State Carbon Markets Have Been Challenged Before
State carbon programs have been challenged before and were upheld by the courts. In what seems to be a repeat challenge, on April 8th, the Trump administration issued an executive order broadly targeting carbon compliance programs in the US by framing them as a threat to energy dominance and national security [1]. There are several state-specific compliance carbon markets active across the US including California, Washington, and a regional cooperative
involving 10 Eastern states [2]. California’s cap and trade program was first established in 2012 as a market-based system creating economic incentives for reducing GHG emissions and funding climate mitigation efforts. Cap and Trade works by setting a declining limit on the state’s overall emissions, with yearly allocations of ‘allowances’ representing a quantified amount of GHGs that can be emitted. Companies producing emissions can buy and sell these allowances amongst each other or purchase compliance offsets (for up to 4% of excessive emissions) to meet required reduction targets [3]. In the US and Europe, compliance carbon markets have proven an effective means of steering large industries to adopt cost-effective strategies for reducing emissions.
The executive order seeks to identify and dismantle cap and trade systems by considering state-imposed regulations to mitigate climate change as unconstitutional. In 2019 compliance carbon markets were similarly challenged when the first Trump administration tried to block California and Quebec from linking their cap and trade programs in a cross-border carbon market [4]. A federal judge dismissed the first administration’s claims that the regional linkage required congressional approval, allowing the joint carbon market to commence. The constitutionality of carbon pricing mechanisms and policies was also debated in 2012 when California’s Low Carbon Fuel Standard (LCFS) was brought to court over claims of violating the US Commerce Clause. The case centered around legality of out-of-state ethanol suppliers having higher carbon intensity fuels for the added GHG emissions associated with transporting eligible fuels from production site to California end-users. The courts ruled that LCFS assigning higher carbon intensities to out-of-state ethanol did not violate the Commerce Clause because fuel producers choosing to participate in LCFS market incentives are required to account for all sources of GHG emissions from “well to wheel” [5]. In light of prior legal precedents, several scholars have agreed that state compliance carbon markets remain well-sheltered from federal opposition. Two reasons cited for this are existing powers given to states under the Clean Air Act to regulate emissions, and how the Supreme Court’s overturning of the Chevron doctrine now limits government agency ability to issue rules blocking state climate policies such as carbon markets [6]. For states like California, the message has stayed clear – states do indeed have authority to implement climate policies, and successfully-run programs like cap and trade will outlast federal leadership cycles.
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