IIAR

On August 8, 2017, the United States Court of Appeals for the District of Columbia Circuit issued a ruling in the case of Mexichem Fluor Inc. vs. the EPA finding that the Environmental Protection Agency (EPA) exceeded its statutory authority by promulgating a rule in 2015 that regulated the use of hydrofluorocarbons (HFCs). The 2015 regulation was issued by EPA through its Significant New Alternatives Program (SNAP) as a part of the Obama Administration’s plan to reduce greenhouse gas emissions. The regulation restricted the use of 38 HFCs in over 20 uses including retail food refrigeration.

In response to the regulation, two HFC manufacturers sued EPA challenging the validity of the rule. The companies argued that EPA exceeded its statutory authority under Section 612 of the Clean Air Act by requiring manufacturers to replace HFCs. They also argued that the removal of HFCs from the approved substitutes list was arbitrary and capricious. Given the change in administrations, there was initially some uncertainty about how the new Trump Administration would approach the legal challenge to an Obama era regulation. The Trump Administration has already taken numerous actions to dismantle regulations finalized under President Obama. This includes declining to defend legal challenges to Obama regulations and proactively moving to reverse Obama era actions. However, in this case, the Trump Administration chose to defend the EPA regulation during the court proceeding.

The lawsuit centers around Section 612 of the Clean Air Act, which authorizes EPA to replace ozone-depleting substances with chemicals, product substitutes, or alternative manufacturing processes that reduce overall risks to human health and the environment. EPA administers Section 612 through the SNAP program through which the agency maintains a list of approved and prohibited substitutes. The rule issued in 2015 changed the designation of some HFCs, including R404A, R134a, R407C and R410A, from the approved list to the prohibited list. The policy change impacted manufacturers that had replaced the ozone depleting refrigerant R-22 with a refrigerant such as R404A or R134a (when it was on the approved list) by prohibiting its future use in certain applications.

This drove the two companies to challenge whether EPA had the authority to require a manufacturer to now replace HFCs, which are non-ozone-depleting substances, with another substitute. In addressing the question, the court cited EPA’s historical stance that it did not possess authority under Section 612 to require the replacement of non-ozonedepleting substances. The court cited EPA statements from 1994 that Section 612 “does not authorize EPA to review substitutes for substances that are not themselves” ozone-depleting substances.

EPA defended the 2015 rule by arguing that Section 612 does provide sufficient authority to require the replacement of a non-ozone-depleting substitute that had previously been on the approved list. EPA argues that the word “replace” in the statute applies not only to the initial substitution for an ozone depleting substance such as R-22, but any subsequent use of a substitute. In effect, EPA asserts that replacement is not a one-time occurrence, but rather an ongoing action.

The court rejected EPAs rationale stating that under EPA’s current interpretation of the word “replace,” manufacturers would continue to “replace” an ozone-depleting substance with a substitute even 100 years or more from now. The court went on to say that such a boundless interpretation of EPA’s authority under Section 612 borders on the absurd. EPA’s authority to regulate ozone-depleting substances under Section 612 does not give EPA authority to order the replacement of substances that are not ozone depleting but that contribute to climate change.

While the court was clear that Section 612 of the Clean Air Act does not authorize EPA to regulate HFCs, it offers the agency some options for addressing the use of HFCs. The court cites the Toxic Substances Control Act (TSCA), National Ambient Air Quality Standards Program and the Hazardous Air Pollutants program as alternative authorities that EPA could consider using to restrict HFC use. The court makes clear that its ruling does not affect these authorities in any way.

The court also addressed the theory that EPA could potentially take retroactive action to disapprove of a substitute for an ozone depleting substance. Under a retroactive disapproval approach, EPA could potentially prohibit manufacturers from making products that use HFCs even though those HFCs were approved as substitutes when a manufacturer decided to initially replace an ozone-depleting substance with HFCs.

In order for EPA to advance the retroactive disapproval approach, the court lays out three steps the agency must take:

EPA would have to reasonably conclude either (i) that Section 612(c) provides EPA with statutory authority to employ a “retroactive disapproval” approach or (ii) that EPA has inherent authority to retroactively disapprove a prior replacement, even a replacement that occurred many years ago.

EPA must explain the basis for its conclusion and explain its change in interpretation of Section 612(c). EPA must comply with applicable due process constraints on retroactive decision-making. To satisfy the Due Process Clause, EPA must at a minimum provide regulated parties fair warning of the conduct a regulation prohibits or requires. In this case, for example, even if EPA has statutory authority to retroactively disapprove the replacement of an ozone-depleting substance with HFCs, EPA plainly may not impose civil or criminal penalties on a manufacturer based on the manufacturer’s past use of HFCs at the time when EPA said it was lawful to use HFCs.

It is not clear what EPA’s next step will be. After the court’s ruling, an EPA spokesperson indicated that the agency will be considering its options. EPA could choose to appeal the court’s decision to the Supreme Court. The agency could also exercise one of the options suggested by the court such as claiming the authority for retroactive disapproval or utilizing one of its other statutory authorities like the Toxic Substances Control Act to regulate the use of HFCs. Alternatively, EPA could take no further action, let the court ruling stand, and not continue to actively pursue the regulation of HFCs.

Industry also has the option to consider appealing the court’s decision. While Mexichem and Arkema Inc. opposed the EPA rule and brought the court case, other companies supported the rule and had made significant investments in new refrigerants. For example, Chemours expressed disappointment in the ruling and stated that it is assessing its options, including an appeal. Honeywell, another company that has made investments in alternatives to HFCs, urged EPA to continue its efforts to phase out HFCs despite the court decision.

The outcome of the lawsuit creates additional uncertainty regarding how the U.S. government will address the future use of HFCs. President Trump and several of his key policy advisors continue to express skepticism on climate change and climate policies. The United States has officially withdrawn from the Paris Climate Agreement, but no official policy has been articulated on the Kigali Agreement, which expands the reach of the Montreal Protocol to include a global phasedown of HFCs.

Given that the court has ruled that the SNAP program does not give EPA the authority to regulate HFCs, the agency would need to find an alternative mechanism to effectuate the phasedown of HFCs called for under Kigali. While Trump’s EPA and Department of Justice defended addressing HFCs through SNAP, it remains unclear how aggressively EPA will either appeal the court’s decision or find another avenue to pursue restricting HFCs in the future.

Despite these policy uncertainties in the United States, the overall momentum of industry remains in the direction of moving away from HFCs. Over the long term, global policies are expected to continue supporting the Kigali Agreement and HFC phasedowns. And, whether driven by U.S. federal policies, or industry trends, HFC use in the United States is expected to decline as well. These trends continue to represent an opportunity for growth in the use of natural refrigerants.