EcoZone Blog: Climate Change Outline: Emissions Trading Sub-National Challenges

1. Potential Challenges to Sub-National Regulation

In response to the recent flurry of activity at the US regional, state, and local levels on climate change, questions have surfaced regarding whether these initiatives are compatible with the US Constitution and its system of federalism. Though the states have broad authority to regulate public health and welfare, the Constitution places limitations on their authority to regulate in certain areas where federal authority is pre-eminent. Emerging carbon trading regimes at the regional and state level are already being challenged by affected interests. For example, early in the RGGI development process, Edison Electric Institute (a trade association for the utility sector) raised many of the constitutional issues discussed below in comments it submitted regarding the RGGI MOU.1 More recently, a power company sued to overturn the State of New York's administrative regulations implementing RGGI, raising several constitutional issues in its complaint.2 Whether such initiatives will ultimately survive constitutional challenges depends on many unknowns, though perhaps most significantly it will depend on the scope and content of future federal legislation on climate change.

The issues implicated by sub-national regulation of climate change can be divided into four separate constitutional limitations on state action: limitations imposed by federal pre-emption of state law through the Supremacy Clause of the US Constitution; limitations imposed by the 'foreign affairs' power of the Constitution; limitations imposed by the Compact Clause; and limitations imposed by the 'dormant commerce clause' power.

(1) Pre-emption

The doctrine of pre-emption flows from the Supremacy Clause, which states that federal laws are 'the supreme law of the land.'3 Federal laws will pre-empt, and thus invalidate, state laws when: (1) federal laws explicitly state that they pre-empt any state law addressing the subject of the federal legislation;4 (2) Congress 'intends federal law to occupy the field;' or (3) to the extent that the state law conflicts with a federal statute such that it is 'impossible for a private party to comply with both state and federal law' or the state law 'stands as an obstacle' to the accomplishment of Congress' goals.5 In the context of climate change, the viability of each of these pre-emption challenges will depend primarily on the scope and content of future federal GHG legislation. Challenges based on existing federal legislation are beginning to emerge. Pre-emption challenges have been mounted, albeit unsuccessfully, against certain state regulatory activity directed at GHGs, such as California's mobile source standards,6 on the basis of existing federal legislation under the CAA. In addition, the recent challenge to New York's implementation of RGGI includes a claim that RGGI is pre-empted by the federal Public Utility Regulatory Policies Act (PURPA).7 The lack of challenges to other sub-national initiatives in part is a reflection of ripeness––these programs have only begun to take effect. As commitment periods for these programs start up, state participants may expect to see additional judicial challenges. While it remains to be seen how courts will rule on these lawsuits, the absence of specific federal legislation on climate change could make it difficult for a court to conclude that Congress has either expressly or impliedly pre-empted such programs under the CAA or any other statute.8

This issue is therefore more likely to be resolved directly in new federal legislation on climate change. Although some of the federal bills have been silent on preemption, others would explicitly pre-empt all sub-national trading initiatives.9 There will be significant pressure from industry to include such express pre-emption mechanisms. It remains unclear, however, whether such express pre-emption language will prevail. A more likely result may involve a model similar to the existing Clean Air Act, wherein Congress set a national standard for automobile emissions but allowed California to undertake experimental deviation from the standard.10 The remaining states have the option of selecting the national or California approach, and industry thus has only two different standards with which it must comply rather than a quiltwork of up to 50 different targets.11

Another option would be to reward regional trading participants by allocating additional federal emissions allowances to those early moving states, and to ensure that covered entities that have participated in state-level reduction measures are given credit for such activity under a subsequent federal scheme.12 Yet another possibility would be to allow federal and regional/state trading systems to link with a federal trading program by recognizing the regional/state allowances in the federal market.13 While trade-offs exist for each option, express pre-emption of sub-national trading systems is likely to be politically challenging, leaving the likelihood that a threat of pre-emption challenge will hang over sub-national carbon schemes for some time until resolved by the courts.

(2) Foreign affairs pre-emption

The US Constitution...