Constitutional implications of regional C(O.sub.2) cap-and-trade programs: the northeast regional greenhouse gas initiative as a case in point.

AuthorFunk, William
  1. INTRODUCTION II. THE RGGI III. PREEMPTION IV. COMPACT CLAUSE V. THE DORMANT COMMERCE CLAUSE A. Offsets B. Leakage VI. CONCLUSION I. INTRODUCTION

    For eight years the Bush administration avoided addressing global warming, first denying its existence, then denying its anthropogenic contributions, and finally denying the government's legal ability to combat it. There is a new administration, however, and Presidential candidate Obama campaigned in favor of a national cap-and-trade program. Nevertheless, there are many matters of critical importance on the U.S. Congress' plate, and as of this writing Senate Majority Leader, Harry Reid, was hoping to take up climate change legislation by the end of the summer of 2009. The chances of passage even then are not clear. Economic woes and Republican opposition could still do it in.

    This political reality suggests that existing and proposed regional cap-and-trade programs may have continuing importance. Consequently, the constitutional implications of these programs are worthy of consideration. The Regional Greenhouse Gas Initiative (RGGI) is already in effect in ten northeastern and mid-Atlantic states, (1) while the Western Climate Initiative and Mid-western Regional GHG Reduction Accord are still far from operational. This Article considers three possible constitutional issues with regard to a regional cap-and-trade program, focusing on the RGGI: preemption, the Compact Clause, and the Dormant Commerce Clause.

  2. THE RGGI

    The RGGI is a cooperative undertaking of ten states (2) that began in 2005 with a Memorandum of Understanding. (3) In 2006 the RGGI developed a Model Rule. (4) Each state undertook to cap overall C[O.sub.2] emissions from electrical generating plants in the state in accordance with the RGGI Model Rule. (5) In essence, beginning in 2009 and lasting until 2014, the cap is set at the estimated amount of emissions in 2008. Thereafter, the cap is decreased by 2.5 percent each year until 2018, for a total decrease in emissions of 10 percent from the 2008 baseline.

    Each fossil-fuel-fired electric generating unit serving a generator of twenty-five MW or larger must possess sufficient allowances for its emissions in any compliance period. Most of these allowances are sold at auction, and the purchasers can freely trade them on the market. Those who need more allowances to cover their emissions will need to buy them; those that possess more than they need may sell them. The money generated by the auctions will be used to fund energy conservation, energy efficiency, and clean energy programs.

    The RGGI also allows for the assignment of "offset allowances" to generating facilities for certain types of projects that reduce or sequester greenhouse gas emissions in areas outside of electrical generation. Currently, only five types of projects can qualify for offset allowances. (6) Generally no more than 3.3 percent of a facility's allowances can be offset allowances. (7) There are strict application and verification processes to qualify an offset. An offset project may be located in any state, not just a RGGI state, if the other state has a cooperating regulatory agency that has entered into a Memorandum of Understanding with the RGGI states to provide oversight of the offset projects in that state.

    The RGGI is implemented by each state enacting its own laws, which must conform to the RGGI Model Rule, to govern the generating facilities in its state. (8) RGGI, Inc., a nonprofit corporation, was created to provide technical and administrative services to the RGGI states. The allowance auctions are performed by World Energy Solutions, Inc., which operates online exchanges for energy and green commodities, and Potomac Economics, which performs monitoring and competitive assessment of wholesale electricity markets in the United States, oversees the auction.

  3. PREEMPTION

    California's attempt to regulate C[O.sub.2] emissions of automobiles was challenged by local automobile dealers in part on the grounds that federal law preempted individual state regulation of greenhouse gases because such regulation would interfere with the President's negotiations with foreign powers to achieve a global agreement on the control of greenhouse gases. (9) The argument was that the United States could better persuade other non-Kyoto nations to participate in a global agreement if the United States could maintain it would only agree to address greenhouse gas emissions if these other nations also agreed to address them. If, however, individual states began to regulate greenhouse gas emissions on their own, this would undercut the United States' bargaining position. There is some authority for state law being preempted on the basis of Presidential negotiations with foreign nations. For example, in Am. Ins. Co. v. Garamendi, (10) the Supreme Court held that a California law imposing certain requirements on foreign insurance companies that did business in Germany during the Holocaust interfered with the President's negotiations with the German government for reparations for Holocaust survivors.

    Nevertheless, the court rejected the automobile dealers' argument on two separate grounds. First, the court found "no evidence" that it was United States policy to prevent states from taking any action to reduce greenhouse gas emissions, so that the United States could "speak with one voice" in foreign negotiations. (11) Second, even if there were such evidence, the court held that the California automobile emission regulation would not constitute a "clear conflict" with U.S. foreign policy sufficient to result in preemption of the state law under the authority of Garamendi. (12) The court noted that all past cases finding preemption of state law because of conflict with United States foreign policy involved state laws directed at foreign nations or nationals, whereas California's regulation of California automobile emissions had no relation to foreign nations or nationals. The court's analysis seems sound. Moreover, it is unlikely that the present administration would support a claim that state attempts to restrict greenhouse gases interfere with its foreign policy.

    At least one case has found a state law regulating pollutant emissions preempted by the Clean Air Act. (13) New York enacted a law that effectively prohibited New York utilities from selling S[O.sub.2] offsets to upwind states under the Clean Air Act's acid rain cap-and-trade program. (14) This law clearly interfered with the federal Act's "emission allocation and transfer system" (15) and consequently was preempted by the federal law. However, here it is not apparent how the RGGI requirements could possibly interfere with the federal Acid Rain program or any other part of the Clean Air Act.

    Finally, a recently filed case (16) challenging New York's participation in the RGGI asserts that RGGI is preempted by the Public Utility Regulatory Policies Act (PURPA). (17) An electric generator is suing New York's Public Service Commission (PSC) claiming that it will refuse to allow the company to pass through the increased cost of purchasing allowances, thereby violating the company's ability to recover the "fully avoided costs" to which it is entitled as a "qualifying facility" under PURPA. (18) Whatever claim Indeck Corinth may have to recover its "fully avoided costs," it is clear that RGGI is not preempted on this basis. Nothing in RGGI precludes the PSC from allowing qualifying facilities to pass through increased costs. The fault, if there is one, lies with the PSC, not RGGI. Indeed, the theory behind RGGI supports emitters being able to pass through increased costs, which will reduce the demand for electricity.

    As may be seen, RGGI does not raise serious preemption problems under existing law, despite possible claims to the contrary. Of course, when--or if--Congress passes a federal cap-and-trade program for greenhouse gases, the preemption issue will almost certainly be dealt with explicitly. Congress is not unaware of the various regional cap-and-trade programs, and early bills on the subject have evidenced a clear intent to exempt state or regional cap-and-trade programs from federal preemption, so long as the state or regional program is stricter than the federal program. (19) Moreover, RGGI itself contains an explicit provision to sunset if a comparable federal program is enacted. (20)

  4. COMPACT CLAUSE

    Article I, [section] 10, cl. 3, of the U.S. Constitution says that "no state shall, without the consent of Congress ... enter into any agreement or compact with another state...." By its terms it would seem that the Constitution requires the RGGI states to obtain congressional consent for the RGGI agreement. Nevertheless, those states have not sought or obtained consent.

    Despite the seemingly clear language of the Constitution, however, the U.S. Supreme Court in 1893 opined that the Compact Clause should not be read literally. (21) Rather, it should be read in context to mean that "the...

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