In National Resources Defense Council v. Southern California Air Quality Management District, 2011 W.L. 2557246 (C.A. 9 (Cal.)), the National Resources Defense Council (“NRDC”) sought to call the Southern California Air Quality Management District (“SCAQMD”) to account for purportedly using invalid “offsets” for emissions increases resulting from new stationary sources. A panel of the Federal Ninth Circuit Court of Appeals found, however, that: (1) the District Court’s decision refusing to hold SCAQMD to a validity standard for its internal “offsets” for emissions increases was correct because such a validity standard is not required by the Clean Air Act (“CAA”), 42 U.S.C. section 7503(c) (“Section 173(c)”); and (2) ironically, the District Court lacked jurisdiction to reach that decision where original jurisdiction lies in the Courts of Appeals pursuant to CAA section 7607.

Specifically, CAA is a state/federal partnership, see, e.g., CAA section 7402. The United States Environmental Protection Agency (“EPA”) develops and approves National Ambient Air Quality Standards (“NAAQS”), CAA section 7409(n). States enforce the NAAQS through State Implementation Plans (“SIP”), which must be approved by the EPA and become Federal law after they are approved. CAA section 7410(a), (k).

In regions that have not been found to attain the NAAQS (“nonattainment regions”), SIPs must require permits for construction and operation of new or modified major stationary emission sources. In addition, CAA section 7503(a)(1)(A) (“Section 173”) requires that new emission sources obtain “offsetting emissions reductions.” Section 173(c) also requires that such “offsets” be “in effect and enforceable” when a new source comes on line, as well as “offset by an equal or greater reduction” that was not “otherwise required.” Id.

The SIP for the Southern California Air Basin, developed by SCAQMD, sets forth its new source review program in regulation XIII, which has been substantially approved by EPA. Rule 1303(b)(2) of Regulation XIII establishes guidelines for acceptable offsets. The first mechanism is Emission Reduction Credits (“ERC”), Rule 1309(b)(d)(e), which contains five specific validity requirements: offsets must be (1) real; (2) quantifiable; (3) enforceable; (4) permanent; and (5) surplus beyond existing requirements. The second mechanism is allocation from a priority reserve maintained by SCAQMD, pursuant to Rule 1309.1, which serves to compensate for certain priority sources and exemptions allowed under SCAQMD Rule 1304.

In this case, NRDC claims that SCAQMD violates CAA Section 173(c) by depositing and distributing credits that do not meet the requirements of Rule 1309(b)(d) or (e) from its priority reserve accounts. In its holding, the Court first reasoned that exclusive jurisdiction lies in the Federal Courts of Appeals because, in 2006, EPA had promulgated a rule approving revisions to the SIP for the South Coast Air Basin, 71 Fed.Reg. 35,157 (June 19, 2006) and “determining that SCAQMD’s internal credits complied with section 173(c).” Id. The Court went on to find that the promulgation of the above rule constituted a “final action of the administration,” constituting “consummation of the agency’s decisionmaking process such that legal consequences will flow from it.” The Court found that, because EPA approved both the SIP and the integrity of SCAQMD’s priority reserve accounts with respect to compliance with Section 173(c), NRDC was “effectively seeking review of the EPA’s decision,” which may only be brought in the Federal Courts of Appeals. CAA section 7607.

The Court then went to the substance of NRDC’s claim of invalidity of SCAQMD’s internal offsets. There, it held that Rule XIII distinguishes between ERCs, to which the five enumerated validity requirements apply, and internal offsets such as those in SCAQMD’s priority reserve to which they do not. In doing so, the Court opined: “Applying the ERC validity requirements to the internal offsets would require collapsing this distinction between ERCs and the priority reserve. Doing so would be inconsistent with the disjunctive ‘either/or’ language of Rule 1303(b)(2).”

The importance of this decision should not be underestimated. First, in finding that any challenge to a SIP approved by the EPA constitutes a challenge to the EPA which may only be brought in the Federal Courts of Appeals constrains access to the district courts for potential litigants; eliminates the mediation of the appellate courts which is normally available in the Federal system between the district courts and largely inaccessible United States Supreme Court, and requires potentially greater expenditure of funds to access the higher courts. Moreover, the Court’s substantive holding, that offsets from the priority reserve under the South Coast Air Basin SIP need not be subject to stringent validity requirements, leaves the way open for a loosening of offset requirements on certain categories of new stationary sources of emissions in the South Coast Air Basin, one of the most impacted in the nation, which can hardly afford a loosening of restriction. The good news, however, is that with the loosening of restriction, comes the potential for increased economic activity that might otherwise have been delayed or permanently foreclosed.