The essential role of state enforcement in the brave new world of greenhouse gas emission limits.
Author | Bogoshian, Matt |
Position | Company overview |
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INTRODUCTION II. THE NATURE AND EXTENT OF THE GREENHOUSE GAS EMISSION REDUCTION EFFORT REQUIRES THE FULL PANOPLY OF ENFORCEMENT TOOLS III. THE CAP-AND-TRADE MARKET POSES SIGNIFICANT ENFORCEMENT CHALLENGES IV. CALIFORNIA'S EXPERIENCE WITH ENERGY MARKETS PROVIDES IMPORTANT LESSONS V. FEDERAL PREEMPTION OF STATE ENFORCEMENT POSES SIGNIFICANT RISKS VI. THE FILED RATE DOCTRINE HAS NO PLACE IN A CAP-AND-TRADE MARKET VII. OTHER LESSONS LEARNED FROM THE ENERGY CRISIS VIII. CONCLUSION I. INTRODUCTION
In June 2005, Governor Schwarzenegger addressed the United Nations on the topic of global warming and famously declared, "I say the debate is over. We know the science. We see the threat, and we know that the time for action is now." (1) Convinced by overwhelming scientific evidence, the California Legislature passed, and the Governor signed, a landmark law, referred to as "AB 32," which requires the State to reduce greenhouse gas emissions to 1990 levels by 2020. (2) AB 32 poses significant, even daunting, requirements. By 2012, the California Air Resources Board will have issued extensive regulations for virtually every sector of the State's economy across all geographic regions that set forth specific actions for the reduction of greenhouse gas emissions. (3) The new regulations will use multiple mechanisms to achieve the reduction requirements, including the traditional command and control approach, market mechanisms, and regional targeting. (4) While the potential regulations and mechanisms have received a great deal of attention, much less attention has been given to an essential element of achieving the reductions: enforcement. We know from extensive experience that enforcement must be integrated into the process of creating regulations. Further, we must have enough regulators and prosecutors to ensure that enforcement is viable, appropriate and effective.
The Air Resources Board's Scoping Plan for AB 32 identifies as a key mechanism for reduction of greenhouse gases the creation and implementation of a cap-and-trade market, in which electricity generators and other significant sources of greenhouse gas emissions will be allowed to buy and sell emission units to meet an ever-diminishing "cap" on overall emissions. (5) This market may involve hundreds of millions of dollars worth of trades, which will create significant incentives for fraud, manipulation and other misconduct. We know from California's energy crisis and the recent national mortgage meltdown that market abuse combined with insufficient market oversight is a recipe for disaster. (6) Thus, when creating the rules for a cap-and-trade market, we must apply the lessons learned from these experiences and integrate market monitoring and enforcement into the market itself. By requiring market participants to sufficiently fund monitoring and enforcement efforts, the few participants tempted to try to manipulate the market will understand from the outset that market misconduct will not be tolerated. While ensuring market fairness in a market of this expected size and complexity is a tall task, it will be far more manageable if we heed the painful lesson from the California energy crisis and the recent mortgage meltdown: relying exclusively on federal market enforcement can lead to disaster.
Significant reduction of greenhouse gas emissions is a massive undertaking and a tremendous challenge. California's multi-layered and often decentralized enforcement network needs to be allowed to continue its historic enforcement role if we are to meet the challenge. In the new world of carbon constraint, California's experience with environmental enforcement provides a useful road map for effective measures, while malfunctioning energy markets and the difficulties posed by federal preemption are significant roadblocks to avoid. For our greenhouse gas reduction efforts to be successful, we must intelligently apply the lessons California has learned to ensure effective monitoring and enforcement approaches. Our experience convinces us of the essential need to integrate enforcement into all market regulations from the outset. Without such effective enforcement mechanisms, our efforts to address global warming will fail, a result that no one can accept.
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THE NATURE AND EXTENT OF THE GREENHOUSE GAS EMISSION REDUCTION EFFORT REQUIRES THE FULL PANOPLY OF ENFORCEMENT TOOLS
Under AB 32, California requires a greenhouse gas emission reduction to 1990 levels by 2012, which is roughly a 28 percent reduction from business-as-usual levels. From 2020 to 2050, the Governor's Executive Order directs an additional 80 percent reduction. (7) Not surprisingly, to reach the 2020 reduction mandates, the Air Resources Board's Scoping Plan identifies many possible reduction mandates across all industries and activities throughout the State, such as traditional command-and-control regulations as well as cap-and-trade market mechanisms.
Because greenhouse gases are emitted from a wide variety of sources, the regulatory challenge they pose is significant and will require use of all existing enforcement resources. Many of the new greenhouse gas emission reduction controls are command-and-control regulations that will fit squarely in the regulatory scheme with which California regulators and enforcers are familiar. These regulations direct emission reductions or set emission limits. Failure to meet the specific requirements is a violation of the rule, subjecting the violator to injunction and penalty. In this system, enforcement promotes deterrence because the rational economic actor seeks to avoid penalties and costs for noncompliance. In California, a network of state and local regulators and prosecutors has been enforcing such environmental regulations and programs for decades.
AB 32 and other laws requiring greenhouse gas emission reductions will cover an unprecedented number of sources and will require significant monitoring and data review to ensure compliance. As such, no single governmental agency, federal or state, has the resources to ensure compliance alone; we must use a team approach. California's multilayered system provides a potential road map for addressing this challenge. The California model divides responsibility for enforcement among multiple agencies and governments, often with overlapping mandates that are usually complementary. While the system includes some inefficiency and can result in some frustration for regulated entities, overlapping jurisdiction tends to increase the likelihood of enforcement and compliance by increasing the number of eyes and ears evaluating compliance. Done correctly, efficient enforcement results in greater adherence from the regulated community, greater protection of human health and the environment, and greater fairness for the vast majority of businesses that follow the regulatory requirements.
Federal environmental laws, typically, provide a floor for environmental protection, but state and local jurisdictions may be empowered to enact laws that are broader in scope or set higher standards. (8) California has exercised its authority to enact greater environmental protection in many instances, often influencing the environmental standards for the rest of the nation. (9) Under this overlapping enforcement system, in most instances, state and local prosecutors and regulatory agencies can enforce both federal and state laws. State and local authority is essential because federal agencies, most notably the US Environmental Protection Agency (US EPA), simply do not have the resources necessary to adequately enforce the federal statutes. As a result, many states, including California, receive funding for state implementation of certain aspects of environmental programs mandated by federal law, including state-led enforcement efforts. This system of overlapping authorities and responsibilities among different governmental agencies and levels of government is not without challenges, as some...
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