Coupling Environmental Justice with Carbon Trading

Author:Joseph Lam
Position:J.D. candidate, May 2013, at the University of California, Los Angeles School of Law
by Joseph Lam**
Cap and trade has become the mechanism of choice
for many American lawmakers seeking to address the
global issue of climate change.1 The recent adoption of
the California cap and trade system has further spurred present
discussions on whether a domestic cap and trade system to regu-
late greenhouse gas (“GHG”) emissions would be most effective
in mitigating climate change.2 Moreover, the Regional Green-
house Gas Initiative (“RGGI”) program currently implemented
in the Northeastern states further contributes to this debate.3
Despite its regulatory nature, major business associations and
environmental groups have endorsed market-based cap and
trade, and the proposed system has enjoyed more political trac-
tion than other possible GHG regulations, such as a carbon tax.4
The idea of cap and trade is simple enough: set a “cap” that
equals the annual allowable emissions of the targeted pollutant;
allocate, either by auction or by free distribution, a certain number
of allowances to pollute, which should cumulatively fulfill the
cap; and allow the selling and purchasing (i.e., trade) of these
allowances between firms.5 Many cap and trade prog rams also
include offset provisions that allow firms to purchase additional
allowances from the regulator by investing in additional pollution
reducing programs.6
Theoretically, this system would create an efficient and
low-maintenance administrative scheme to reduce GHGs. Under
a cap and trade program, the regulated firms could use their own
industry knowledge and expertise to decide the most sensible
method of reduction. Additionally, firms could also cover emis-
sions beyond their allocated amounts by purchasing allowances
from other firms.7 If Firm A can reduce GHG emissions cheaply,
it can sell its allowances to Firm B, which may not be able to
reduce its emissions at such a low cost. Therefore, the aggregate
reduction goal of cap and trade is achieved at the lowest cost
because the most efficient polluters, like Firm A, bear the lion’s
share of responsibility to meet the emissions cap.8 As the cap
is periodically lowered, successful price signals would likely
be able to spur on the continuous reduction of emissions at the
lowest cost through trading and technological innovations.9
A well-designed cap and trade program will not only bring
economic efficiency, but increased administrative expeditious-
ness as well—the government would play a more passive facili-
tator role: set the cap, auction off allowances, monitor the use
of those allowances, facilitate the purchase of offsets, verify
the facilities’ emissions levels, and enforce against firms who
exceed their allowed emissions levels.10
Policymakers, academics, and economists have touted GHG
reduction and cap and trade as the perfect marriage because
GHGs have the same effect on climate change no matter where
the emissions occur; a unit of emissions in California will affect
the globe the same amount as a unit of emissions in New York.11
Greenhouse gases also do not have localized effects like sulfur
dioxide or lead, so one California firm can use a large amount
of allowances without disproportionately jeopardizing the health
and welfare of its neighboring residents.12
Although GHGs generally have global effects, the co-
pollutants that often accompany them can cause severe health
and environmental problems in the local communities where
emissions are often highest.13 Typical co-pollutants include
volatile organic compounds (“VOCs”), sulfur dioxide, benzene,
carbon monoxide, nitrogen oxide, and other harmful particulate
matter.14 Since firms located in low-income minority communi-
ties tend to have the most antiquated facilities that emit the highest
amount of GHGs, these companies would probably be the ones
that would need to purchase the most allowances through cap and
trade to meet their limited allocations.15 Although cap and trade
aims to provide facilities with flexibility to decide for themselves
when to reduce emissions or use allowances, this runs against
environmental justice goals of promoting public participation,
distributive justice, and community empowerment.16 To attain
economic efficiency and to maintain a broad holistic solution,
cap and trade programs and proposals, as we know them, do not
factor in distributional consequences in any meaningful way.17 If
cap and trade goes according to plan, streamlined trading would
run like a thoroughbred, liquidity would increase, and all these
decisions that affect human health and the environment would
effectively occur without input from the people who are affected
locally. Additionally, many of the enacted and proposed GHG
regulations have focused on preventing and mitigating harm,
but have not devoted the same attention and care in providing
improvements to the condition of the people’s lives.
This article holds that environmental justice and cap and
trade can actually be harmonized, arguing for a more robust and
nuanced cap and trade system that promotes principles of public
participation, equity, and empower ment, while still maintaining
an optimal and efficient market-based system. In fact, a cap
and trade program could even be used to spur on environmental
*This article is a shortened and revised version that is based on a longer and
expanded article in the Chicago-Kent Journal of Environmental and Energy
Law, entitled Spurring on Environmental Justice Through Cap and Trade.
** Joseph Lam is a J.D. candidate, May 2013, at the University of California,
Los Angeles School of Law.
41WINTER 2012
justice. To achieve this end, such a system must involve: (1) an
identification process,18 (2) investment into environmental jus-
tice communities,19 and (3) financial mechanisms to fund such
The first step in implementing a cap and trade program
that enhances environmental justice is to define “environmental
justice” itself and identify where environmental justice com-
munities are located. Environmental justice communities are
generally defined as those composed predominantly of persons
of color or a substantial proportion of persons below the pov-
erty line that are also subjected to a disproportionate burden
of environmental hazards relative to other communities.21
Proper identification of these communities is important because
one cannot hope to aid the environmental justice movement if
one does not know who or what comprises an environmental
justice community.
The second step of implementation calls for the investment
of revenue generated by cap and trade back into those communi-
ties that are most affected by environmental pollution and health
problems. This article adopts the proposal of the California
Market Advisory Committee to devote “a significant portion
of the allowance value to investments in communities that bear
disproportionate environmental and public health burdens.”22
Under this proposal, the revenue gathered through cap and trade
would be placed into the hands of the affected community to
invest in clean energy and technology projects that could benefit
the community’s environmental health and economic condition.
The third step calls for financial mechanisms to allow the
cap and trade program to gather the revenue needed to facili-
tate the second step. These financial mechanisms would likely
take the form of allowance auctions, luxury taxes, and possibly
monetary penalties for excess emissions.23
The first fundamental step in incorporating environmental
justice in a national GHG cap and trade program is to identify
the communities who are most-at-risk to environmental harms
and are hindered in being able to reduce their exposure to these
harms. Although it may sometimes be clear which communi-
ties are most negatively affected by environmental pollution,
a formal database would serve an important role to officially
recognize the environmental justice communities. By identify-
ing these environmental justice communities, policymakers and
government regulators would have a database from which to
administer benefits to the communities more effectively.
Other government entities, such as the California Air
Resources Board (“CARB”), which includes the Environmental
Justice Advisory Committee (hereinafter “EJAC”), have
proposed similar programs called the “screening method.”24
Members of EJAC have advocated for such a screening method
to determine which areas qualify as environmental justice
Environmental justice communities can be identified or
“screened” in two ways. First, a certain neighborhood can attempt
to self-identify as an environmental justice community by apply-
ing with the regulatory agency. Such an evaluation of applicants
could use EJAC’s August 25, 2010 screening method recommenda-
tions to CARB as a model for the criteria to use when identifying
environmental justice communities.26 Specifically, EJAC has rec-
ommended that “[a]t the very least we expect the [CARB] to
include race ethnicity, home ownership, age of housing stock,
language isolations, age[,] and access to health services” when
screening for potential environmental justice communities.27
This recommendation is based on EJAC’s research, which found
that, in the San Francisco Bay, income, race ethnicity, home
ownership, language isolation, and land use have been “shown
to be statistically significant indicators of increased cancer risk
or respiratory hazards [].”28 This Bay Area study demonstrates
that the effects of environmental injustice correlates with low-
income and minority communities.29 EJAC further recommends
that the criteria take into account cumulative effects, tailoring
certain criteria for certain types of regions (e.g., measuring
pesticide use in farm areas), and conducting analysis on land
use including the proximity of emitting facilities to residential
neighborhoods.30 The self-identification process would also
allow environmental justice communities to voice their concerns
and needs. By allowing environmental justice communities to
publicly participate in the identification process, the government
is legitimizing and validating the communities’ concerns and
problems. This would promote one of the environmental justice’s
main goals of furthering public participation.
Second, in conjunction with self-identification, regulators
could also actively seek out and identify potential environmental
justice communities on their own. In fact, regulators should
have ultimate responsibility to identify and evaluate potential
environmental justice communities. Even if that process requires
fewer government resources, regulators cannot simply rely on
the environmental justice communities to self-identify. Instead,
the government must proactively pinpoint environmental justice
communities based off a set of specified criteria. Government
decision-makers and regulators could choose to partner with
nonprofit groups or contract with commercial survey companies
to identify those underprivileged communities that are at high
risk of environmental and public health harms. While it would
likely be a difficult task to index every eligible community
in America, once such a list is created in toto, government
regulators would then theoretically have a comprehensive list of
communities to work from. Through this identification process,
specific information about each community would accordingly
be gathered, creating an encyclopedic database containing
profiles of all environmental justice communities. Such a data-
base would afford the government the ability to understand and
meet the needs of individual communities in the most tailored
and direct way.
However, problems could arise if a self-identified community
that desires recognition as an environmental justice
community is rejected by or omitted from the designation process
by the government. This could present an even bigger issue if the
coveted benefits and resources that designation affords environ-
mental justice communities are significant.
While this article cannot specifically address every situation,
it suggests two possible solutions to ensure that an environmental
justice communities database covers all deserving communities.
First, the government should establish broad and flexible criteria
that consider a wide range of environmental problems in various
environmental justice communities. 31 Second, the government
could implement an appeals process whereby an applicant-
community that is denied designation can make its case to an
appeals board. This appeals process would allow for a more
detailed review to determine whether a community satisfies
the established criteria vis-à-vis a meeting and reconsideration
of any special circumstances that the community in question
may have.
After designating the environmental justice communities,
government regulators should maintain close monitoring of the
firms in these communities to ensure compliance with regula-
tions and firms’ purchase of allowances sufficient to match their
emissions. These government regulators may also want to
promote more public participation by implementing a public
accountability process where private citizens can call and report
any suspicious or illegal activity by a firm. Thus, while firms
operating in designated environmental justice communities
would not be subject to more stringent cap and trade regula-
tions, they would be under more vigilant government and public
monitoring compared to firms outside of environmental justice
Funding for this oversight could come from various sources.
First, these funds could come from the government enforcement
budget already in place.32 An enforcement agency could choose
to focus more of its resources on environmental justice enforce-
ment because the cost should theoretically be lower under a cap
and trade regime. Second, funding could be raised if a portion
of the revenue gained through the cap and trade program’s
allowance auctions is specifically set aside for enforcement and
monitoring efforts in environmental justice communities. In this
way, the companies buying allowances would supplement the
cost of enforcement.
In furthering the environmental justice goal of community
empowerment, a cap and trade program can provide funding for
localized investments in clean energy and technology projects
that could revitalize communities surrounding the projects. By
investing the capital raised by market-based programs, such as
the auctioning of allowances, in these local areas, cap and trade
programs could stimulate economic growth in environmental
justice communities.
In recent years, much emphasis has been placed on the
potential economic benefits associated with green develop-
ment and “green-collared” jobs.33 Political leaders, government
policymakers, academics, nonprofit groups, economists, urban
planners, labor unions, and businesses have all taken interest
in fostering economic growth in conjunction with sustainable
communities, clean energy technology, and improving the
overall quality of life for the local residents.34 The use of a
GHG cap and trade program can support and combine two
major environmental policy goals. The first major goal is to
shift America’s fossil fuel based economy towards an economy
that “can function effectively through renewable energy sources
and [] achiev[e] high levels of energy efficiency.”35 The second
major goal is to encourage the broad principles of environmental
justice by promoting environmental health improvement
and empowering the local environmental justice communities.
Combining these two goals could bring about significant
reductions in GHG emissions while also creating environmental
and economic improvements in impoverished environmental
justice communities. Thus, by striving for the first goal to envi-
ronmental justice communities, policymakers can fulfill the
second goal as well. When a plethora of the clean technology
and clean energy investments and projects are funneled into
environmental justice communities, green-collar jobs would
be created to satisfy the need for individuals to manufacture
and provide pertinent goods and services.36 Van Jones, a lead-
ing expert in the area of green technology, wrote, “[w]e should
use the transition to a better energy strategy as an opportunity
to create a better economy,” and revitalize communities by,
“creat[ing] new markets, new technology, new industries, and a
new workforce”37 based on a corresponding need for thousands
of contracts and workers.38
Investing in the development of renewable and clean energy
infrastructure and technology (hereinafter, “clean energy”)
in local communities would lead to greater prospects for job
creation and economic advancement. According to a report by
the Renewable and Appropriate Energy Laborator y, “[a]cross a
broad range of scenarios, the renewable energy sector generates
more jobs than the fossil fuel-based energy sector per unit of
energy delivered (i.e., per average megawatt).39 U.S. Commerce
Department research has also shown that 16.7 jobs are created
for every $1 million spent on clean energy investments, com-
pared to the 5.3 jobs created through $1 million in spending on
oil, natural gas, or coal investments.40 “Clean energy invest-
ments” could include spending for building retrofits, public
transportation, smart grid electrical transmission systems, solar
power, wind power, and biomass fuels.41
The creation of jobs—green or otherwise—occur from
the direct, indirect, and induced effects of spending.42 To
borrow from an example given in a report by the Department
of Economics and Political Economy Research Institute
at University of Massachusetts, Amherst, significant jobs are
created when resources are invested into the business of
43WINTER 2012
retrofitting homes.43 This first causes the direct effect creation
of jobs for workers who could be retrofitting the homes.44 But
also, indirect job creation comes from the jobs associated with
those industries that supply intermediate goods for the build-
ing of retrofits such as lumber, steel, and conveyances. Further,
induced job creation would result when these workers spend
their incomes on other goods and services, further increasing
overall employment capacity.45
These clean energy jobs, because of their characteristics
and demands, are often well-suited to local residents in envi-
ronmental justice communities. Clean energy jobs require
traditional blue-collar workers; as Dr. Raquel Pinderhughes, a
San Francisco State University urban planning and development
professor, wrote that “[g]reen collar jobs are blue color jobs
in green businesses- that is, manual labor jobs.”46 At the same
time, the University of Massachusetts, Amherst has reported
that clean energy spending produces more jobs at all pay levels
than the fossil fuel industry does, further expanding the capacity
for employment at all skill levels.47 Because clean energy jobs
require more workers at every skill level, more opportunities
are created for those without a college degree. According to an
IMPLAN 2008 Current Population Survey, one million dollars
of clean energy investments creates 8.0 jobs for workers with
a high school diploma or less, while a fossil fuel expenditure
of the same amount creates only 2.2 jobs of the same type.48
And one million dollars of clean energy investments creates 4.8
jobs for workers with a high school diploma or less paying on
average $15/hour, which is over six times greater than the fossil
fuel industry’s 0.7 jobs.49
Furthermore, many of these clean energy investments
tend to rely more on domestic goods, services, and labor than
their fossil fuel counterparts.50 For example, according to the
report by the University of Massachusetts, Amherst, about
ninety-seven percent of total spending in public transportation
and building retrofits would most likely remain in the U.S.
economy.51 Instead of outsourcing labor or importing goods and
services, these investments’ applications are concentrated within
the United States.52 In fact, these jobs would also benefit the
localized communities in which they are located because many
of them cannot be outsourced.53 For example, a home can only
be retrofitted where it is located and the retrofitting of a public
transportation system cannot plausibly be done overseas.54 The
data above demonstrates that the clean energy sector offers a
greater quantity of jobs without sacrificing quality and pay.55
Ultimately, these jobs can empower and revitalize the local com-
munities both economically and environmentally because they
are “high quality, living wage manual labor jobs that engage
[community members] in meaningful, environmentally restor-
ative, community serving work and livelihoods.56
Environmental justice communities can harness the wealth
of potential benefits that comes from clean energy investments.57
As the federal government has done in the past with programs
such as the U.S. Department of Energy’s Weatherization
Assistance Program, the government could also marshal finan-
cial resources to each environmental justice community for the
purpose of making clean energy investments.58 These financial
resources would not come from additional taxpayer dollars, but
from the revenue gained through the cap and trade program’s
various financial mechanisms. The federal government should
play this subsidiary role to facilitate the local empowerment of
these communities.
The financial resources that could facilitate investments into
rehabilitating environmental justice communities mentioned in
the previous section would come primarily from a few financial
mechanisms within the cap and trade program. The following
financial mechanisms can be implemented into the cap and trade
program to generate more revenue for clean energy investments
in environmental justice communities.
An auction system should follow the California Market
Advisory Committee’s recommendation to initially allocate
a portion of allowances for free. Additionally, the government
should hold an annual auction for a portion of the allowances.59
As noted by the California Market Advisory Committee, it is pos-
sible to use “the allowance value to finance reductions of GHGs
and criteria pollutants in communities that bear disproportionate
environmental and public-health burdens.60 The percentage of
allowances auctioned should then increase over time.61
Under an effective system, firms would purchase the allow-
ances based on how many units of emissions they plan to emit.
The government should also set a baseline bid price to ensure
that each allowance is sold for a minimum amount. It is critical
for the government to ensure that there is an adequate demand
for these allowances, so the government must also set an overall
cap that is low enough to prevent an oversaturation of allow-
ances on the market.62 The auctioning of allowances would not
likely generate adequate revenue if the firms do not otherwise
constantly and consistently need allowances to meet their level
of emissions. In addition to auctioning allowances to firms, the
government could also open up the auction to the general public.
Private citizens or groups in the general public can purchase
allowances and effectively retire them by never using them, thus
helping to decrease supply and create a greater demand that
would drive up the price of allowances generally.
It is important to point out that there is no historical prec-
edent for the auctioning off of all allowances; usually, at least a
portion of the allowances are distributed freely to firms.63 There
is a concern such a large auction of allowances to so many regu-
lated entities could prove unwieldy.64 However, the government
is not completely unfamiliar with other types of auctions on such
a large scale. For example, the U.S. government has performed
and managed treasury auctions before, which can be just as
complex and large.65 Of all the organizations and entities in
the country, the federal government has the most resources,
knowledge, and experience to run a GHG emissions allowances
auction.66 Several state and federal carbon trading programs
have already begun implementing allowance auctions.67 For
example, in North America the Regional Greenhouse Gas
Initiative (“RGGI”) has been in place since 2009 and has allowed
all RGGI states to auction a majority of their allowances and
establishes a reserve price for those auctioned shares.68
The government should also consider implementing a
luxury tax into its cap and trade program to incentivize firms
to keep their emissions levels within a reasonable amount. The
luxury tax should work as follows: first, the government would
designate a percentage of overall emissions as the threshold
where, if a firm were to emit an amount exceeding that percent-
age, it would have to pay a heavier tax—the luxury tax—for
every ton of emissions over this threshold. For example, the
government could set a luxury cap as 0.5% of the total emissions
within the cap and trade system. Under this proposal, if Firm
A’s amount of emissions comprises 0.6% of the total emissions,
it would have to pay a hefty tax in accordance with those emis-
sions above the luxury cap.
One scholar, Professor Kaswan of the University of San
Francisco School Of Law, has proposed a similar approach. This
cap and trade approach would treat certain environmental justice
geographic areas differently by placing limits on the “percent-
age of allowances permitted from outside the program area [i.e.,
the markets’ geographic region], and a greater than 1:1 ratio [of
allowances to emissions] could be required” and mandate even
more allowance purchasing.69 Though this is not exactly the
same as a luxury tax, Professor Kaswan’s proposal could dis-
incentivize the use of allowances by making them less valuable
in certain geographic areas. In this way, the proposal conflicts
with the market-based values of a cap and trade system.
The luxury cap should be carefully calculated so that firms
are not discouraged from trade amongst themselves, which
would disrupt the efficiency and effectiveness of the cap and
trading program.70 At the same time, the luxury cap should not
be so high that firms ignore its existence. In setting a luxury tax,
government regulators must strike a balance to maintain dis-
tributive justice in pollution trading and ensure that the market
is not significantly disrupted. To accomplish this, the govern-
ment should hire economists, research groups, and surveyors to
formulate an appropriate tax.
The luxury tax serves to reconcile two competing prin-
ciples that arise within the cap and trade program. The first is
distributive justice: poor communities should not have to suffer
a disproportionate amount of pollution and bear the majority
of the nation’s emissions.71 The other is marketplace morality:
firms are guided more by price signals and cheaper reductions
than by concern for the localized effects of concentrated pollut-
ants.72 Though it is important to incentivize firms to participate
in the cap and trade program and reduce their GHG emissions
efficiently and cheaply, this program must also ensure that the
emissions levels in environmental justice communities do not
reach unreasonable—or unjust—levels. A luxury tax would
incentivize firms to make good faith attempts to reduce their
own emissions instead of merely relying on allowances.
This article also proposes the investment of a portion of
revenues gained from monetary penalties that firms pay for
excess emissions, into clean energy investments in environmen-
tal justice communities. There have already been proposals by
the California Market Advisory Committee to “use a portion of
the allowance value…to finance pollution reductions in commu-
nities that bear disproportionate environmental and public-health
burdens . . . .”73 Using a portion of collected monetary penalties
to invest in burdened communities’ clean energy projects could
further encourage environmental justice through cap and trade.
At first blush, it may seem implausible for a market-based
cap and trade program to harmonize with—let alone encour-
age—environmental justice. But implementing a cap and trade
system that allows for localized clean energy investments could
do just that. Identifying environmental justice communities,
promoting public participation, and increasing oversight and
compliance in a new cap and trade system are the steps needed
to achieve this goal. Further, clean energy investments in
overburdened communities, and the subsequent economic and
employment benefits, could serve as the vehicle needed to har-
monize these twin aims. Implementation of an effective cap and
trade system can not only curb greenhouse gas emissions and
climate change, but can improve the environmental health and
economic condition of local communities across America.
Endnotes: Coupling Environmental Justice with Carbon Trading
1 See California Adopts Extensive ‘Cap and Trade’ Plan,
(Oct. 20, 2011, 8:11 PM),
2 Id.
visited Mar. 5, 2012).
5 Roberta Mann, How to Love the One You’re With: Changing Tax Policy to
Fit Cap-and-Trade, 2 SAN DIEGO J. CLIMATE & ENERGY L. 145, 156 (2010).
6 Id.
7 Id.
8 Id.
9 Id.
continued on page 68