Four public interest organizations, eleven states, the District of Columbia, and the City of New York (collectively petitioners), challenged a Final Rule issued by the National Highway Traffic Safety Administration (NHTSA) that set corporate average fuel economy (CAFE) standards for "light trucks" for Model Years (MYs) 2008-2011. The Final Rule used a traditional fleet-wide average method for MYs 2008-2010 (Unreformed CAFE) and a new CAFE structure for MY 2011 and beyond (Reformed CAFE). Petitioners challenged the Final Rule under the Energy Policy and Conservation Act (EPCA)and the National Environmental Policy Act (NEPA).The Ninth Circuit held that, for four of petitioners' seven EPCA challenges to the Final Rule, the agency acted arbitrarily and capriciously under EPCA. The Ninth Circuit also held the Final Rule's accompanying Environmental Assessment (EA) was inadequate under NEPA. The Ninth Circuit remanded the rule to NHTSA for expeditious promulgation of CAFE standards consistent with the court's opinion and for preparation of a full Environmental Impact Statement (EIS).
a. The Energy Policy and Conservation Act of 1975 and the Regulatory Context
Congress enacted EPCA in the aftermath of the energy crisis created by the 1973 Mideast oil embargo. To further EPCA's primary goals of energy conservation and energy security, the statute establishes CAFE standards for automobiles. A CAFE standard is "a performance standard specifying a minimum level of average fuel economy applicable to a manufacturer in a model year."The statute directs the Secretary of Transportation to set CAFE standards at "the maximum feasible average fuel economy level that the Secretary decides the manufacturers can achieve in that model year."To determine the "maximum feasible average fuel economy" level, EPCA directs the Secretary to "consider technological feasibility, economic practicability, the effect of other motor vehicle standards of the Government on fuel economy, and the need of the United States to conserve energy."
Under EPCA, NHTSA has authority to regulate fuel economy of vehicles up to 10,000 pounds gross vehicle weight rating (GVWR).However, NHTSA had historically excluded automobiles with a GVWR over 8,500 pounds from CAFE regulation.Historically, NHTSA has also distinguished between passenger automobilesand non-passenger automobiles (i.e., light trucks).Light trucks include many sport utility vehicles, vans, and pickup trucks. In 2002, the National Academy of Sciences (NAS) published a report finding that NHTSA's less stringent CAFE standards for light trucks provided an incentive for manufacturers to invest in making and promoting light trucks to consumers.The NAS report further found that technologies existed to significantly reduce fuel consumption and that raising CAFE standards would reduce fuel consumption.The report noted that the most important reason for improving fuel economy is concern about global warming due to increasing accumulation of greenhouse gases in the atmosphere.More stringent CAFE standards are relevant because passenger automobiles and light trucks produce about five percent of the world's greenhouse gases.
b. NHTSA's Promulgation of the Final Rule
On December 29, 2003, NHTSA published an advance notice of proposed rulemaking to solicit comments on proposed changes for setting more stringent CAFE standards, updating the distinction between passenger automobiles and light trucks, and increasing the GVWR limit for vehicles subject to CAFE standards.On August 30, 2005, NHTSA proposed setting CAFE standards for light trucks in MYs 2008-2010 at standards determined by its marginal cost-benefits analysis to be the "maximum feasible" standards.For MY 2011 and beyond, NHTSA proposed to adopt a Reformed CAFE system that "would set different CAFE standards for vehicles based on size, measured by the vehicle's footprint."NHTSA proposed that MYs 2008-2010 would serve as a transition period during which manufacturers could comply by meeting either the Unreformed or Reformed CAFE standards. The proposed rule suggested no changes to the criteria distinguishing passenger automobiles from light tracksand proposed regulation of only medium-duty passenger vehicles (MDPVs) within the 8,500 to 10,000 pound vehicle class as opposed to all passenger vehicles in that weight class.NHTSA accompanied the proposed rule with a draft EA that analyzed three alternatives to the proposed rule. The draft EA concluded the proposed CAFE standards would reduce emissions of carbon dioxide, and projected only minor cumulative effects from the rulemaking.
NHTSA received over 45,000 comments on the proposed rule. Manufacturers generally opposed subjecting vehicles greater than 8,500 pounds to CAFE regulations. In contrast, states and environmental and consumer organizations generally argued that more stringent CAFE standards were feasible, practical, and required to conserve energy and achieve energy security. They also took issue with NHTSA's decision to use a marginalized cost-benefit analysis that excluded a monetization of GHGs from the light truck fuel economy rulemaking. Commenters also submitted numerous scientific reports and studies detailing the relationships between emissions from light trucks, greenhouse gas emissions, and climate change.
NHTSA issued the Final Rule on April 6, 2006.NHTSA set the Unreformed CAFE standards at the same level as in the proposed rule. Under the Reformed CAFE standards for MY 2011 and beyond, NHTSA set a separate fuel economy target for each vehicle of a different footprint, such that a manufacturer's CAFE target would vary depending on its fleet mix. This Reformed standard "reduces the incentive to enlarge the footprints of light trucks in order to shift them into a higher bracket with a lower fuel economy standard."Under the Final Rule, NHTSA monetized externalities associated with the emission of criteria pollutants during gasoline refining, but did not monetize the benefit of reducing carbon dioxide emissions because it concluded the value of reducing greenhouse gas emissions was too uncertain to explicitly value in a cost-benefit analysis. NHTSA also rejected the idea of a "backstop" under the Reformed CAFE that would have set a minimum fallback fuel economy level for manufacturers. NHTSA argued such a backstop would limit the ability of manufacturers to respond to shifts in consumer demand. NHTSA also declined to change the definition of passenger and light trucks, and chose not to regulate vehicles between 8,500 and 10,000 pounds other than MDPVs.
c. The Ninth Circuit's EPCA Analysis of the Final Rule
The Ninth Circuit reviewed NHTSA's promulgation of the Final Rule under the arbitrary and capricious standard.Petitioners challenged the Final Rule on seven grounds. The Ninth Circuit rejected petitioners' challenge to NHTSA's use of marginal cost-benefit analysis, omission of a vehicle weight reduction, and use of a transition period to Reformed CAFE during MYs 2008-2010. However, the Ninth Circuit agreed with petitioners that NHTSA acted arbitrarily and capriciously by failing to monetize benefits from greenhouse gas emissions reduction, failing to set a "backstop" fuel economy level under the Reformed CAFE, failing to revise the definitions of passenger automobiles and light trucks, and choosing to not set CAFE standards for all automobiles between 8,500-10,000 pounds GVWR. On these four grounds, the Ninth Circuit remanded the rule to the agency.
First, the Ninth Circuit held NHTSA did not act arbitrarily and capriciously by using a marginal cost-benefit analysis to determine the maximum feasible average fuel economy level. The EPCA assigns the Secretary of Commerce the responsibility of setting the "maximum feasible" CAFE standard for each model year. The court determined the meaning of "maximum feasible" was not plain, but that the agency must at least consider the statutory factors of technological feasibility, economic practicability, other motor vehicle standards, and energy conservation.The Ninth Circuit held that EPCA gives NHTSA discretion to decide how to balance these factors "as long as NHTSA's balancing does not undermine the fundamental purpose of the EPCA."The court thus rejected petitioners' challenge to NHTSA's decision to place cost-benefit analysis at the "front and center" of the Final Rule.The statute was silent on whether marginal cost-benefit analysis may be used, and whether use of cost-benefit analysis was within NHTSA's discretion to balance potentially conflicting EPCA factors to determine the "maximum feasible" CAFE standards.
Second, the Ninth Circuit considered whether NHTSA acted arbitrarily and capriciously by failing to monetize benefits of greenhouse gas emissions reduction. In its cost-benefit analysis, NHTSA analyzed the impact of more stringent CAFE standards on manufacturers' employment and sales. However, the agency did not qualitatively or quantitatively consider the benefits of carbon emissions reductions, despite comments from petitioners citing to peer-reviewed scientific literature supporting inclusion of such benefits. NHTSA argued that placing a monetary value on the benefit of greenhouse gas reductions was improper because the value of reducing greenhouse gases was too uncertain to support explicit valuation.
The court held NHTSA's reasoning for not monetizing emissions benefits was arbitrary and capricious for four reasons. First, although the record indicated a range of possible values that could be assigned to the benefit of emissions reductions, the value was "certainly not zero" and petitioners showed that it was possible to monetize the benefit.Second, NHTSA did not give any reasons to support its conclusion that the range of possible values was "extremely wide," and several commenters recommended the same value-fifty dollars per ton of carbon. Third, NHTSA's reasoning that it could not monetize greenhouse gas emissions because the benefits were uncertain was not well supported because NHTSA monetized other uncertain benefits such as crash, noise, and congestion costs. The Ninth Circuit emphasized that although the agency may use a cost-benefit analysis, "it cannot put a thumb on the scale by undervaluing the benefits and overvaluing the costs" of stricter CAFE standards.Fourth, NHTSA's conclusion that petitioners did not "reliably demonstrate" monetization would have affected the stringency of the CAFE standards ran "counter to the evidence."NHTSA thus failed to "articulate a satisfactory explanation for its action including a rational connection between the facts found and the choice made."Thus, the Ninth Circuit remanded to the agency to include a monetized value for the benefit of emissions reductions in its analysis of proper CAFE standards.
Third, the Ninth Circuit held NHTSA did not act arbitrarily and capriciously when it omitted a weight reduction for vehicles between 4,000 and 5,000 pounds curb weight as a potential measure manufacturers could use to increase their fuel economy. The NAS report found that such a reduction would result in a safety benefit.However, this conclusion was disputed by two members of the NAS committee.In determining whether to omit the weight reduction, NHTSA selected a confidence interval of 1,000 pounds, which petitioners challenged as arbitrary and capricious. The court held petitioners did not sufficiently establish deficiencies in NHTSA's reasoning. Specifically, petitioners failed to demonstrate that NHTSA relied on factors not intended by Congress, failed to consider an important aspect, or that NHTSA's decision ran counter to the evidence presented to the agency when selecting the 1,000 pound confidence interval.
Fourth, the Ninth Circuit considered whether NHTSA acted arbitrarily and capriciously by not setting a backstop for the Reformed CAFE standards. Under Reformed CAFE, a manufacturer's required fuel economy level will depend on the mix of a manufacturer's fleet. Petitioners argued that under EPCA, NHTSA was required to set a minimum level of average fuel economy, so the Reformed CAFE should include a "backstop" fixed minimum standard for light trucks so the "'minimum level of average fuel economy applicable to a manufacturer in a model year' would not be determined solely by the manufacturer's fleet mix."NHTSA responded that such a backstop would unfairly limit consumer choice.
The Ninth Circuit held NHTSA's failure to set a backstop under Reformed CAFE was arbitrary and capricious. Noting neither the language nor the structure of ECPA explicitly requires adoption of a backstop, the court nonetheless determined that if the Reformed CAFE was adopted without a backstop, "each vehicle of a particular footprint would be required to meet a minimum average fuel economy level, but there would be no fleet-wide minimum."The court held NHTSA did not consider the statutory factors for setting "maximum feasible" levels in determining whether to adopt a backstop. Instead, the agency erred by weighting consumer demand and choice heavily, while ignoring the overarching goal of the explicit and mandatory statutory factor of energy conservation.Because NHTSA erred by not considering statutorily required factors and not demonstrating a backstop would be technologically infeasible, the Ninth Circuit remanded to NHTSA to reconsider whether a backstop would be proper under the EPCA statutory factors.
Fifth, the Ninth Circuit held NHTSA did not act arbitrarily and capriciously by using MYs 2008-2010 as a transition period to implement the Reformed CAFE standard for MY 2011 and beyond. Petitioners argued such a transition period was impermissible under EPCA because it violated NHTSA's duty to "prescribe a single maximum feasible average fuel economy level."The court rejected petitioners' challenge by determining that NHTSA did not grant manufacturers an "exemption," as such, because they were only given a choice between complying with one of two standards. More importantly, the agency provided a reasoned explanation, namely that the transition period would minimize potential for compliance burdens under the Reformed CAFE standards and would give manufacturers an opportunity to develop advance product plans for their fleets that incorporate considerations of Reformed CAFE compliance.
Sixth, the court considered NHTSA's decision to not "reform the SUV loophole."In the advance notice of proposed rulemaking, NHTSA had sought input on how to revise the obsolete distinction between passenger automobiles and light trucks. However, in its proposed rule, NHTSA decided not to revise the definitions because it worried such a revision might impair an orderly transition to the Reformed CAFE standards. In the Final Rule, NHTSA made only a minor change to the definition of "light truck." Petitioners argued that such a decision was arbitrary and capricious because it ran counter to the evidence that SUVs and pickup trucks now function primarily as passenger vehicles and because NHTSA did not provide a reasoned explanation for why it could not close the loophole while transitioning to Reformed CAFE standards.
The Ninth Circuit held that NHTSA's decision to not otherwise revise the definition of light trucks was arbitrary and capricious. First, NHTSA did not provide a reasoned explanation of why the Reformed CAFE transition could not be accomplished at the same time as revision of the passenger automobile and light truck definitions. Second, NHTSA's decision ran counter to the evidence that today many light trucks are manufactured and used primarily for transporting passengers. Such evidence contradicted the agency's earlier assertion that passenger vehicles are defined as vehicles used primarily for transporting individuals.The court concluded the original distinction between passenger vehicle and "work/cargo vehicles" has broken down, stretching the distinction between cars and light trucks "well beyond its original purpose."The court thus held NHTSA's decision not to revise its definitions was arbitrary and capricious, particularly in light of the EPCA's goal of energy conservation. The court remanded the rule to NHTSA to revise its definitions of passenger automobiles and light trucks, or provide a reason for not revising its definitions.
Finally, the Ninth Circuit reviewed NHTSA's choice to not set CAFE standards for vehicles between 8,500 to 10,000 pounds GVWR, other than MDPVs. EPCA requires NHTSA to regulate fuel economy of "automobiles." Vehicles between 6,000 to 10,000 pounds GVWR are statutorily defined as "automobiles" when average fuel economy standards are "feasible" and setting such standards "will result in significant energy conservation."Since 1978, NHTSA had only regulated vehicles under 8,500 GVWR as "automobiles." In the Final Rule, NHTSA declined to include vehicles over 8,500 GVWR because they are not subject to United States Environmental Protection Agency (EPA) testing. As a result, NHTSA argued, manufacturers' testing burdens would increase and the agency lacked sufficient data to estimate a fuel economy baseline. The Ninth Circuit determined the agency's explanation was not well-reasoned because petitioners presented compelling evidence explaining why setting CAFE standards for such vehicles would be feasible. Petitioners also presented substantial evidence that inclusion of such vehicles "would result in significant energy conservation and that these vehicles are substantially used for the same purposes as a vehicle 6,000 pounds."NHTSA did not address this evidence in its Final Rule. The Ninth Circuit determined that although EPCA gives NHTSA discretion in determining whether the feasibility and energy conservation factors were met, once the two factors are satisfied then the vehicles are necessarily "automobiles" and NHTSA must set a fuel economy standard. Additionally, EPA actually performs the requisite fuel economy tests on most of the affected vehicles, and NHTSA gave no reasoned explanation of why it would be infeasible to set standards even without EPA testing. The court held that NHTSA's choice not to set CAFE standards for these vehicles was arbitrary and capricious, and remanded the issue to the agency to promulgate CAFE standards for all vehicles between 8,500 to 10,000 pounds GVWR or provide a reasoned explanation for not regulating such vehicles.
d. The Ninth Circuit's NEPA Analysis of the Final Rule
NEPA requires federal agencies to prepare an EIS for major federal actions that may significantly affect the human environment.An EIS should contain a discussion of significant environmental impacts and a range of alternatives to the action proposed by the agency.An agency may first prepare an EA to determine whether a proposed action will require an EIS.Whether an action will require an EIS depends on the context and intensity of the action.Context includes the scope of the agency's action and interests affected, while intensity refers to the severity of impact.The Ninth Circuit reviewed NHTSA's Final Rule for compliance with NEPA under the arbitrary and capricious standard.Specifically, the court reviewed the EA to determine whether it fostered informed decisionmaking and public participation.The Ninth Circuit held the EA inadequate and remanded to the agency to prepare a full EIS.
The Ninth Circuit first determined EPCA did not constrain NHTSA's ability to comply with NEPA. NHTSA argued that EPCA limited its ability to consider more stringent CAFE standards in the EA. NHTSA also relied on a United States Supreme Court case, Department of Transportation v. Public Citizen,for the proposition that it did not need to consider the effect of the Final Rule on climate change. In Public Citizen, the Supreme Court held an agency did not need to consider the environmental effects of cross-border motor carriers in its EA because the agency had no statutory authority to control the emissions from those Mexican carriers.The Ninth Circuit determined Public Citizen did not resolve the case at bar because NHTSA clearly had authority to impose or enforce fuel economy standardswhile Public Citizen applies only to situations where the agency lacks the statutory authority to act on findings from an EA or EIS.Further, the CAFE standards set by NHTSA would affect the "level of the nation's greenhouse gas emissions and impact global warming."Thus, the court observed that EPCA's goal of energy conservation and NEPA's goal of facilitating informed decisionmaking based on understanding of environmental consequenceswere complementary.
Next, the Ninth Circuit examined the sufficiency of the EA. The court noted the focus of its EA review centered on whether the agency had considered possible consequences of the proposed agency action before issuing its "finding of no significant impact" (FONSI) and whether the agency reasonably concluded that no EIS was required. An EA must sufficiently establish the reasonableness of not preparing an EIS,should include a brief discussion of the environmental impacts of the proposed action and its alternatives,and in some circumstances must include an analysis of the cumulative impacts of a project.
The court concluded the EA's environmental impact analysis was inadequate because it merely quantified the expected amount of carbon dioxide emitted from light trucks under Unreformed and Reformed CAFÉ Standards. The EA failed to discuss or evaluate the actual environmental impact on climate change of these emissions.NHTSA again argued it had no obligation to assess the cumulative impact of its rule on climate change because Congress required that CAFE standards be technologically feasible and economically practicable. The Ninth Circuit again rejected this theory, explaining the "impact of greenhouse gas emissions on climate change is precisely the kind of cumulative impacts analysis that NEPA requires agencies to conduct."The court thus concluded NHTSA had a duty to assess these impacts in the EA even though the phenomenon of climate change is a global phenomenon largely beyond the agency's control.
The Ninth Circuit next concluded NHTSA failed to "[r]igorously explore and objectively evaluate all reasonable alternatives"in its EA. NHTSA considered a narrow range of alternatives in the EA, all derived from its cost-benefit analysis. The agency justified its choice on the grounds that other more stringent CAFE standards would not meet the EPCA mandate of being both technologically feasible and economically practicable. NHTSA also argued petitioners had not identified any other specific alternatives the agency should have considered because petitioners' suggested alternatives were not reasonably related to the purpose of the Final Rule. The Ninth Circuit determined NHTSA's argument that it had no discretion to set more stringent standards was flawed. The Ninth Circuit also found petitioners had submitted a cost-benefit analysis-proposing more stringent standards-that was reasonably related to the purposes of CAFE standards because it would meet the EPCA goal of energy conservation.
Finally, the Ninth Circuit held that NHTSA's decision to issue a FONSI was arbitrary and capricious. An agency must prepare an EIS whenever a substantial question is raised of whether an agency action may "cause significant degradation of some human environmental factor."Petitioners argued the evidence presented a substantial question of whether the Final Rule may have a significant impact on the environment. Petitioners further contended NHTSA never evaluated the impacts of carbon emissions, despite evidence that greenhouse gas emissions may change the climate in a nonlinear manner because of positive feedback mechanisms. In response, NHTSA argued its FONSI was self-evident because its Final Rule would actually decrease the growth of carbon emissions by two-tenths of a percent from the baseline approach and that the impact from global warming was too speculative to require NEPA analysis.
The Ninth Circuit agreed with petitioners, finding they had raised a substantial question as to whether the light truck CAFE standards for MYs 2008-2011 may cause a significant degradation of the environment. The court cited several pieces of evidence submitted by petitioners indicating that the increase of anthropogenic greenhouse gas in the atmosphere could give rise to nonlinear adverse environmental impacts. NHTSA's conclusion that a small reduction in the growth of carbon emissions would not have a significant impact on the environment was not supported by any analysis of data or a statement of reasons. The court held the Final Rule's lowering of carbon emissions as compared to the status quo did not support the conclusion that the rule would not significantly affect the environment. Because NHTSA's EA failed to provide the requisite "hard look" at the environmental consequences, the Ninth Circuit found the EA arbitrary and capricious.The court thus remanded to the NHTSA to prepare a full EIS.
 Committee on the Effectiveness and Impact of Corporate Average Fuel Economy (CAFE) Standards, National Research Council, DOT/NHTSA Report, Effectiveness and Impact of Corporate Average Fuel Economy (CAFE) Standards 17-18 (2002) [hereinafter NAS Report].
 Average Fuel Economy Standards for Light Trucks Model Years 2008-2011, 70 Fed. Reg. 51,414, 51,424 (proposed Aug. 30, 2005) (to be codified at 49 C.F.R. pt. 523) [hereinafter Proposed Light Trucks Standards].
 Average Fuel Economy Standards for Light Trucks Model Years 2008-2011, 71 Fed. Reg. 17,566, 17,566 (Apr. 6, 2006) (to be codified at 49 C.F.R. pts. 523, 533, 537) [hereinafter Final Light Trucks Standards].
 See Klamath-Siskiyou Wildlands Ctr. v. Bureau of Land Mgmt., 387 F.3d 989, 995 (9th Cir. 2004)(holding BLM performed an inadequate cumulative impact analysis when the agency calculated a total number of acres to be logged without describing the environmental effects of logging those acres).