Tradable emissions programs: implications under the takings clause.

• Author: Austin, Susan A.

1. INTRODUCTION

   The Fifth Amendment of the United States Constitution provides that "private property [shall not] be taken for public use, without just compensation."(1) Supreme Court cases interpreting the Takings Clause generally fall into two classes.(2) In the first, the government authorizes a physical appropriation or actually takes title to the property;(3) compensation is generally required.(4) In the second, the government merely regulates the use of property, and compensation is required only if the "purpose of the regulation or the extent to which it deprives the owner of the economic use of the property suggests that the regulation has unfairly singled out the property owner to bear a burden that should be borne by the public as a whole."(5)

   A critical issue in the first class of cases is whether the economic interest in question is in fact a property interest within the meaning of the Fifth Amendment. On many occasions the Supreme Court has entertained the question of what constitutes "private property" within the meaning of the Takings Clause, but a coherent theory has yet to emerge.(6) Likewise, the Court has not provided clear guidance with respect to the "essentially ad hoc, factual inquiries"(7) to be made in the second class of cases.(8) Thus, much uncertainty surrounds what constitutes a taking in either class of cases.

   Amidst this uncertainty, federal and state regulatory agencies grappling to control air pollution are forging ahead with innovative methods of regulation. Tradable emissions programs are one of these new methods.(9) Under a tradable emissions program, the government issues emissions permits that companies may trade among themselves.(10) Several programs are already in place(11) and many more are in the planning phase.(12) As these programs are being developed, it is important for regulators to consider whether they are increasing the risk of a successful takings claim against the government if future policy warrants a decrease in the level of pollution allowable under the permits or if some companies are unable to obtain enough permits and must shut down.(13) If tradable emissions programs make the government vulnerable to successful takings claims, then the government could potentially be forced to pay huge sums of money as "just compensation" to polluters. Before embarking on programs that could place such a burden on the government's ability to curb air pollution, legislators and regulators need to consider and minimize the risks involved.

   After a brief introduction to tradable emissions programs in theory and in practice, Part II of this Comment examines the possibility that these programs may render the government vulnerable to takings claims that fall into either of the two classes of takings cases. Part III analyzes whether tradable emissions permits are private property within the meaning of the Takings Clause, concluding that a court probably would not construe them as such. Part IV analyzes the regulation of property use through the regulation of tradable emissions permits, concluding that a takings claim under this theory is also unlikely to be successful under current law. Although a successful takings claim is unlikely under either of the two classes of cases, Part V offers recommendations for how government reg-ulators should implement tradable emissions programs to further reduce the likelihood of a successful takings claim. In addition, Part V suggests how courts should respond to a takings claim should one be brought.

2. AIR QUALITY REGULATION

   The Clean Air Act (CAA)(14) governs air quality regulation in the United States. Under the CAA, the Environmental Protection Agency (EPA) administers several air pollution control programs, such as the acid deposition control program.(15) State agencies also administer air quality programs.(16) Both EPA and state agencies charged with air pollution regulation have a variety of regulatory techniques available, several of which are described below.

   Air quality regulation is generally divided into two large groupings: command-and-control regulation and market-based regulation.(17) Under a command-and-control regime, regulators require specific emission levels for specific pollution sources.(18) Particular pollution control technologies or methods also may be specified.(19) Market-based regulation, on the other hand, aims to allow polluters to reduce pollution where pollution control is least costly.(20)

   Emissions trading programs, a type of market-based air pollution regulation, can be broken down into four types: netting, bubbles, offsets, and banking.(21) Netting, also referred to as internal trading,(22) allows a firm to create a new source in a plant by reducing emissions from another source in the same plant.(23) A "bubble," named for putting an imaginary "bubble" over a number of sources, allows existing sources to trade emission reduction credits among themselves.(24) A program of offsets allows a firm to locate in a "non-attainment area" if the firm "offsets" new emissions by reducing emissions from existing sources by the same amount.(25) Finally, banking allows firms to save emission reduction credits for future use.(26)

   EPA and various state agencies have moved cautiously in implementing these programs, beginning with a modest netting program in 1974.(27) With the 1990 CAA Amendments, Congress addressed acid deposition by establishing an emissions trading program for sulfur dioxide.(28) Only in 1994 did a multi-pollutant emissions trading program finally take effect.(29)

   The CAA established a federal emissions trading program to control acid deposition.(30) The purpose of the acid deposition control subchapter is to reduce the annual emissions of sulfur dioxide and nitrogen oxides by requiring compliance with emission limitations.31 Deadlines for these emission limitations could be met by using an emission allocation and transfer system.(32) Under this system, the Administrator allocates allowances for each affected unit.(33) There is no cost to the recipient, except under section 416, which grants the Administrator power to hold special reserve allowances and to create a subaccount for direct sales.(34) Allowances allocated under the acid deposition control program can be transferred among owners or operators of the affected sources.(35)

   The statute expressly provides that the acid deposition provisions do not create any property rights:

   An allowance allocated under this subchapter is a limited authorization to

   emit sulfur dioxide in accordance with the provisions of this subchapter. Such

   allowance does not constitute a property right. Nothing in this subchapter or

   in any other provision of law shall be construed to limit the authority of the

   United States to terminate or limit such authorization.(36)

   The legislative history confirms that Congress did not intend to create property rights within the meaning of the Fifth Amendment.(37)

   State agencies creating their own tradable emissions programs for local air pollutants have followed the federal government's lead. In 1993, the South Coast Air Quality Management District (SCAQMD), the state agency responsible for air quality in the Los Angeles area, implemented a tradable emissions program called the Regional Clean Air Incentives Market (RECLAIM) Program.(38) Like the federal acid deposition statute, the RECLAIM regulations explicitly state that no property rights are created by the tradable emissions program. Specifically, the regulations state that a RECLAIM Trading Credit (RTC) is a "limited authorization to emit RECLAIM pollutants."(39) RECLAIM pollutants may be emitted only in accordance with District rules and state and federal law.(40) Moreover, although an RTC "may be bought, sold, traded or otherwise transferred or acquired in accordance with the provisions of this rule," and although an RTC may be used as collateral for indebtedness security, "[a]n RTC shall not constitute a security or other form of property."(41) The District reserves the right to amend the RECLAIM rules in response to program reevaluations pursuant to Rule 2015-Backstop Provisions, or at other times. Moreover, the SCAQMD Rules state, "[n]othing in the District rules shall be construed to limit the District's authority to condition, limit, suspend or terminate any RTCs or the authorization to emit which is represented by a Facility Permit."(42)

   EPA is encouraging other states and regional associations of states to use market-based systems of pollution control.(43) In summer 1995, EPA proposed a rule that would provide approved generic rules that states could adopt to implement programs that allow open market trading of pollutants that cause ground-level ozone.(44) The preamble to the proposed rule, like the CAA,(45) explicitly states that "[the open market trading rule] would not confer property rights to the [permit] holder."(46)

   As tradable emissions programs become more widespread, the issue of whether the government is vulnerable to takings claims will become increasingly important. A takings claim is plausible under either of the two classes of takings cases described in the Introduction. A takings claim under the first class of cases would be triggered by a change in government policy that reduces the level of pollution allowable under the permits. A claimant bringing suit under this theory would argue that the permits themselves are property and thus their depreciation in value should be compensated. A claim under the diminution in value theory would be triggered either by a change in government policy, as above, or by a situation in which the price of permits rose so high that an industry had no choice but to shut down. A claimant corporation bringing suit under this theory would argue that the regulation went "too far" in depriving the owner of economic use of its land. Parts III and IV examine the case law that would be relevant in a suit brought under each...