Confiscation of Emission Reduction Credits: The Case for Compensation Under the Takings Clause
By Justin Savage
INTRODUCTION
In 1976, the Environmental Protection Agency (EPA) authorized states to begin Emission Reduction Credit (ERC) trading programs to meet the requirements of the Clean Air Act (CAA). Under these programs, stationary sources may bring their emissions permanently below the legally required limits and use this emissions savings to create an ERC. ERCs may be used immediately, traded, or banked. Interest in ERC trading programs grew enormously following the enactment of the 1990 CAA, which explicitly authorized the states to engage in emissions trading. Consequently, several states have recently adopted ERC trading programs, which “represent[ ] the . .. most farreaching attempt to implement a marketable permit system.”
As ERC programs proliferate, the likelihood grows that state regulators may confiscate ERCs to meet air quality goals. Confiscation would probably deter sources from creating ERCs, and thus society would lose the benefits of ERC programs. Scholars have overwhelmingly recognized these benefits. The Fifth Amendment's Takings Clause provides a possible shield against confiscation because it prohibits the government from taking “private property . . . for public use without just compensation.” In recent commentaries, authors concluded that ERC confiscation does not violate the Takings Clause. In the latest commentary, Susan A. Austin asserts that a takings challenge to confiscation would probably fail, “even if the government repossessed the [[[tradable emissions] permits.” Moreover, Austin recommends that governments “make clear that tradable emissions permits are government benefits that the government may reclaim at will.”
This Note challenges Austin's descriptive and normative conclusions. The outcome of a takings claim generally depends on “ad hoc, factual inquiries.” However, prior commentaries on the takings implications of ERCs failed to survey the varying state laws governing ERCs. This Note surveys these state ERC programs and concludes that some state laws recognize a property interest in ERCs. In those states, confiscation of ERCs arguably constitutes a taking. Furthermore, the government should recognize a limited property right in ERCs because emissions trading would be greatly enhanced. These descriptive and normative arguments are set forth in five parts. Part II presents a general overview of the CAA and explains the genesis of ERC programs. Part II, moreover, describes the significant benefits provided by emissions trading with ERCs. Part III argues that ERCs possess the characteristics of private property and would be categorized as intangible property for purposes of the Takings Clause. Part III then surveys state ERC programs, concluding that some states seem to create a property right in ERCs that would be cognizable under the Takings Clause. Part III concludes with a normative justification for property rights in ERCs. Part IV rebuts Austin's argument that the Supreme Court applies a presumption against vesting to government-created property rights. This presumption against vesting actually represents an amalgam of the doctrine of unmistakenability and other lines of precedent. Ultimately, these lines of precedent provide no barrier to the creation and protection of property rights in ERCs. Part V argues that a court probably would hold that certain confiscations constitute a taking, depending on the circumstances. Finally, Part VI concludes that the judiciary and government regulators should protect ERCs from state confiscation.
In 1976, the Environmental Protection Agency (EPA) authorized states to begin Emission Reduction Credit (ERC) trading programs to meet the requirements of the Clean Air Act (CAA). Under these programs, stationary sources may bring their emissions permanently below the legally required limits and use this emissions savings to create an ERC. ERCs may be used immediately, traded, or banked. Interest in ERC trading programs grew enormously following the enactment of the 1990 CAA, which explicitly authorized the states to engage in emissions trading. Consequently, several states have recently adopted ERC trading programs, which “represent[ ] the . .. most farreaching attempt to implement a marketable permit system.”
As ERC programs proliferate, the likelihood grows that state regulators may confiscate ERCs to meet air quality goals. Confiscation would probably deter sources from creating ERCs, and thus society would lose the benefits of ERC programs. Scholars have overwhelmingly recognized these benefits. The Fifth Amendment's Takings Clause provides a possible shield against confiscation because it prohibits the government from taking “private property . . . for public use without just compensation.” In recent commentaries, authors concluded that ERC confiscation does not violate the Takings Clause. In the latest commentary, Susan A. Austin asserts that a takings challenge to confiscation would probably fail, “even if the government repossessed the [[[tradable emissions] permits.” Moreover, Austin recommends that governments “make clear that tradable emissions permits are government benefits that the government may reclaim at will.”
This Note challenges Austin's descriptive and normative conclusions. The outcome of a takings claim generally depends on “ad hoc, factual inquiries.” However, prior commentaries on the takings implications of ERCs failed to survey the varying state laws governing ERCs. This Note surveys these state ERC programs and concludes that some state laws recognize a property interest in ERCs. In those states, confiscation of ERCs arguably constitutes a taking. Furthermore, the government should recognize a limited property right in ERCs because emissions trading would be greatly enhanced. These descriptive and normative arguments are set forth in five parts. Part II presents a general overview of the CAA and explains the genesis of ERC programs. Part II, moreover, describes the significant benefits provided by emissions trading with ERCs. Part III argues that ERCs possess the characteristics of private property and would be categorized as intangible property for purposes of the Takings Clause. Part III then surveys state ERC programs, concluding that some states seem to create a property right in ERCs that would be cognizable under the Takings Clause. Part III concludes with a normative justification for property rights in ERCs. Part IV rebuts Austin's argument that the Supreme Court applies a presumption against vesting to government-created property rights. This presumption against vesting actually represents an amalgam of the doctrine of unmistakenability and other lines of precedent. Ultimately, these lines of precedent provide no barrier to the creation and protection of property rights in ERCs. Part V argues that a court probably would hold that certain confiscations constitute a taking, depending on the circumstances. Finally, Part VI concludes that the judiciary and government regulators should protect ERCs from state confiscation.