and reflected in subsequent regulatory periods . Indeed, the words “permanent” and “baseline” appear nowhere i n s ection 607

. As outlined , 559 F.3d at 519

.

supra

CAA § 607 declares: “The rules under this section [to be promulgated by EPA] shall permit a production [and consumption] allowance for a substance for

an y year to be transferred for a production [or consumption] allowance for another substance for the same year on an ozone depletion weighted basis.” 42 U.S.C. § 7671f(b) (emphasis added). EPA summed up its analysis of th is operative language as follows: , p. 8 , Congress left it to the broad discretion of EPA to determine how transfers of baselines are to be treated. Given th is built

- in discretion and the silence of s ection 607 , it is le ft for EPA to reasonably interpret w hat constraints, if any, Congress placed on the establishment of baselines for each step

- down period.

Af ter considering the language of section 607 and the legislative history, EPA believes that section 607(b) is best read as permitting Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 5949 only year

- by

- year inter

- pollutant transfers. Section 607(b) states that EP A ’s rules are to permit “a production allowance for a substance for any year to be transferred for a production allowance for another substance for the same year.” This language emphasizes the year

- by

year nature of such transactions. No parallel language appears in section 607(c) [which governs inter

- company transfers]

. 74 Fed. Reg. at 66,421

- 22. This was not a new interpretation regarding the limits of inter

- pollutant transfers in contrast to inter

- company transfers . A s EPA had explained in 2003 when it first set baselines for HCFCs, “[t]he pe rmanent transfer of baseline allowances is a lasting shift of some quantity of a company’s allowances to another company , ” which is governed by Section 607(c). Id.

As EPA detailed , a program that allows for int er - pollutant tra n s fers on an annual basis provides market flexibility by permitting a company to adjust its production based on market demand . However, once inter

- pollutant transfers are carried forward to a new regulatory period in the form of a permanen t baseline adjustment, that transfer does not merely affect the company conducting the transfer, it has a significant impact on all other manufacturers , because it requir es them to reduce their production to compensate for the increase d production of the

s pecific HCFC afforded to the company conducting the transfer. JA 26 1

- 63. As EPA pointed out, this results in less

– not greater

– market flexibility by allowing one or two companies to potentially manipulate the entire marketplace by at 66,422 ( quoting 68 Fed. Reg. at 2835 )

. Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 6050 increasing their own allowances for a high

- demand HCFC to the detriment of all of their competitors. 74 Fed. Reg. at 66,421

. In their own analysis of Section 607, Petitioners do not quarrel with the notion that the intent of th e inter

- pollutant transfer provision , section 6 07(b), is to prohibit a company from engaging in trades that will allow it to use allowances in a subsequent year. Pet. Br. 57. Instead, attempting to divorce the concept of baselines from allowances , Petitioners assert that the transfer of a baseline “d oes nothing to move allowances from one year into another, so baseline trades are entirely consistent with CAA §607(b). ” Id.

An allowance un der Title VI is simp ly a percentage of a baseline : the percentage being the numerator and the baseline being the denominator

. For example, for 2010 any company that produced HCFC

- 22 during the baseline years may produce 41.9% of its baseline. 74 Fed. Reg

. at 66,446. Arkema’s baseline for HCFC

- 22 as listed in the 2010 (Final) Regulation is 28,219,223 kg. , n.19. This is nothing more than semantic gymnastics that seeks to contort the clear application of the statute

.

Id. Thus, under the 2010 R egulation, Arkema’s production allowance for 2010 is 11,823,854 kg of HCFC

- 22 (41.9% of 28,219,223 kg)

. As set forth in the P roposed R ule , under which Arkema’s prior intra

- company baseline transfers were reflected in its baseline for 2010, its baseline for HCFC

- 22 would be 46,692,336 kg. 73 Fed. Reg.
at 78,703. If EPA were to promulgate a revised rule that awarded Arkema a Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 6151 ba seline that reflected past inter

- pollutant transfers, Arkema would end up with a production allowance for 2010 of 19,564,088 kg HCFC

- 22 (41.9% of 46,692,336 kg) . Thus, recognition of baseline transfers from the years 2008 and 2009 w ould allow Arkema to pr oduce nearly 8 million more kilograms (nearly 8 ,000 metric tons) of HCFC

- 22 in 2010 than under the 2010 Regulation as currently promulgated

. Since an allowance is defined as one kilogram of an HCFC, even using Petitioners’ parlance, recognition of Arkem a’s past inter

- pollutant transfers results , in the absence of other adjustments, in the effective transfer of 8 million allowances from earlier years into 2010. And b ecause a baseline transfer essentially replicates itself each year, recognition of Arkema ’s transfer of inter

pollutant baselines allowances conducted in 2008

- 2009 would effectively give Arkema tens of millions of extra allowances through the end of the 2010

- 2015 regulatory period. Indeed, EPA has explained how a company could use inter

- poll utant baseline transfers to create allowances for another chemical that will outlive the regulatory life of the transferred chemical. JA 261. For example, in 2019 a company could convert its HCFC

- 22 allowances into HCFC

- 123 allowances through an inter

- po llutant baseline transfer. In 2020, the HCFC

- 22 allowances would live on in the form of HCFC

- 123 allowances even though the regulation Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 6252 calls for HCFC

- 22 allowances to be totally eliminated in 2020. Id. Such market manipulation could effectively destroy EPA’s worst

- first regulatory regime by perpetuating allowances that were intended to be abolished

. Petitioners also assert that if EPA interpreted section 607(b)’s emphasis on the year

- by

- year nature of inter

- pollutant transfers as prohibiting such tra n s fers from becoming permanent, then EPA should have inferred a similar restriction from language in section 607(c) which governs inter

- company transfers, because it contains the word “annual

. ” According to Petitioners, because EPA did not make this in ference, its statutory interpretation of section 607(b) must be flawed. Pet. Br. 58. Id.

A mere glance at these two provisions dis proves Petitioners ’ argument. Section 607(b) , which deals only with inter

- pollutant transfers, expressly “permit[s] a product ion allowance for a substance for any year to be transferred for a production allowance for another substance for the same year . . . .” Section 607(c), which deal s only with inter

- company transfers, contains no such language. It merely states that one of the parties, the transferor, must be subject to “an enforceable and quantifiable reduction in annual production which,” inter alia , exceeds the production allowances transferred. There is nothing about this language that, like the language of section 607 (b), requires an inter

- company transfer to be for the “same year.” Instead, the language of section 607(c) is Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 6353 simply part of a more detailed exposition of the general principle in section 607(a) that trades under any of the provisions of section 607 are t o result in a benefit to the environment. Petitioners ’ semantic gyrations over the legislative history of Section 607 are no less contorted. The relevant legislative history is summarized in three paragraphs of the Chaffee

- Baucus Statement of Senate Ma n a gers under the Heading “Exchange Authority

– New Section 607.” 1 A Legislative History of the Clean Air Act Amendments of 1990

[A] producer may decide to reduce CFC

- 11 by an amount greater than is required in a given year and, in the same year , be authorized to produce a greater amount of CFC

- 113 than would otherwise be allowed. With the exception of such inter

- pollutant transfers, the bill does not authorize the exchange of production allowances. (Comm. Print 1993) at 927. As stated therein, the Senate version of the bill allowed for inter

- pollutant transfers in the sam e year . In describing how such inter

- pollutant transfers would work, the report states:

Id. (emphasis added). While the House bill “direct[ed] the Administrator to promulgate regula tions regarding the exchange of production allowances,” it “does not authorize inter

- pollutant transfers.” Id.

The Confer ence Agreement addressed differences in the two bills by combining the two separate concepts, not by adding the concept of inter

- pollutant Thus, neither bill was intended to allow for an inter

- pollutant transfer executed in one year to have effect in subsequent years. Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 6454 transfers to occur over multiple years , as Petitioners contend

. T he report states: “Conference Agreement. The Admin istrator is directed to promulgate regulations that will authorize inter

- pollutant transfers, as in the Senate bill , and trades with other persons, as in the House amendment.” Id. (emphasis added). The Conference Agreement did not call for the final bill to allow for inter

- pollutant transfers in addition to those set forth in the Senate bill but rather to “authorize inter

- pollutant transfers, as in the Senate bill . . . .” As explained, such transfers were expressly limited to those which could occur sol ely within the same year. Id. Petitioners review the identical legislative history and come to a different conclusion , not by citing actual statements in the report but by imbuing that report with a gloss that does not actually exist in the written wor ds. For example, Petitioners assert that the final bill incorporates an approach of the Senate that was designed to “maximize industry flexibility,” Pet. Br. 55, words that do not appear in the relevant legislative history. They further postulate that “f ree trading of HCFCs was inherent in [the Senate’s] approach,” Pet. Br. 56, again citing to no actual statements supporting this conclusion. 11

11 I n support of this proposition, Petitioners merely cite the Senate bill which took the “basket of chemicals” approach and declare that this evidences the Senate’s desire for flexibility. Pet. Br. 55

- 56. It evidences nothing of the sort , but in any case, a s outlined above, this approach was not mandated by Congress or adopted by EPA in establishing the HCFC allowance program. Regardless of any purported

– and unstated

– desire for industry flexibility or a free trading bias , Petitioner s simply Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 6555 ignore the express limitation the Senate placed on inter

- pollutant transfers; that they may only occur in the “same year.” While the legislative history is sparse, it certainly cannot be interpreted to require EPA to recognize previously executed i nter

- pollutant transfers in setting baselines in subsequent regulatory periods. Finally, Petitioners assert that EPA’s regulation governing transfers of allowances , 40 C.F.R. §82.23, contradict s EPA’s interpretation of the statute

. Pet. Br. 32

- 33. A gain , Petitioners fail to cite to any express statement in the regulations supporting their view. Instead, Petitioners surmise that if EPA had intended to exclude int er - pollutant transfers from the category of permanent transfers , it would have structured the regulation differently. Id. This, of course, is nothing more than pure supposition , wholly unsupported by the regulation or anything in the record. Moreover, the provision most relevant to the issue, 40 C.F.R. §82.23(d) , expressly states: “A person rec eiving 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 phase

- out schedu les in this section

. ” This provision contemplates an inter

- company transfer of baseline allowances, since there would be no reason to identify which party receives the baseline adjustment if it was a

one - party transaction. Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 6656 Petitioners readily admit that EPA must be accorded broad discretion in interpreting its authority under an ambiguous statute. Pet. Br. 52 . Apparently for this reason, Petitioners suggest that this deferential standard cannot be applied in this case because EPA did not actually exerci se its discretion in interpreting the statute because it mistakenly believed it was prohibited from doing so. Pet. Br. 51

- 52. See also

In referring to EPA’s conclusions related to its statutory authority, Petitioners use words like “foreclose” or “prohibit

. ” pp. 58

- 59 ( citing cases for the proposition that “ [w]hile the Secretary has dis cretion * * *, that discretion m ust be e xercised through the eyes of one who realizes she possesses it” ). Indeed, the relief Petitioners seek is merely an order from the Court requiring the 2010 Regulation to be “remanded so that EPA can interpret the statute anew * * * and bring its experience and expertise to bear” in interpreting the statute. Pet. Br. 59, 52.

See , e.g. , Pet Br. at 53: “EPA concluded that the legislativ e history foreclosed the possibility of baseline inter

pollutant transfers . . . .” Yet, EPA never made such a statement nor did it use such words in interpreting the statute

. In any case, i n interpreting a statute an agency will determine what a statute allows and may describe actions that are “prohibited”

o r “foreclosed” by the statute. But this reflects the agency’s substantive interpretation of the statute based on its experience and expertise in applying the Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 6757 statute , not a conclusion that the agency is, in the first instance, prohibited from even engaging in an interpretation of what the statute allows. EPA did, in fact, utilize its experience and expertise in interpreting the
statute to determine not only possible interpretations of the statute b ut the best interpretation . As EPA stated : “After considering the language of section 607 and the legislative history , EPA believes that section 607(b) is best read as permitting only year

- by

- year inter

- pollutant transfers. . . . Hence, EPA interprets s ection 607 as requiring that all inter

- pollutant transfers, whether occurring between companies or within a single company, be conducted on a yearly

– and thus temporary

– basis.” 74 Fed. Reg. at 66,421

- 22 (emphasis added)

. Thus, there is no need to

rema nd this action so that EPA may reinterpret the same statute all over again. 12
I V . THE 2010 REGULATION IS NOT IMPERMISSIBLY R ETROACTIVE Petitioners assert that the 2010 Regulation retroactively extinguishes a right to which they are entitled : an increase d baseline in HCFC

- 22 that resulted from inter

- pollutant transfers Petitioners conducted during the prior regulatory period. Petitioners contend that Title VI does not provide EPA with authority to implement its rules governing company baselines retroacti vely. Pet. Br. 60

- 65

.
12 Although Petitioners seek a remand with regard to their statutory interpretation argument, the overall relief they seek is for the 2010 Regulation to be vacated. Pet. Br. 65. This, of course, would be inappropriate relief, since it would cause all companies’ allowances, even Petitioners ’ , to disappear until EPA promulgates a new regulation. Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 6858 Petitioners’ claim fails because its un derlying premise is incorrect. By its express terms, the 2010 Regulation is prospective only; it applies only to production and consumption of HCFCs that occurs on or after January 1, 2010. 7 4 Fed. Reg. at 66,418. It does not in any way attempt to “reach back” to find that Petitioners are in violation of Title VI because they conducted inter

- pollutant transfers of baseline allowances and/or produced or consumed HCFCs in excess of their origin al baseline at any time through December 31, 2009. Petitioners concede that a regulation can only be impermissibly retroactive if it impairs vested rights acquired under existing law. Pet. Br. 61 . EPA’s regulations make clear that permission to produc e and consume HCFCs (through the grant of allowances) is not a right but a “privilege” granted by EPA under the terms of its own regulations. See e.g. , 40 C.F.R. § 82.3: “C onsumption allowances means the privileges granted by this subpart to produce and i mport controlled substances . . . . Production allowances means the privileges granted by th is subpart . . . .” (Emphasis added). Moreover, as detailed supra , th is privilege expired on December 31, 2009

. Thus, it cannot be said that any prior opportuni ty afforded to Petit io ners to exchange baseline allocations of one pollutant for those of another was a vested right that was required to have lasting effect in regulations governing new regulatory periods. Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 6959 At bottom, Petitioners assert that the 2010 Regulation is impermissibly retroactive because they relied upon EPA’s purported adherence to Petitioners’ own view of how baselines may be altered and made business decisions based on their expectation that this view would be applied in the next generati on of regulations. 13 The courts, however, have made clear that even when one’s business expectations are, unlike here, based on a grant of rights that are not set to expire, reliance on a particular regulatory application or procedure that is later reverse d by an agency does not make the new regulation retroactive. As this Court summarized in Chemical Waste Management, Inc. v. EPA

It is often the case that a business will undertake a certain course of conduct based on the current law, and will then find its expectations frustrated when the law changes. This has never been thought to constitute retroactive lawmaking, and indeed most economic regulation would be unworkable if all laws disrupting prior expectations were deemed suspect. , 869 F.2d 1526, 1536 (D.C. Cir. 1989):

See also Mobile Relay Assocs. v. FCC , 457 F.3d 1, 11 (D.C. Cir. 2006) (“[A]n agency order that ‘alters the future effect, not the past legal consequences’ of an action, or that ‘upsets expectations based on prior law,’ is not retroactive.” ) (citations omitted); Sinclair Broadcast Group , Inc. v. FCC

13 Not surprisingly, most other HCFC prod ucers anticipated that EPA would utilize the same baselines for the 2010

- 2014 period as those previously applied without adjustments for inter

- pollutant transfers , and based their own business decisions on that expectation. 74 Fed. Reg. at 66,419

- 21. , 284 F.3d 148, 166 Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 7060 (D.C. Cir. 2002); DirecTV, Inc. v. FCC

Because Petitioners held no vested rights to see their inter

- pollutant transfers reflected in a new regulatory regime, and because the 2010 Regulation merely upsets Petiti oners’ expectations based on prior law that expired under its own
terms , th e 2010 Regulation cannot be deemed to be impermissibly retroactive. , 110 F.3d 816, 825

- 26 (D.C. Cir. 1997) (finding that an explicit policy to allocate surrendered broadcast channels free to existing licen sees, later abandoned in favor of an auction policy, was not a retroactive rule).

For the foregoing reasons, the Petitions for Review should be denied. CONCLUSION

Resp ectfully submitted,
DATE: March 30, 2010 OF COUNSEL: DIANE E. Mc CONKEY Office of General Counsel U.S. Environmental Protection Agency Ariel Rios Building 1200 Pennsylvania Avenue, N. W. Mail Code: 2344A Washington, DC 20460 IGNACIA S. MORENO As sistant Attorney General Environment & Natural Resources Div.

PERRY M. ROSEN /s/ Perry M. Rosen United States Department of Justice Environment & Natural Resources Div. Environmental Defense Section P.O. Box 23986 Washington D.C. 20026

- 3986 Tel: (202) 353

- 7792 Fax: (202) 514

- 8865 perry.rosen@usdoj.gov Counsel for Respondent EPA Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 7161 This brief complies with the type

- volu me limitation of Fed. R. App. P. 32 (a)(7)(B) because this brief contains 13,919 words, excluding the parts of the brief exempt under Fed. R. App. P. 32 (a)(7)(B)(iii). This brief complies with the typeface requirements of Fed. R. App. P. 32(a)(5) and the typeface style requirements of Fed. R. App. P. 32(a)(6) because the brief was prepared in proportionally spaced typeface using Microsoft Word 14 point Times New Roman type. CERTIFICATE OF COMPLIANCE UNDER FED. R. APP. P. 37(A)(7)(b)

So certified this 30 th day of March, 2010, by
/s/ Perry M. Rosen Perry M. Rosen Counsel for Respondent EPA Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 7262 I hereby certify that the foregoing Brief of Respondent Environmental Protection Agency was electronically filed with the Clerk of the Court using the CM/ECF system, which wil l send said Brief to the attorneys of record for all parties in this case. CERTIFICATE OF SERVICE

March 30, 2010 /s/ Perry M. Rosen Counsel for Respondent EPA Perry M. Rosen Case: 09-1318 Document: 1237311 Filed: 03/30/2010 Page: 73