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The Waxman-Markey Bill State Preemption Exception

A California-Sized Hole in the Proposed Federal Allowances Bucket?
Beveridge & Diamond, P.C. - Client Alert, July 9, 2009

ISSUE

  • The Waxman-Markey Bill (H.R. 2454) is commonly represented as striking a compromise on the question of state preemption: states would be permitted to impose more stringent controls on GHG emissions, including implementation of a state-wide cap such as that adopted in California, but the states may not "interfere" with the operation of the federal cap-and-trade program for a five-year period from 2012-2017.
  • Upon closer inspection, however, the Bill appears to cede expansive authority to states to adopt measures that would directly impact the nature and scope of the federal cap-and-trade program, including the availability of allowances and their cost in the new carbon marketplace.
    • Although states would not be permitted to establish their own cap-and-trade programs as such, they would be permitted to require stationary sources to surrender and retire federal emission allowances and offsets under state programs. Those requirements could be imposed above and beyond the compliance requirements established by Congress under the federal program, including during the "five year moratorium period."
    • A sufficiently large enough state (i.e., California) or group of states that takes advantage of this authority would therefore be able to reduce the total amount of federal allowances available in the national cap-and-trade program. Because the number of allowances in the system directly affects their market value, a state could take unilateral actions that could significantly raise the price of allowances and offset credits throughout the entire country (in effect, increasing the taxing effect of cap-and-trade across the country).
    • Put differently, the Bill establishes a bucket of allowances available to covered entities each year, tied to a 2005 baseline. Those allowances are to be reduced to a specific level in the bucket on a schedule intended by Congress to achieve a given target of emissions reductions, with assumptions about the related cost of those reductions throughout the economy.
    • But the Bill effectively allows California (and other states) to poke a hole in the bottom of that bucket and drain federal allowances out of the national program by forcing them to be surrendered by sources within the state. Indeed, the Bill gives states the express authority to adjust the size of that hole without regard to any national allowance budget set by Congress.
    • For example, California could require sources in the state to return to 1990 (Kyoto) emissions levels. To do so, those sources would need to acquire allowances from the federal pot, draining them from the available national allowance bucket. Given its size, the aggressiveness of the non-reviewable regulatory targets decided upon by California, not Congress, would effectively determine the level of allowances in the national bucket.
    • There is no dispute that the level of available allowances in the bucket determines the price of each allowance within the bucket. And because the price of allowances will in turn flow throughout the entire economy, all sectors of the national economy could be dramatically affected by a large state’s policy choices on emissions targets.

TEXTUAL ANALYSIS

  • Section 335 of the Bill sets out the preemption language that precludes a state from implementing or enforcing a cap and trade program during the years 2012-2017. The provision narrowly defines the term "cap-and-trade," however, to encompass only those programs in which "a State .. issues ... emission allowances."
  • Section 334 of the Bill, by contrast, expressly permits a State to "require surrender to the State .... of emission allowances or offset credits established or issued under this Act [i.e., the new federal program]," and to "require the use of such allowances or credits as a means of demonstrating compliance with requirements established by a State."
  • These provisions appear to be designed intentionally to give the states the ability to adjust the level of federal emission allowances or credits available within the federal program, based on controls that they impose on stationary source emissions at the state level.

RELEVANT EXCERPTS FROM WAXMAN -MARKEY BILL (H.R. 2454)

SEC. 334. STATES.

Section 116 of the Clean Air Act (42 U.S.C. 7416) is amended by adding the following at the end thereof:

‘‘For the purposes of this section, the phrases ‘standard or limitation respecting emissions of air pollutants’ and ‘requirements respecting control or abatement of air pollution’ shall include any provision to: cap greenhouse gas emissions, require surrender to the State or a political subdivision thereof of emission allowances or offset credits established or issued under this Act, and require the use of such allowances or credits as a means of demonstrating compliance with requirements established by a State or political subdivision thereof.’’

SEC. 335. STATE PROGRAMS.

Title VIII of the Clean Air Act, as added by section 331 of this Act and amended by several sections of this Act, is further amended by adding after part E (as added by section 333(c) of this Act) the following new part:

“PART F—MISCELLANEOUS

‘‘SEC. 861. STATE PROGRAMS.

‘‘Notwithstanding section 116, no State or political subdivision thereof shall implement or enforce a cap and trade program that covers any capped emissions emitted during the years 2012 through 2017. For purposes of this section, the term ‘cap and trade program’ means a system of greenhouse gas regulation under which a State or political subdivision issues a limited number of tradable instruments in the nature of emission allowances and requires that sources within its jurisdiction surrender such tradeable instruments for each unit of greenhouse gases emitted during a compliance period. For purposes of this section, a ‘cap-and-trade program’ does not include a target or limit on greenhouse gas emissions adopted by a State or political subdivision that is implemented other than through the issuance and surrender of a limited number of tradable instruments in the nature of emission allowances, nor does it include any other standard, limit, regulation, or program to reduce greenhouse gas emissions that is not implemented through the issuance and surrender of a limited number of tradeable instruments in the nature of emission allowances. For purposes of this section, the term ‘cap and trade program’ does not include, among other things, fleet-wide motor vehicle emission requirements that allow greater emissions with increased vehicle production, or requirements that fuels, or other products, meet an average pollution emission rate or lifecycle greenhouse gas standard."

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