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Senior Underwriter, Environmental, North America

Air Pollution, which migrates across state borders, is in a State of Confusion. There is a mini-trend that once air pollution crosses state lines, a question arises as to which polluters are responsible, and how much. This Inter-State air pollution discussion revolves around recent case law regarding Clean Air Act Section 110 (State Implementation Plans for national ambient air quality standards (NAAQS)) and Section 126 (Interstate pollution abatement). Despite case law conflict, environmental insurance can play a role to would-be responsible parties. EME Homer City Generation LP v. EPA On December 10, 2013, the U.S. Supreme Court will hear arguments from an appeal in EME Homer City Generation, LP v. EPA. EME Homer City was lessee and operator of Homer City generating station, a coal-burning electric power facility that is affected by the so-called Transport Rule. “In August 2011, to implement the statutory good neighbor requirement, EPA promulgated the (Transport) rule also known as the Cross-State Air Pollution Rule. The rule defines emissions reduction responsibilities for 28 upwind States based on those States' contributions to downwind States' air quality problems and limits emissions from upwind States' coal- and natural gas-fired power plants, among other sources. Those power plants generate the majority of electricity used in the United States, but they also emit pollutants that affect air quality. The Transport Rule targets two of those pollutants, sulfur dioxide (SO2) and nitrogen oxides (NOx).” (See Opinion.) Per the Federal Register, the Summary of the Transport Rule states: “EPA is limiting the interstate transport of emissions of nitrogen oxides and sulfur dioxide that contribute to harmful levels of fine particle matter and ozone in downwind states. EPA is identifying emissions in the eastern United States that significantly affect the ability of downwind states to attain and maintain compliance with fine particulate matter national ambient air quality standards (NAAQS). (See Federal Register, 40 CFR Parts 51, “Federal Implementation Plans: Interstate Transport of Fine Particulate Matter and Ozone and Correction of SIP Approvals”, August 8, 2011.) The Transport Rule is derived from the “good neighbor” provision of the Clean Air Act. The good neighbor provision requires that a State Implementation Plan, or SIP: (D) contain adequate provisions — (i) prohibiting, consistent with the provisions of this subchapter, any source or other type of emissions activity within the State from emitting any air pollutant in amounts which will — (I) contribute significantly to nonattainment in, or interfere with maintenance by, any other State with respect to any such national primary or secondary ambient air quality standard. See 42 U.S.C. § 7410(a)(2)(D). (Emphasis added.) The Rule, as outlined in the Federal Register, states: “The good neighbor provision only requires the elimination of emissions that significantly contribute to nonattainment in other states; it does not shift to upwind states the responsibility for ensuring that all areas in other states attain the NAAQS.” In August 2012, the U.S. Circuit Court of Appeals in D.C. issued an opinion regarding air pollutants by stating the EPA exceeded its statutory authority in implementing the Transport Rule. It was noted that “some emissions of air pollutants travel across state boundaries.” (See Opinion at 1.) Upwind states have a duty to prevent sources within their borders that contribute significantly to a downwind state’s nonattainment of federal air quality standards. In EME Homer City Generation, the District of Columbia Circuit Court stated: “The (Clean Air Act) statute is not a blank check for EPA to address interstate pollution on a regional basis without regard to an individual upwind State's actual contribution to downwind air quality.” The Court believed that EPA may not force an upwind state to reduce more than its own contribution, and that each upwind state must share in the responsibility proportionately. In short, the Court stated “EPA's Transport Rule exceeds the agency's statutory authority.” Put simply, the statute requires every upwind State to clean up at most its own share of the air pollution in a downwind State — not other States' shares. Before the U.S. Supreme Court, the following questions, in part, are presented: 1.Whether States are excused from adopting SIPs prohibiting emissions that "contribute significantly" to air pollution problems in other States until after the EPA has adopted a rule quantifying each State's interstate pollution obligations. 2.Whether the EPA permissibly interpreted the statutory term "contribute significantly. In the Federal Petitioners’ (EPA’s) filed Brief, they state “contribute significantly” is not defined, and that the “EPA has long interpreted the provision to permit the agency to take into account the availability of cost-effective emission-reduction measures when calculating the amount of a State’s significant contribution, and that interpretation is reasonable. The Petitioners argue that the court of appeals’ proportional approach is not compelled by the Act.” (See Petitioners’ Brief at 17.) The Petitioners disagree with the lower court’s opinion that each “upwind state shoulder on its fair share.” (See Petitioners’ Brief at 46.) The Petitioners seem to advocate upwind States being required to excessively reduce emissions that contribute to air quality problems in downwind states whose own emissions, by themselves, put them out of attainment. Interestingly, some members of the power generation industry, such as Exelon Corporation, have already invested in pollution control equipment as a response to EPA’s Transport Rule to employ a market-based approach ensuring emissions reductions - either by operating controls or by purchasing allowances, which dictates “where emission reductions will occur at the lowest cost”. (See Exelon Brief at 7, 15, 25) In their filed brief with the U.S. Supreme Court, Respondents appear to hang their hat on the EPA’s lower court acknowledgement that “its reading of the Statute would allow the EPA to require a State to reduce more than the State’s total emissions that go out of State.” (See Respondents Brief at 1.) Further, Respondents’ position is that EPA does not take account that less costly controls could still allow downwind states to attain non-ambient air quality standards. Respondents are opposed to EPA overcontrolling (unfairly) upwind states. The promulgation of rules, such as the Transport Rule, is a potentially flawed Separation of Powers and/or bicameralism constitutional problem that allows EPA to implement a rule from a statutorily-derived text without Congressional consent and presidential presentment. Congress, which knows its own intent, has no say in whether the EPA, which is part of the Executive Branch, exceeded the authority delegated to EPA by Congress itself. Rules like this do not need passage of two houses of Congress and presidential acceptance, as statutes require. As a result, there is always a possibility that EPA can misinterpret its delegated authority. Further, allowing EPA to legislate via rulemaking tilts the scales of powers in favor of the Executive. On the other hand, Congress may – possibly by design – be agreeable to EPA implementing controversial rules so that the political Congressional branch is not “blamed” for attempting an overly aggressive stance. What becomes somewhat questionable is that such rules may be an “end around” the consent of the governed, or the people. This allows Congress to escape potential ire from its constituents; delegating rulemaking to EPA is the Congressional version of a “punt” so that EPA receives the wrath of the people, or the litigation of citizen groups – and Congress goes unscathed If the nation wishes to get “tough” on downwind air pollution, Congress should act more courageously, definitively and unambiguously by itself and not ask EPA to do its “dirty” work on pollution rules. Moreover, if Congress acts, then there is no likelihood of litigation over whether EPA exceeded delegated authority. GenOn Rema, LLC v. EPA In GenOn Rema, LLC v. United States Environmental Protection Agency (EPA), a 2013 Third Circuit Court of Appeals Case, the Third Circuit Court of Appeals upheld a rule and denied GenOn’s petition for review. (See Opinion at 4-5). Portland Generating Station (Portland), a 427-megawatt coal-fired electricity generating plant in Northampton County, PA is directly across the Delaware River near Knowlton Township, NJ. Section 126(b) “Interstate Pollution Abatement” of the Clean Air Act allows downwind states (New Jersey) to petition the EPA for a finding that a source in an upwind state (Pennsylvania) affects the petitioning state attainment with national ambient air quality standards (NAAQS) for certain pollutants. Section 126(b) states: (b) Petition for finding that major sources emit or would emit prohibited air pollutants Any State or political subdivision may petition the Administrator for a finding that any major source or group of stationary sources emits or would emit any air pollutant in violation of the prohibition of section 7410(a)(2)(D)(i) of this title or this section. Within 60 days after receipt of any petition under this subsection and after public hearing, the Administrator shall make such a finding or deny the petition. The State of New Jersey Department of Environmental Protection (NJDEP) filed such a petition under Section 126(b), requesting the EPA to issue an order restricting sulfur dioxide emissions from Portland. NJDEP requested that the EPA make a finding that the trans-boundary sulfur dioxide emissions from nearby Portland contributed to nonattainment. The EPA found that Portland emitted sulfur dioxide interfering with the control of air pollution across state borders. In response to a petition under the Clean Air Act, the EPA issued a rule imposing direct limits on Portland’s emissions and a schedule of restrictions to reduce its sulfur dioxide emissions by about 81% at its two coal-fired generating units within three (3) years of the rule. GenOn REMA, LLC (owner and operator of Portland) challenged this “Portland Rule” as inconsistent with its authority under the Clean Air Act and as arbitrary and capricious. Once the EPA independently determined that Portland was interfering with NJ’s air quality, it reasonably abided by the Clean Air Act in enacting the “Portland Rule” to require emissions reductions. (See Opinion at 27.) This 126(b) Petition seems to be an end-around the broader interstate process discussed in EME Homer City Generation. If the broader Transport Rule is rendered invalid by the U.S. Supreme Court, there is nothing to stop Petitioners to target single entities in Interstate Air Pollution matters. If the EPA’s approach to reduction is based on science and rationale, the Court may defer to the EPA’s finding. For instance, those power plants at issue in the EME Homer City Generation case which generate the majority of electricity used in the United States could be targeted individually via a 126(b) Petition, or Petitions. If at first, one provision of the Clean Air Act, or implementing rule, does not succeed, try, try another. Role of Environmental Insurance In either case, whether air pollution is required to be reduced via a singular 126(b) petition, or more broadly via the Transport Rule, environmental insurance carriers can provide a policy covering these inherent exposures. If there is an air emission which triggers a remediation expense, environmental insurance policies provided to such polluters can respond to remedy either the insured’s property or a third party property. Besides cleanup, policies can also provide third-party coverage for bodily injury and property damage arising from air emissions. This sort of unquantifiable tort liability can protect against an individual or a group suing an air emitter who causes bodily injury (perhaps respiratory illness) due to air emissions, or property damage allegations if neighboring properties are devalued or experience a loss of use due to continual air emissions. Lastly, if there is a civil fine or penalty associated with non-compliance of reduced emission requirements, environmental insurance policies could also respond to this monetary relief sought. While the results of this emission litigation are “up in the air”, the role of environmental insurance is not. It will continue to be a steadying necessity in the uncertain world of environmental administrative agency actions and ensuing litigation. Brett McGovern is a senior underwriter in XL Group's North America Environmental business. 

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