U.S. ENVIRONMENTAL PROTECTION AGENCY
        OFFICE OF INSPECTOR GENERAL
                      Catalyst for Improving the Environment
Office of Counsel Legal Review
      EPA's California Waiver
      Decision on Greenhouse Gas
      Automobile Emissions
      Met Statutory Procedural
      Requirements

      Report No. 09-P-0056
      December 9, 2008

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                UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
                               WASHINGTON, D.C. 20460
                                                                        OFFICE OF
                                                                     INSPECTOR GENERAL
                                December 9, 2008

The Honorable Dianne Feinstein
Chairman
Subcommittee on Interior, Environment, and Related Agencies
Committee on Appropriations
United States Senate
Washington, D.C. 20510

Dear Madam Chairman:

       This is in response to your January 2, 2008, letter requesting that the Office of
Inspector General (OIG) investigate whether the decision by the U.S. Environmental
Protection Agency (EPA) to deny California's request for a waiver to implement a law to
reduce greenhouse gas (GHG) emissions from automobiles deviated from standard
protocols. As I noted in my March 17, 2008, correspondence to you, we have narrowed
the focus of our review to address whether the statutory requirements related to the
waiver decision were met.  I also noted that our anticipated response date would be
within a few months.  That time frame was necessarily lengthened, however, to enable us
to coordinate our efforts with the Government Accountability Office (GAO), given that
GAO has been conducting a similar inquiry. The Inspector General Act requires that we
coordinate with  GAO and avoid duplication of efforts. [See 5 U.S.C. app.  3, § 4(c).]
As discussed below, we determined that the statutory requirements were met.

I.      Background

       Section 209(a) of the Clean Air Act (CAA) preempts States from implementing
their own emission control  standards for new motor vehicles. According to 42 U.S.C.
§ 7543(a), "No State or any political subdivisions thereof shall adopt or attempt to
enforce any standard relating to the control of emissions from new motor vehicles or new
motor vehicle engines subject to this part." California alone, however, is granted a
special waiver under Section 209(b) to maintain a separate regulatory program that is "in
the aggregate, at least as  protective of public health and welfare." The applicable
provision states:

             The Administrator shall, after notice and opportunity for public
             hearing, waive application of this section to any State which has

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             adopted standards (other than crankcase emissions standards) for
             the control of emissions from new motor vehicles or new motor
             engines prior to March 30, 1966, if the State determines that the
             State standards will be, in the aggregate, at least as protective of
             public health and welfare as applicable Federal standards.
             No such waiver shall be granted if the Administrator finds that —
             (A) the determination of the State is arbitrary and capricious,
             (B) such State does not need such State standards to meet
             compelling and extraordinary conditions, or (C) such State
             standards and accompanying enforcement procedures are not
             consistent with section 7521 (a) of this title.  [42 U.S.C. §
             7543(b)(l).]

       In 2002, California passed a law requiring the California Air Resources Board
(CARB), the State's primary air pollution agency, to issue regulations to reduce GHG
emissions from new automobiles. In 2004, CARB issued regulations requiring annual
reductions in average GHG emissions for new vehicles  beginning with the 2009 model
year and phased in gradually over 8 years. By the 2016 model year, emissions from new
vehicles would be cut by 30 percent.  [See Cal. Admin.  Code tit. 13, § 1961.1.]

       In December 2005, California requested that EPA grant a waiver of preemption
under Section 209(b), which would allow California to  implement the GHG emissions
regulations. [See CARB Letter to Administrator Johnson dated December 21, 2005.]
EPA deferred action on the waiver request pending the  outcome of the Supreme Court
ruling in Massachusetts v. EPA.  The Supreme Court issued its decision on April 2, 2007,
holding that GHGs are air pollutants under the CAA. [Massachusetts v. EPA, 549 U.S.
497, 127S.Q. 1438, 1453, 167 L.Ed.2d 248 (2007).] EPA then published a Federal
Register notice on April 30, 2007, announcing a public  hearing and a comment period on
California's waiver request; a notice on May 10, 2007, announced a second hearing.  [See
72 FR 21260 (April 30, 2007) and 72 FR 26626 (May 10, 2007).] Public hearings were
held on May 22, 2007 in Washington, DC, and on May  30, 2007 in Sacramento,
California.  EPA set a written comment deadline of June 15, 2007. [Id.]

       Over the next several months, EPA staff from both the Office of Transportation
and Air Quality and the Office of General Counsel evaluated the comments and prepared
to brief the Administrator.  The Administrator was briefed on June 15, September 12,
September 20, and October 30, 2007. The June 15 briefing essentially consisted of a
general overview. The September 12 presentation essentially summarized the comments
and the key issues and arguments raised by the comments.  The September 20
presentation focused on the options available to the Administrator. Three basic options
were laid out: 1) to grant the waiver; 2) to grant it partially or conditionally;  or 3) to deny
it. [See September 20, 2007, document entitled, "California GHG Waiver Options
Briefing for the Administrator."] The October 30 briefing provided additional
information on several issues relating to the waiver.  The Administrator made no decision
at these meetings.

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       On December 19, 2007, the Administrator sent a letter to California's Governor
informing him that EPA "will be denying" California's waiver request.  [See Letter to
Governor Arnold Schwarzenegger from EPA Administrator Stephen Johnson Regarding
California's Request for a Waiver of Pre-emption for Its Greenhouse-Gas Regulations,
dated December 19, 2007 (Administrator Johnson Letter).] On March 6, 2008, EPA
issued a notice of decision formally denying California's waiver request. [See 73 FR
12156 (March 6, 2008).]

II.     Analysis

       As noted earlier, the statutory requirements governing EPA in making a waiver
decision are set out in Section 209(b) of the CAA. The requirements are few and
straightforward. First, EPA must provide "notice" and an  "opportunity for a public
hearing" before it renders a Section 209(b) waiver decision.  Second, that section requires
that the Administrator deny a waiver if the Administrator "finds" one of three reasons:
1) the State's  proposed  standards are arbitrary and capricious; 2) the State's proposed
standards are  not needed to meet compelling and extraordinary conditions;  or 3) the
State's proposed standards are not consistent with provisions of the CAA.

       With regard to the first requirement, EPA published a Federal Register notice
announcing an opportunity for hearing and comment on CARB's request for a waiver on
April 30, 2007. [See 72 FR 21260 (April 30, 2007).]  At that time, EPA scheduled a
public hearing in Washington, DC, for May 22, 2007, and  established a comment period
deadline of June 15, 2007. A second Federal Register notice on May  10, 2007,
announced  an additional public hearing for May 30, 2007,  in Sacramento, California; the
June 15, 2007, comment period deadline was retained. [See 72 FR 26626 (May 10,
2007).]  The two hearings were held as scheduled, and the comment period closed on
June 15, 2007.  [See Administrator Johnson Letter.]  Administrator Johnson, in his letter
to Governor Schwarzenegger, stated that EPA heard from  over 80 individuals at the
hearings and received "thousands of written comments" from parties representing diverse
interests. [Id.] Administrator Johnson also noted that EPA continued to "communicate
with stakeholders in the waiver process after the comment period ended . .  . ."  [73 FR
12157 (March 6, 2008).] In short, EPA satisfied the notice and hearing requirements of
Section 209(b).

       With regard to the second requirement, Administrator Johnson chose to deny the
waiver because, in accord with Section 209(b)(l)(B), he determined that California did
not establish a need to meet compelling and extraordinary  air quality conditions.  [See
73 FR 12156  (March 6, 2008).] In both the letter to Governor Schwarzenegger and in the
much more lengthy Federal Register decision of March 6,  2008, Administrator Johnson
set out a number of arguments to support the "compelling  and extraordinary conditions"
position.  Seemingly,  Administrator Johnson's key argument for denying the waiver was
that the recent waiver request was distinguishable from earlier requests. [Id-]  The
Administrator noted that earlier requests for waivers had been designed to allow
California to adopt standards to govern pollutants that were directly related to local and
regional air quality. [Id.]  In this instance, however, California's proposed  standards

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were focused on the more general problem of GHGs and, according to the Administrator,
Section 209(b) was not intended to address a national air quality problem where the direct
environmental effect on California is only loosely established.  [Id. at 12157.]

       Administrator Johnson contended that GHGs have national effects in an equal
measure regardless of where the emissions occurred.  [Id. at  12160,12168.] Hence, the
Administrator, in his letter to Governor Schwarzenegger, advocated a national approach
to the GHG problem. [See Administrator Johnson Letter.] He pointed to a recent Federal
energy law, the Energy Independence and Security Act, which set a standard of 35 miles
per gallon for all 50 States (as opposed to the 33.8 miles per gallon California standard)
as a national approach to addressing global climate change. [Id.] Because the GHG
problem seemingly affected all States equally,  Administrator Johnson determined that
California did not have a unique case of compelling and extraordinary air quality
conditions due to GHGs, and thus he denied the waiver.  [See 73 FR at 12162, 12168
(March 6, 2008)]. Administrator Johnson referred to commenters on both sides of the
issue in his Federal Register decision. In his letter to Governor Schwarzenegger,
Administrator Johnson  assured California that  this waiver decision would not affect
future waiver requests that would not involve GHGs and that would be tied to specific
local and regional air quality problems in the State. [See Administrator Johnson Letter.]

III.     Conclusion

       In this case, Administrator Johnson conducted a notice and hearing phase and
based his decision to deny the waiver on one of the three criteria set out in Section
209(b); therefore, he satisfied the procedural statutory requirements.  We believe that a
number of the other issues raised in your request will be either litigated in the courts or
investigated by other agencies, including GAO.

       The estimated cost of this report - calculated by multiplying the project's staff
days by the applicable daily full cost billing  rates in effect at the time - is $17,946.

       Thank you for your interest in the work of the OIG.  If you should have any
questions on this or any other matter, please  contact Mark Bialek,  Associate Deputy
Inspector General and Counsel, at (202) 566-0861.

                                         Sincerely,
                                         Bill A. Roderick
                                         Deputy Inspector General

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