Decentralizing Cap-and-Trade? State Controls Within a Federal Greenhouse Gas Cap-and-Trade Program
By Alice Kaswan
INTRODUCTION
Scientists agree that dramatic reductions in greenhouse gas emissions are necessary to save the planet from catastrophic climate change. Recently proposed climate change legislation recognized that imperative, proposing an eighty-three percent reduction in greenhouse gases below 2005 levels by 2050. That kind of reduction cannot occur without dramatic change to America's industrial and energy infrastructure. A national cap-and-trade program is likely to be one of the central mechanisms for implementing that transition. Although the precise scope and timing of a cap-and-trade program remains uncertain as this Article goes to press, legislative proposals in 2009 and 2010 continue to rely upon a cap-and- trade program as the primary mechanism for directly reducing greenhouse gas (GHG) emissions from stationary sources.
The nature and operation of a cap-and-trade system will present central political questions with significant economic and environmental ramifications. This paper addresses a critical structural issue: Should only the federal government make the judgment calls? Or should states retain some control over the in-state operation of a national cap-and-trade program? As this Article goes to press, the issue remains strongly contested. Rumors are circulating that the bipartisan group of Senators struggling to craft politically viable climate legislation intend to preempt state programs. State entities and others have responded with letters urging them to preserve state power.
Most of the nation's existing pollution control laws follow a cooperative federalist model: the federal government and the states share control over stationary sources of emissions. Some argue that climate law should be different, offering centralized, uniform, and exclusive federal control over greenhouse gas emissions through a national cap-and-trade program. In particular, economists focus on the importance of a streamlined national program that minimizes transactions costs and maximizes economic efficiency. Under that view, state controls could interfere with the market. If this view were to prevail in federal legislation, state controls would be preempted and the states would lose substantial control over the sources within their jurisdiction.
This Article argues, in contrast, that states should retain substantial autonomy to control in-state sources within a federal cap-and-trade system. State autonomy is justified by benefits to the nation as a whole, since states can provide a safety net for federal failure and provide on-going laboratories of invention for future federal and state policies. State autonomy is also justified by the importance of state democratic prerogatives over the multiple political, economic, and environmental implications of cap-and-trade design. Cap-and-trade policies will significantly impact all states' economic well-being, opportunities for new green technologies, and ancillary environmental conditions. The Article explores the theoretical arguments for and against state control and identifies the concrete benefits and drawbacks of several potential forms of state control.
After providing a basic introduction to cap-and-trade programs in Part II, Parts III through V address the attributes and benefits of three selected forms of state control within a federal cap-and-trade program. Part III addresses a fundamental environmental policy choice: whether states should retain the latitude to impose direct regulatory emission reduction requirements on stationary sources covered by the national trading program. Part IV addresses the politically charged issue of offset policy, the policy that determines the extent to which sources covered by a cap-and-trade program must make reductions themselves, or can instead rely upon “offsetting” reductions or sequestration occurring outside of the covered sectors and outside of the United States. Part IV also considers potential state rules on offset integrity, rules that would determine the quality and validity of purported offsets. Part V addresses state initiatives to integrate greenhouse gas policy with traditional air pollution control policy, a key issue given the interrelatedness of GHG and co-pollutant emissions. It discusses how and why states could seek to adjust trading policies to maximize their co-pollutant reduction benefits.
Part VI addresses the potential drawbacks posed by allowing states to exert control within a federal trading program. It notes first that states are unlikely to exercise their autonomy, thus minimizing potential adverse impacts. Assuming that states do exercise their authority, however, Part VI analyzes the potential external impacts from the aforementioned state policies, including impacts on the national allowance market and on out-of-state entities. It then explores a common industry concern with state regulation: the potential for a patchwork of state controls, resulting in an unequal playing field and administrative complexity for national and multinational firms. The Article also analyzes state controls' impact on economic and administrative efficiency. Part VI concludes that, in general, none of these potential adverse impacts justify eliminating state control, though in some cases, particularly in the offset context, they could justify some limits on state controls.
Several preliminary assumptions are in order. The Article assumes a federal trading program that uses federal allowances, and it does not consider the wisdom of simultaneous state or regional trading programs in which states or regions issue their own allowances for internal trading. The Article also assumes that the federal program would establish consistent minimum emissions reporting requirements for covered sources. In addition, a nationwide trading program would require uniform federal allowance measurement protocols so that a “ton” of emissions has the same meaning for both the selling and the purchasing entity.
Scientists agree that dramatic reductions in greenhouse gas emissions are necessary to save the planet from catastrophic climate change. Recently proposed climate change legislation recognized that imperative, proposing an eighty-three percent reduction in greenhouse gases below 2005 levels by 2050. That kind of reduction cannot occur without dramatic change to America's industrial and energy infrastructure. A national cap-and-trade program is likely to be one of the central mechanisms for implementing that transition. Although the precise scope and timing of a cap-and-trade program remains uncertain as this Article goes to press, legislative proposals in 2009 and 2010 continue to rely upon a cap-and- trade program as the primary mechanism for directly reducing greenhouse gas (GHG) emissions from stationary sources.
The nature and operation of a cap-and-trade system will present central political questions with significant economic and environmental ramifications. This paper addresses a critical structural issue: Should only the federal government make the judgment calls? Or should states retain some control over the in-state operation of a national cap-and-trade program? As this Article goes to press, the issue remains strongly contested. Rumors are circulating that the bipartisan group of Senators struggling to craft politically viable climate legislation intend to preempt state programs. State entities and others have responded with letters urging them to preserve state power.
Most of the nation's existing pollution control laws follow a cooperative federalist model: the federal government and the states share control over stationary sources of emissions. Some argue that climate law should be different, offering centralized, uniform, and exclusive federal control over greenhouse gas emissions through a national cap-and-trade program. In particular, economists focus on the importance of a streamlined national program that minimizes transactions costs and maximizes economic efficiency. Under that view, state controls could interfere with the market. If this view were to prevail in federal legislation, state controls would be preempted and the states would lose substantial control over the sources within their jurisdiction.
This Article argues, in contrast, that states should retain substantial autonomy to control in-state sources within a federal cap-and-trade system. State autonomy is justified by benefits to the nation as a whole, since states can provide a safety net for federal failure and provide on-going laboratories of invention for future federal and state policies. State autonomy is also justified by the importance of state democratic prerogatives over the multiple political, economic, and environmental implications of cap-and-trade design. Cap-and-trade policies will significantly impact all states' economic well-being, opportunities for new green technologies, and ancillary environmental conditions. The Article explores the theoretical arguments for and against state control and identifies the concrete benefits and drawbacks of several potential forms of state control.
After providing a basic introduction to cap-and-trade programs in Part II, Parts III through V address the attributes and benefits of three selected forms of state control within a federal cap-and-trade program. Part III addresses a fundamental environmental policy choice: whether states should retain the latitude to impose direct regulatory emission reduction requirements on stationary sources covered by the national trading program. Part IV addresses the politically charged issue of offset policy, the policy that determines the extent to which sources covered by a cap-and-trade program must make reductions themselves, or can instead rely upon “offsetting” reductions or sequestration occurring outside of the covered sectors and outside of the United States. Part IV also considers potential state rules on offset integrity, rules that would determine the quality and validity of purported offsets. Part V addresses state initiatives to integrate greenhouse gas policy with traditional air pollution control policy, a key issue given the interrelatedness of GHG and co-pollutant emissions. It discusses how and why states could seek to adjust trading policies to maximize their co-pollutant reduction benefits.
Part VI addresses the potential drawbacks posed by allowing states to exert control within a federal trading program. It notes first that states are unlikely to exercise their autonomy, thus minimizing potential adverse impacts. Assuming that states do exercise their authority, however, Part VI analyzes the potential external impacts from the aforementioned state policies, including impacts on the national allowance market and on out-of-state entities. It then explores a common industry concern with state regulation: the potential for a patchwork of state controls, resulting in an unequal playing field and administrative complexity for national and multinational firms. The Article also analyzes state controls' impact on economic and administrative efficiency. Part VI concludes that, in general, none of these potential adverse impacts justify eliminating state control, though in some cases, particularly in the offset context, they could justify some limits on state controls.
Several preliminary assumptions are in order. The Article assumes a federal trading program that uses federal allowances, and it does not consider the wisdom of simultaneous state or regional trading programs in which states or regions issue their own allowances for internal trading. The Article also assumes that the federal program would establish consistent minimum emissions reporting requirements for covered sources. In addition, a nationwide trading program would require uniform federal allowance measurement protocols so that a “ton” of emissions has the same meaning for both the selling and the purchasing entity.
