EcoZone Blog: Climate Change Outline: Emissions Trading Legal Issues 2

This 15th chapter of our outline addresses legal issues that may arise in emissions trading.

(1) Legal Issues in US Carbon Trading

The trading of GHG emissions rights has various antecedents in the United States, such as the leaded gasoline trading program, the federal Acid Rain Program, allotments of ozone-depleting substances pursuant to Montreal Protocol obligations, vehicle manufacturer certification trading, California's RECLAIM trading scheme for nitrogen and sulfur emissions, and, more recently, a federal renewable fuels standard,1 and various statelevel alternative energy portfolio standards. There are a number of legal issues common to trading programs that must be considered, some of which may need to be modified or clarified as applied to carbon trading. These issues relate broadly to carbon trading programs whether at the state, regional or federal level; however, much of the experience and commentary on these issues is drawn from the US federal context.

(a) Property rights

Surprisingly, the basic notion of a 'right' to emit GHGs (sometimes disparagingly referred to as a 'right to pollute') and the nature of the emissions being traded remains subject to some uncertainty. Domestic law in each sovereign jurisdiction determines the legal status of the allowances traded and the corresponding property rights granted to the allowance holders. In the US tradition, property rights are 'bundles' of smaller sub-rights, such as the right to use, transfer, or preserve property, and which enjoy conditional protection from government interference.2 The concept of trading carbon emissions as 'rights' has set up a tension wherein, on the one hand, a strong conception of property rights could trigger government compensation requirements under the US Constitution's 'taking clause'3 if rights are altered (for instance, if allowances are promised to emitters, but the overall cap on emissions is subsequently lowered), yet, on the other hand, a weak conception of property rights could fail to vest participants with the certainty needed to invest in, transfer and trade in emissions allowances. Thoughtful definition of emissions rights will be necessary to ensure administrative flexibility while minimizing risk and uncertainty in emissions trading. The US experience through the Clean Air Act's (CAA) pioneering Acid Rain Program established the contours of property rights in emissions trading.4 Allowances under the Acid Rain Program do not constitute legal property rights; instead, they are termed 'limited authorization[s]' to emit certain levels of sulfur and nitrogen.5 The CAA further states that nothing under the act or US law shall be construed to limit the government's authority to 'terminate or limit' the authorizations.6 At the same time, and perhaps paradoxically, acid rain allowances may be 'received, held, and temporarily or permanently transferred.' The existing and proposed GHG cap and trade systems in the United States have incorporated similar language.7

The policy justification for denying allowances the legal status of property rights is two-fold. First, there is a concern that granting full property rights to emitters would restrict the government's ability to adjust emissions targets, for example, if the existing allocation program fails to achieve anticipated reductions in atmospheric concentrations of GHGs or if new scientific data shows that more vigorous cuts are needed. As noted, under the Fifth Amendment to the US Constitution, the government may not take private property for public use 'without just compensation'.8 US courts have interpreted this clause to include regulatory takings, requiring the government in some situations to compensate property owners where regulations have significantly impaired the value of property.9 A second justification, with particular currency in the environmental community, is the strong philosophical objection to granting participants a 'right to pollute'.10 Artfully drafted definitions of emissions rights help protect the government against regulatory takings claims, while...