D.C. Circuit Vacates Part of the EPA's HFCs Phasedown Rule

On June 20, 2023, the United States Court of Appeals for the District of Columbia Circuit, in Heating, Air Conditioning & Refrigeration Distributors Int'l v. Envtl. Prot. Agency, No. 21-1251, (D.C. Cir. June 20, 2023), vacated the part of the United States Environmental Protection Agency's ("EPA") Phasedown of Hydrofluorocarbons ("HFCs") Rule that (i) mandates refillable cylinders to transport HFCs, and (ii) implements a QR-code certification and tracking system to be affixed to the refillable cylinders.

Overview of the EPA's Previous HFCs Rules Under the SNAP Program

In 1994, the EPA believed that HFCs were an appropriate substitute for ozone-depleting substances used in refrigeration, air-conditioning, and aerosol products. In 2015, the EPA shifted course, determining based on climate change concerns that HFCs—which are greenhouse gases—should no longer be considered a safe substitute. EPA therefore issued a rule under the Significant New Alternatives Policy ("SNAP") Program to prohibit the use of certain HFCs, claiming authority under Section 612 of the Clean Air Act (the "2015 Rule").

In 2017, the D.C. Circuit determined that the EPA exceeded its statutory authority in the 2015 Rule by regulating entities that were currently using HFCs and vacated the 2015 Rule to the extent it required manufacturers to replace HFCs with a substitute substance. Mexichem Fluor, Inc. v. U.S. Envtl. Prot. Agency, 866 F.3d 451 (D.C. Cir. 2017).

In response, in 2018, the EPA promulgated a rule to allow interim use of HFCs by manufacturers (the "2018 Rule"). In 2020, the D.C. Circuit vacated the 2018 Rule for failing to follow the proper notice-and-comment process. Natural Res. Def. Council v. Wheeler, 955 F.3d 68 (D.C. Cir. 2020).

In 2021, the EPA promulgated a rule that lists new alternative substances under the SNAP Program for the refrigeration and air-conditioning sector (the "2021 Rule"). This rule refers to listings from the 2015 Rule, but the EPA notes that "[t]his final rule is not [the] EPA's response to the court's decision" following the 2015 Rule. 

Phasedown of HFCs Under the American Innovation and Manufacturing Act and Phasedown Rule

In 2020, the United States Congress passed the American Innovation and Manufacturing Act (the "AIM Act") to address the environmental impact from HFCs. The AIM Act directs the EPA to phasedown the use of HFCs by 85% by 2036.

The AIM Act required the EPA to issue a final rule to phasedown the production and consumption of HFCs in the United States through an allowance allocation and trading program. Specifically, Congress instructed the EPA to: 

• Determine the production and consumption baseline levels of HFCs in the United States; 
• Cap the production and consumption of HFCs to the corresponding percentage of the baseline for the given year; and
• Determine the quantity of allowances for production and consumption of HFCs for the following year.

The EPA issued a phasedown rule under the AIM Act in October 2021 (the "Phasedown Rule"). The Phasedown Rule: 

• Determined the production and consumption baseline levels;
• Determined the caps in relation to the production and consumption baseline levels;
• Explained how the agency will distribute allowances; and
• Established reporting and auditing requirements for HFC users, including (i) a mandate for refillable cylinders to transport HFCs (effectively banning disposable cylinders); and (ii) a QR-code certification and tracking system for the refillable cylinders.

D.C. Circuit Court Vacates Part of the Phasedown Rule 

In Heating, Air Conditioning & Refrigeration Distributors Int'l v. Envtl. Prot. Agency, two regulated companies and threetrade associations (the "Petitioners") brought suit against the EPA regarding the Phasedown Rule, raising three challenges:

• EPA does not have the authority to regulate HFCs within blends. 
• Congress provided the EPA with "unguided discretion" under the AIM Act, which gave the EPA impermissible legislative power in violation of the nondelegation doctrine. 
• EPA does not have the statutory authority to mandate the use of refillable cylinders and implement a QR-code certification and tracking system.

The court ruled in favor of the multiplying—EPA on the first two challenges, finding that (i) EPA has the authority to regulate HFCs found within blends because an "HFC within a blend is still a 'regulated substance'" that is "chemically identical to an HFC outside of a blend"; and (ii) Petitioners failed to properly exhaust their nondelegation doctrine argument during the notice-and-comment period, as required by the Clean Air Act. 

The court ruled in favor of the Petitioners, however, on the third argument. To demonstrate its authority, the EPA pointed to 42 U.S.C. § 7675(e)(2)(B), which provides that the EPA "shall ensure that the annual quantity of all regulated substances produced or consumed in the United States does not exceed the product obtained by multiplying—(i) the production baseline or consumption baseline, as applicable; and (ii) the applicable percentage listed on the table contained in subparagraph (C)." But the court favored the Petitioners' argument for two reasons: 

• Section 7675(e)(2)(B) is simply a "math equation" that informs the agency of the proper calculations for the production and consumption cap; and
• The phrase "shall ensure" does not give the EPA the power to pass new rules. Instead, "shall ensure" should be read to give the EPA the power to carry out the "detailed instructions" Congress provided within the AIM Act. 

Judge Pillard dissented in part, stating that the refillable cylinder mandate and the tracking requirements in the Phasedown Rule "fall[] squarely within the EPA's congressionally delegated authority." She explained that the requirement for refillable cylinders with trackable QR-codes is a "straightforward way to 'ensure' that the regulated substances they contain correspond to allowances the statute requires." Additionally, she expressed concern that the court's ruling will leave the EPA with "inadequate tools" to carry out the Phasedown Rule and reduce HFC levels in the United States.

Conclusion

The congressional authority provided to the EPA by the AIM Act allows the EPA to regulate HFCs in a way it was unable to do under the SNAP Program. With this authority, the EPA continues to implement new rules to phasedown HFC levels under the AIM Act. In July 2023, the EPA issued a final rule to establish an HFC allocation method for 2024-2028, correct consumption baselines, and change compliance and enforcement provisions. However, as the D.C. Circuit's decision shows, the EPA's authority is not limitless and may be subjected to future challenges if future revised and new regulations do not closely hew to the statute.

Lauren Bauer, a summer associate in the Pittsburgh Office, contributed to this article.

Read the full Climate Report.