The Supreme Court on Monday dealt a setback to the Environmental Protection Agency’s regulation limiting mercury and other toxic emissions from power plants – the “mercury rule.” In Michigan v. Environmental Protection Agency, the Court held that EPA acted unreasonably by making its initial decision to regulate plant emissions without considering the cost of regulation. Although the ruling interrupted the Court’s much-publicized string of “liberal” rulings, in the end the decision may have more impact on the way EPA makes regulations than on whether EPA ultimately regulates emission of mercury and other pollutants from power plants.

The Clean Air Act directs EPA to study and decide whether it is “appropriate and necessary” to regulate power plant emissions. In 2000, EPA concluded that mercury and other toxic emissions from power plants pose a danger to human health and the environment and that regulation of power plants was therefore “appropriate and necessary.” In 2012, after years of further study, rule-making, and litigation, EPA issued its mercury rule. EPA considered costs of compliance in developing the regulations but not in deciding whether to regulate in the first place.

The Supreme Court disagreed with this process. In a 5-to-4 decision, Justice Scalia’s opinion for the majority interpreted the statutory term “appropriate” to require EPA to consider all pertinent factors, including the cost of regulation, in deciding whether to regulate at all. In the Court’s view, EPA’s consideration of cost in fashioning the regulations came too late in the process. The Court therefore held that the power plant regulations were improperly issued.

Justice Kagan’s opinion for the four dissenters agreed with the majority that EPA had to consider cost of any proposed regulations at some time in its rule-making process. But she disagreed that EPA had to do so in deciding whether to regulate power plant emissions in the first place. She argued that EPA reasonably determined that regulation was appropriate based on the finding that exposure to airborne mercury causes extensive health concerns and that EPA could properly consider costs in determining how to regulate, rather than whether to regulate.

The decision in Michigan v. EPA was a loss for environmental advocacy groups that supported the regulation, but it is a narrow ruling, hinging on the meaning of “appropriate.” EPA will have to re-review its decision to regulate emissions from plants and take costs into account, but the Court’s decision does not suggest that cost considerations will ultimately scuttle the mercury rule itself. In fact, industry had already begun to plan operations and investments based on the mercury rule. It remains to be seen how industry and the courts will treat the mercury rule while EPA’s re-review is pending – and what impact, if any, the ruling may have on the Obama EPA’s climate change agenda and other initiatives.