1. Potential Challenges to Sub-National Regulation

In response to the recent flurry of activity at the US regional, state, and local levels on climate change, questions have surfaced regarding whether these initiatives are compatible with the US Constitution and its system of federalism. Though the states have broad authority to regulate public health and welfare, the Constitution places limitations on their authority to regulate in certain areas where federal authority is pre-eminent. Emerging carbon trading regimes at the regional and state level are already being challenged by affected interests. For example, early in the RGGI development process, Edison Electric Institute (a trade association for the utility sector) raised many of the constitutional issues discussed below in comments it submitted regarding the RGGI MOU.1 More recently, a power company sued to overturn the State of New York’s administrative regulations implementing RGGI, raising several constitutional issues in its complaint.2 Whether such initiatives will ultimately survive constitutional challenges depends on many unknowns, though perhaps most significantly it will depend on the scope and content of future federal legislation on climate change.

The issues implicated by sub-national regulation of climate change can be divided into four separate constitutional limitations on state action: limitations imposed by federal pre-emption of state law through the Supremacy Clause of the US Constitution; limitations imposed by the ‘foreign affairs’ power of the Constitution; limitations imposed by the Compact Clause; and limitations imposed by the ‘dormant commerce clause’ power.

  1. Pre-emption

The doctrine of pre-emption flows from the Supremacy Clause, which states that federal laws are ‘the supreme law of the land.’3 Federal laws will pre-empt, and thus invalidate, state laws when: (1) federal laws explicitly state that they pre-empt any state law addressing the subject of the federal legislation;4 (2) Congress ‘intends federal law to occupy the field;’ or (3) to the extent that the state law conflicts with a federal statute such that it is ‘impossible for a private party to comply with both state and federal law’ or the state law ‘stands as an obstacle’ to the accomplishment of Congress’ goals.5 In the context of climate change, the viability of each of these pre-emption challenges will depend primarily on the scope and content of future federal GHG legislation. Challenges based on existing federal legislation are beginning to emerge. Pre-emption challenges have been mounted, albeit unsuccessfully, against certain state regulatory activity directed at GHGs, such as California’s mobile source standards,6 on the basis of existing federal legislation under the CAA. In addition, the recent challenge to New York’s implementation of RGGI includes a claim that RGGI is pre-empted by the federal Public Utility Regulatory Policies Act (PURPA).7 The lack of challenges to other sub-national initiatives in part is a reflection of ripeness––these programs have only begun to take effect. As commitment periods for these programs start up, state participants may expect to see additional judicial challenges. While it remains to be seen how courts will rule on these lawsuits, the absence of specific federal legislation on climate change could make it difficult for a court to conclude that Congress has either expressly or impliedly pre-empted such programs under the CAA or any other statute.8

This issue is therefore more likely to be resolved directly in new federal legislation on climate change. Although some of the federal bills have been silent on preemption, others would explicitly pre-empt all sub-national trading initiatives.9 There will be significant pressure from industry to include such express pre-emption mechanisms. It remains unclear, however, whether such express pre-emption language will prevail. A more likely result may involve a model similar to the existing Clean Air Act, wherein Congress set a national standard for automobile emissions but allowed California to undertake experimental deviation from the standard.10 The remaining states have the option of selecting the national or California approach, and industry thus has only two different standards with which it must comply rather than a quiltwork of up to 50 different targets.11

Another option would be to reward regional trading participants by allocating additional federal emissions allowances to those early moving states, and to ensure that covered entities that have participated in state-level reduction measures are given credit for such activity under a subsequent federal scheme.12 Yet another possibility would be to allow federal and regional/state trading systems to link with a federal trading program by recognizing the regional/state allowances in the federal market.13 While trade-offs exist for each option, express pre-emption of sub-national trading systems is likely to be politically challenging, leaving the likelihood that a threat of pre-emption challenge will hang over subnational carbon schemes for some time until resolved by the courts.

  1. Foreign affairs pre-emption

The US Constitution assigns foreign affairs powers solely to the federal government. ‘The Constitution’s foreign affairs provisions have been long understood to stand for the principle that power over foreign affairs is vested exclusively in the federal government.’14 For example, the President has the power to make treaties and recognize foreign governments;15 Congress has the power to regulate commerce with foreign nations.16 Where Congress and the President have acted through a treaty, the treaty and related legislation may preempt state laws under the Supremacy Clause. Even where Congress and the President have not acted, courts have occasionally invoked the dormant aspect of these powers to limit state activity that interferes with federal foreign relations.17

One focal point of foreign affairs challenges to sub-national cap and trade systems will be whether these systems interfere with the ability of the federal government to speak with ‘one voice’ on climate change in foreign affairs. For example, the Supreme Court has invalidated state laws in cases where the Court determined that the laws present a risk of disruption or embarrassment in foreign affairs, due in part to the intrusive evaluation by state courts (or regulatory authorities) of foreign legal systems.18 Another key issue is whether the state measures in question involve areas where the states have traditionally exercised regulatory control over international activity (eg, in the field of taxation). If a state law falls within an area of traditional state competence, the law is less likely to be pre-empted even though it affects foreign affairs, unless there is a clear and substantial conflict with federal policy.19 On the other hand, if a state law exceeds the scope of traditional state competence and has even a slight impact on federal foreign affairs interests, the law is likely to be preempted. 20 Yet another factor is whether the federal authorities have raised concerns about the risks of conflict with federal foreign affairs activity.21

In evaluating the vulnerability of the state climate laws, therefore, much will depend on the precise content of the laws and the ways in which they touch on foreign affairs. Under one theory, because climate change is a quintessentially global issue and the Executive Branch is engaged in multilateral negotiations to address climate change issues, virtually any state action in this field is an intrusion on the foreign affairs power of the national government. If federal policy is framed in this way, state and sub-national systems that reduce overall US GHG emissions could potentially weaken the President’s ability to secure the participation of key developing countries in exchange for US commitments.22 On the other hand, state and regional cap and trade systems could actually bolster the US negotiating position by increasing the ‘commitment credibility’ of the federal government.23 As discussed above, moreover, linkage provisions in various sub-national programs raise foreign affairs pre-emption issues to the extent that they may require direct cooperation and engagement between states and the foreign authorities to which they are linking. The contours of this analysis will likely change with the emerging federal climate policy of the new administration. The degree to which state climate change laws might entail subjective evaluations of the adequacy or compatibility of foreign GHG control regimes or offset schemes will also be relevant.

  1. Compact Clause

The Compact Clause of the US Constitution prohibits states from entering into compacts with other states or foreign nations without Congressional consent.24 Although the Constitution does not define a ‘compact,’ five indicia of a compact have been distilled from US judicial law: (1) reciprocity, or the mutual exchange of privileges or benefits among states; (2) co-operation among state officials or legislators in developing the agreement; (3) establishment of a regional body to administer or enforce the agreement; (4) conditioning of state statutes on action by the other states; and (5) the ability of a state to modify or repeal its statute unilaterally.25

Even if an agreement among states, such as the RGGI MOU, rises to the level of a constitutionally suspect ‘compact,’ courts have held that not all compacts require congressional consent. Instead, the key concern is whether the compact would encroach upon or interfere with the ‘just supremacy’ of the federal government.26 Courts have provided guidance on what will not constitute an interference with the just supremacy of the federal government. For example, the mere presence of federal interest in an issue covered by an interstate compact does not encroach upon federal supremacy.27 Despite the seemingly broad language in the Constitution prohibiting interstate compacts without Congressional consent, judicial treatment of these compacts has substantially curtailed this limitation on state power. To date, no US court has invalidated an interstate agreement under the compact clause.

If an interstate agreement falls within the scope of the Compact Clause and is deemed to encroach upon the just supremacy of the federal government, the parties to the agreement will be required to seek Congressional consent. Historically, where states have sought permission before entering into interstate compacts, Congressional consent amounted to little more than a rubber stamp on state proposals.28 As states have begun to cooperate on issues of greater complexity, Congress has increasingly used its authority under the Compact Clause to place conditions on granting consent, such as requiring the addition or inclusion of certain provisions in the compact.29 This power could amount to a federal tailoring of interstate compacts. A decision not to seek Congressional consent, therefore, is ultimately a choice between exposing an interstate compact to legal challenges versus potentially relinquishing to Congress substantial influence over the compact.

The sub-national schemes described above thus raise the question of whether they require Congressional consent. States participating in RGGI and the WCI, for example, have all signed an MOU but have not yet sought Congressional approval. Whether these MOUs amount to compacts requiring Congressional consent is unclear.30 They would appear to reflect some of the indicia of an interstate compact, such as RGGI’s presence of an overarching administrative body.31 In a recent legal challenge to New York’s implementation of RGGI, the plaintiff asserts that RGGI’s MOU violates the Compact Clause by enlarging the participating states’ political influence over the regulation of GHGs without Congress’ authorization and encroaching on federal supremacy through interference  with federal government’s interest in regulating GHGs as pollutants.32 Although Compact Clause challenges are rare and have so far been unsuccessful, cap and trade agreements among states may well invoke renewed judicial application of this constitutional doctrine.

  1. Commerce Clause

The Commerce Clause of the US Constitution grants Congress the power to regulate commerce among the states.33 The so-called ‘dormant commerce clause’ has been understood to provide ‘protection from state legislation inimical to the national commerce [even] where the Congress has not acted’.34 Under this doctrine, absent a compelling justification, a state may not adopt measures that facially discriminate against interstate or foreign commerce, even where the state seeks to advance a legitimate state policy objective.35 The dormant commerce clause doctrine serves to restrain states both from adopting protectionist policies (ie, policies that disproportionately benefit in-state interests) and from adopting measures that result in excessive interference in foreign affairs. The first question is whether a statute involves facial discrimination. ‘[A] statute that facially discriminates against interstate or foreign commerce will, in most cases, be found unconstitutional’.36 The threshold is higher for statutes that discriminate against foreign commerce than for those discriminating against interstate commerce alone, because of the potential effects on the ‘efficient execution of the Nation’s foreign policy’.37 Notably, the presumption against state laws that discriminate against foreign commerce does not require a finding that such laws provide an advantage to in-state interests.

If a law facially discriminates, it will survive judicial review only if it demonstrably advances a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives.38 On the other hand, courts will generally uphold a nondiscriminatory state law with ‘incidental’ effects on interstate commerce, unless the state law imposes a burden that is ‘clearly excessive’ compared to the state benefits it generates.39 This balancing of interests for nondiscriminatory laws provides states an opportunity to justify laws that restrict interstate commerce provided there are countervailing benefits within the state.

It remains unclear how the major sub-national GHG initiatives such as RGGI, WCI, and MGGRA will fare under these standards. Although they do not appear to involve facial discrimination, they may nevertheless provoke dormant commerce clause challenges if the burden they place on interstate commerce outweighs the state benefits generated. Commonly cited state benefits of GHG regulation include protection against sea-level rise and the threat of frequent and higher intensity tropical storms, as well as mitigation of localized climate change impacts such as heat waves, flooding, or drought.40 Despite these potential benefits relating to the protection of the health and welfare of state residents or resources, where state policy concerns are strongest, it may be difficult to demonstrate that the state initiatives will have a direct impact on local conditions.41

The burden of sub-national cap and trade programs on interstate commerce, on the other hand, will probably be characterized as a restriction on the movement of emissions-intensive products or services across state lines. For example, in response to concerns that RGGI’s cap on electricity generators within the region will result in leakage, regulators are seeking ways to limit the importation of electricity by out-of-state generators not covered by RGGI’s emissions cap.42 Attempts to regulate these generators, even if drafted such that the statute is facially non-discriminatory, may attract dormant commerce clause challenges if they restrict the sale of electricity by generators outside of the RGGI participating states.43 In defense of potential dormant commerce clause challenges, the states will ultimately need to establish that sub-national cap-and-trade systems are not protectionist and that the local interest in mitigating climate change impacts outweighs any burden on interstate commerce.