DC Circuit Upholds Project Emissions Accounting

On July 28, 2026, the District of Columbia Circuit Court of Appeals (DC Circuit) released its decision in Environmental Defense Fund v. Environmental Protection Agency, No. 18-1149, a consolidated case hearing multiple challenges brought by environmental groups against EPA’s project emissions accounting (“PEA”) rule. In a significant win for EPA, the DC Circuit upheld the PEA Rule against all facial challenges to its validity, although it left open the possibility of an “as applied” challenge.

ANALYSIS

The DC Circuit began its analysis by recounting that the Clean Air Act defines a major NSR modification as “any physical change in, or change in the method of operation of, a stationary source which increases the amount of any air pollutant emitted by such source” (42 U.S.C. § 7411(a)(4)).  In Alabama Power v. Costle, 636 F.2d 232 (D.C. Cir. 1979, as amended 1980), the DC Circuit held that the increase is a “net” increase (e.g., decreases can be offset against increases) so long as they are “within the same source” and “contemporaneous.”  The EPA then promulgated its regulatory definition, which applied a “significant net emissions increase” test. 45 Fed. Reg. 52676 (Aug. 7 1980).  This was applied as a “two step” test, with Step 1 looking at whether the proposed physical or operational change would result in a significant emissions increase and, if it did, then whether there were any significant net emissions decreases that would make the change less than significant, where some additional guardrails were applied to the net emissions decrease (e.g., contemporaneous, legally enforceable, etc.).  In 2002, EPA amended this definition to use “project” as a shorthand to replace the “physical change or change in the method of operation” of a source and later added recordkeeping requirements to document that changes that had a reasonable possibility of exceeding the significant thresholds did not.  In 2019, the EPA promulgated the Project Emissions Accounting (PEA) Rule, which allowed a “net” increase approach in Step 1 instead of just Step 2.  Several environmental groups challenged that rule, leading to this case.

After initial sparring on whether the environmental groups had standing, resolved in their favor, the DC Circuit turned to the merits.  The first question is whether the Chenery doctrine, which states that a reviewing court may uphold an agency action “solely” on the grounds invoked by the agency, required the court to vacate EPA’s PEA Rule because the EPA had cited Chevron’s “ambiguity as a basis for agency gap-filling” rationale in support of the rule and the Supreme Court had overruled Chevron in Loper Bright.  The DC Circuit rejected this, noting that after Loper Bright it is not clear that Chenery would apply to “pure” questions of statutory interpretation, but ultimately decided it did not need to resolve that question because the EPA had also stated that it believed the PEA Rule was the “best” interpretation of the Clean Air Act’s NSR provisions.  The DC Circuit thus concluded that where EPA had invoked multiple reasons and would have taken action on any of those reasons, the court can uphold agency action on any of those grounds, citing Salt River Project v. United States, 762 F.2d 1053 (D.C. Cir. 1985).

The environmental groups then argued that the PEA Rule was “contrary to law” because it assigned “inconsistent meanings” to the statutory term modification. The DC Circuit rejected this argument, holding that because a “modification” is a change that causes a non-de-minimis net, source-wide emissions increase, the EPA’s determination and recognition that a “project” that by itself won’t cause a significant emissions increase therefore won’t cause a site-wide one was consistent with the statute’s command. The DC Circuit noted that it was the prior interpretation, which refused to allow netting in Step1, that seems to use an inconsistent approach to the term modification.

The environmental groups next argued that the PEA Rule excised the “any” from the Clean Air Act’s definition of modification. The DC Circuit rejected this argument, holding that if the increases are offset by decreases, there is no increase.

The environmental group’s principal argument—that the PEA Rule is contrary to law because it allows NSR to be avoided in Step 1 by relying on an emissions reduction that occurs after the project emissions increase.  This argument caused the DC Circuit some pause, but ultimately because the environmental groups did not distinguish between increases that occur “shortly after an emissions increase” and those that “occur well after an increase,” the court determined that it would reject the facial challenge to the PEA Rule.  The DC Circuit held that contemporaneity had never been interpreted in this absolute sense and that offsetting emissions increases only need to be “substantially contemporaneous,” noting that in the New York cases it had allowed EPA to look up to 10 years before.  Accordingly, the DC Circuit left open the possibility of a future “as-applied” challenge to the PEA Rule in the case of a “delayed-decrease” project but noted that the environmental groups had not developed that challenge in the case before the court.  The court dropped a footnote, however, stating that the environmental groups had not made an arbitrary and capricious challenge to the contemporaneity challenge so the court would not consider that aspect of the rule but that “agency action may be consistent with the agency’s authorizing statute and yet arbitrary [or] capricious under the APA.”

The environmental groups did bring two arbitrary and capricious challenges to the PEA Rule. First, they argued that the rule is arbitrary because sources can “bundle” unrelated activities into a single project, thus avoiding NSR review, and second, that EPA had failed to explain how its existing rule assured compliance under the PEA Rule’s approach. 

On the first issue, the DC Circuit characterized the environmental groups’ argument as one that EPA “broke a promise” that it would “limit” the definition of “project” to those activities that are “substantially related” to one another and that EPA’s interpretive rule on this topic “is insuffificient” to prevent circumvention by unrelated aggregation.  The DC Circuit rejected the first argument by noting that the PEA Rule explicitly stated that the interpretive rule was not binding on state and local authorities and hence there was no “false premise” upon which the rule was promulgated.  On the second aspect, the DC Circuit observed that entities remain bound by the definitions of “modification” and “project” and that an entity that uses project emissions accountin “in a manner that contravenes these definitions is subject to ‘compliance and enforcement’ proceedings,” noting that EPA”s failure to abide by its interpretive rule might be arbitrary.  The DC Circuit also found persuasive EPA’s explanation for why existing guidance and regulations adequately controlled potential over- and under-aggregation in light of the EPA’s finding that these were absent in prior permitting proceedings.  The DC Circuit also seemed inclined to accept the broader need for case-by-case consideration. 

 On the second, inadequate recordkeeping issue, the DC Circuit acknowledged EPA’s discussion of the recordkeeping issue because of existing regulatory enforcement mechanisms and the likely imposition of minor NSR  permit conditions.  The DC Circuit also acknowledged the environmental groups’ concern that “some projects” that do not trigger reasonable possibility review might evade NSR recordkeeping,  But it disagreed that EPA must achieve “perfect NSR compliance” in its rulemaking. Instead, “it is sufficient for the EPA ‘to analyze the trade-off between compliance improvement and the burdens of data collection and reporting’ and ‘articulate a reasoned judgment as to why any proposed additional burden would not be justifiable in terms of likely enhancement of compliance.’”  The DC Circuit held that the EPA had met this “modest” burden.

Based on this analysis, the DC Circuit denied the petitions for review.

COMMENTARY

There is no doubt that EDF v. EPA is a substantial win for the EPA in the NSR context. It upholds the application of netting to both steps of the NSR applicability test and rejects, fairly conclusively, the environmental groups’ contention that if they can show “any” increase that exceeds de minimis NSR is required unless enforceable offsetting emissions reductions are required. The DC Circuit’s conclusion flows logically from its evaluation of the ”net” nature of the modification test, the restatement of which is another major win for the EPA and helpful to industry and state and local regulators as well. The DC Circuit’s logic makes the whole Step 1/Step 2 approach more coherent: does the project cause a significant increase? If it does, can you net the project against other projects to find that there is no significant net increase. 

Another important aspect of the decision is the DC Circuit’s refusal to further codify the “substantially related” aspect of the “project” definition. As NSR Law Blog has pointed out, the definition of what is a “project” is an inherently complex question closely tied to the business needs and market forces applicable to a particular facility at a point in time.  Agencies and courts are poorly equipped to review these issues. The more limited question the DC Circuit seemed that it might entertain – are the activities encompassed within the “project” sufficiently contemporaneous – at least lends itself somewhat more to judicial resolution. The court’s note that it had approved 10 years in the past, even with the footnote about Chevron deference, suggests that challenges to most typical project timelines are unlikely to be successful.

Likely the greatest concern that industry will have is the DC Circuit’s decision to allow future “as applied” challenges to “delayed-decrease” projects.  NSR Law Blog believes that such challenges likely will come but are unlikely to lead to a short “contemporaneous” period, particularly where the period has stretched out due to challenges filed by project opponents.  NSR Law Blog is bit more concerned with the footnote apparently inviting an arbitrary and capricious challenge.  In both cases, perhaps the best approach may be for the EPA to provide guidance to limit the scope for “arbitrary” action.

Finally, NSR Law Blog wishes that the DC Circuit had taken a harder line that the “project” is the request submitted by the permit applicant.  Using the applicant’s request creates a clear line around what the applicant requested and what the agency did; blurring that line to allow consideration of “other” changes makes the NSR program unworkable. NSR is a permitting program and the work of state and local agencies should be reviewed “on the record” before them and not on other material. Alleged circumvention is not a permit issue; it is an enforcement issue. The DC Circuit should have reiterated that point more clearly.  The courts should not lose sight of this foundational aspect of the NSR program.