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Congress To Consider Preemption of Regional Climate Pacts

April 19, 2010

With Senators Kerry (D-Mass.), Graham (R-S.C.) and Lieberman’s (I-Conn.) climate change legislation reportedly set to be introduced later this month, a number of state officials have openly expressed concern about the effect the legislation might have on the existing cap and trade systems and regulations being developed by the regional climate change programs formed in the past few years by a number of states and Canadian provinces.

The Regional Greenhouse Gas Initiative (“RGGI”), the Western Climate Initiative (“WCI”) and the Midwest Greenhouse Gas Accord (“MGGA”) were all developed in response to a lack of federal action on climate change issues. RGGI, which is based primarily in the Northeast, is the only one of the three programs to have adopted cap and trade rules and to have held carbon auctions. State attorneys general in all of the RGGI states, along with the heads of the environmental protection agencies in those same states, have signed letters urging the Senate not to enact federal climate legislation in such a way as to override RGGI’s existing initiatives. In addition, Senator Bernie Sanders (D-Vt.) and thirteen of his colleagues have also asked that any new federal climate legislation ensure “equity for these states that have taken early action to address carbon pollution at their own expense.”[1]

The Regional Climate Change Compacts

Twenty-three states and four Canadian provinces are members of the three regional climate compacts. The graphic below shows the geographic spread of the three programs within North America.

 Regional Climate Compacts Map

When observer states and provinces are counted, nearly 50% of Americans are now living in states with some sort of climate change rules.[2]

RGGI is the furthest along in regulating greenhouse gases, having adopted the first mandatory, market-based CO2 emissions reduction program in the United States. Signatories to the RGGI agreement are the states of Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont. These ten states have capped CO2 emissions from the power sector, and will require a 10 percent reduction in these emissions by 2018.[3]

Currently, RGGI makes 223 power plants pay for each ton of carbon emitted. Payment is made by means of CO2 allowances, which are sold by auctions held four times each year. As part of its cap and trade rules, RGGI allows utilities regulated by the rules to obtain “offsets,” which may be used to satisfy a limited portion of a regulated power plant's compliance obligation. Offsets represent “a project-based greenhouse gas emission reduction outside of the capped electric power generation sector.”[4]

While not currently auctioning carbon allowances credits or enforcing cap and trade rules, the scope of the WCI is actually broader than RGGI. There are two reasons for this – first, the WCI covers a much broader geographic area than RGGI: WCI members include California, Washington, Oregon, Montana, Utah, New Mexico, Arizona and the Province of British Columbia. Second, unlike RGGI, which only governs power plants, the WCI’s regulations are designed to cover most sectors of the economy, including transportation, and manufacturing. The framework for the WCI’s cap and trade rules were released in 2008.[5] Since that time, the WCI has refined its program, which also includes an offset component. The rules are supposed to become mandatory in 2012, with an overall goal of a 15% reduction in greenhouse gas emissions below 2005 levels by 2020.

The MGGA has a similar goal: the program is designed to cut emissions 20% below 2005 levels by 2020 and 80% by 2050. However, each of the member states (Illinois, Iowa, Kansas, Michigan, Minnesota and Wisconsin and the province of Manitoba)[6] must pass a model rule developed by MGGA or else have the rule approved by executive authority.[7]

Potential Federal Pre-Emption Worries Some Senators and State Officials

Concerns about federal pre-emption of RGGI, WCI and MGGA have accompanied every proposal for federal climate change legislation. Last year, the Waxman-Markey bill that passed the U.S. House drew criticism from both air regulators and environmental groups based on a provision that would have prohibited states and local air authorities from implementing or enforcing their own greenhouse gas emissions caps from 2012 through 2017. Both the National Association of Clean Air Agencies and the Natural Resources Defense Council’s climate center submitted public comments calling for state and regional climate programs to retain authority to suspend their greenhouse gas caps only if they viewed the federal program as strong enough.[8] Congress’ failure to enact legislation last year made those concerns moot.

These same concerns, however, have been voiced with respect to revived climate change legislative proposals currently being worked on in the Senate. In a letter sent on March 26, 14 senators[9] urged Senators Kerry, Graham and Lieberman to make sure that their pending climate legislation ensures “equity for [those states participating in RGGI], that have taken early action to address carbon pollution at their own expense.” The letter expresses a fear that a closure of RGGI might leave participating states with a cash shortage as a result of their investment in greenhouse gas reduction efforts.

A similar letter was sent on March 30 from the directors of the environmental protection departments of 14 states,[10] urging the Senate to preserve the “states’ rights to implement their own climate policies, including but not limited to: state caps, vehicle, fuel and clean energy standards, and other innovative policy mechanisms.” In addition, another letter was sent from state attorneys from New England and all of the region’s state environmental protection heads, urging the Senate not to preempt the operations of RGGI.[11]

Notwithstanding the position reflected in these letters, there is sentiment, particularly among business interests, favoring an outright preemption of the state climate compacts in order to eliminate a patchwork of different regulatory schemes and create certainty in the market for businesses that operate in multiple states. This position is countered by state officials and environmental groups, who are advocating an approach similar to that currently in place in the Clean Air Act, where states are free to adopt more stringent regulatory limits so long as they meet the floor set by national legislation.[12]

Are the State Compacts Worth Fighting For?

Even as they fight to retain their regional systems, all three compacts have seen their share of controversy.

In both New York and New Jersey, monies that were initially raised through the greenhouse gas allowance auctions and which were set aside for investment in energy efficiency, renewable energy or other clean energy technologies have been transferred to the states’ general funds in order to pay for deficit reduction programs. In March 2010, New Jersey transferred $65 million from the state’s Global Warming Solutions Fund to its general fund in order to address an $11 billion state budget shortfall. New York diverted $90 million in RGGI proceeds to its general fund for deficit reduction in 2009.

These actions were criticized by environmentalists, with the New Jersey Sierra Club director coining the term “RGGIcide” to describe a move that “undermines the whole purpose of having the RGGI fund in the first place.”[13] Ironically, however, others noted that New Jersey and New York’s actions might provide an impetus for non-RGGI states to consider putting their own cap-and-trade programs in place, since RGGI members have seen an estimated $600 million in revenue from carbon allowance auctions since the auction program began in early 2009.[14]

Meanwhile, the WCI has had one of its members (Arizona) decline to implement the WCI’s cap and trade rules as a result of the impact of job losses and a burst housing bubble on the state’s economy. Arizona Governor Jan Brewer announced the move by means of an executive order issued in February of this year, stating that, while Arizona would remain a member of the WCI, it would “not implement the [greenhouse gas] cap-and-trade proposal advanced by the WCI … during this economic downturn.”[15] Other member states in the WCI will phase in the cap and trade program over time, as they become ready to participate.

Finally, many of MCCA’s member states are unlikely to take up the legislative or executive actions required to implement that program’s cap and trade rules during the 2010 election year, in which all six of the member states have gubernatorial elections.

Conclusion

One of the primary concerns of environmentalists and state officials involved in ongoing climate change efforts within RGGI, WCI and MGGA is the extent to which federal legislation will pre-empt those existing efforts. However, with the regional compacts themselves in various degrees of upheaval, about the only thing certain is that nothing is certain yet.

For more information, please contact any member of our Climate Change practice group.

[1] Senator Sanders’ comments were quoted in Climate bill worries officials in RGGI states, ClimateWire (April 12, 2010) (subscription required).

[2] Source: Point Carbon.

[3] See RGGI website: About RGGI.

[4] Id.: Offsets

[5] See Western States Issue Design Recommendations for Regional GHG Trading System, Marten Law Environmental News (April 23, 2008).

[6] Indiana, Ohio, South Dakota and Ontario have signed on as observers of MGGA.

[7] Regional carbon regulators could be linked if Congress fails, ClimateWire (November 10, 2009) (subscription required).

[8] See R. Bravender, Enviros, states caution against state pre-emption language in Waxman-Markey bill, ClimateWire (April 27, 2009) (subscription required).

[9] Those signing the letter were Barbara Boxer (D-CA), Christopher Dodd (D-Conn.), Ben Cardin (D-Md.), Barbara Mikulski (D-Md), Jeanne Shaneen (D-N.H.), Frank Lautenberg (D-N.J.), Robert Menendez (D-N.J.), Kirsten Gillibrand (D-N.Y.), Jeff Merkley (D-Or.), Ron Wyden (D-Or.), Jack Reed (D-R.I.), Sheldon Whitehouse (D-R.I.), Patrick Leahy (D-Vt.) and Bernie Sanders (I-Vt.).

[10] The states whose environmental protection department heads signed the letter were California, Connecticut, Delaware, Illinois, Maine, Maryland, Massachusetts, New Mexico, New York, Oregon, Rhode Island, Vermont and Washington.

[11] Climate bill worries officials in RGGI states, ClimateWire (April 12, 2010) (subscription required).

[12] C. Marshall, U.S. senators worry about damage to state climate efforts, ClimateWire (March 31, 2010) (subscription required).

[13] These statements were quoted in C. Marshall, Money to fight climate change gets siphoned into other budgets, ClimateWire (March 19, 2010) (subscription required).

[14] Id.

[15] Governor Brewer’s executive order is quoted in E. Lehman, Ariz. won't apply regional carbon cap, ClimateWire (February 12, 2010) (subscription required).

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