Climate Legislation Federalism Choices: Reflections After Murkowski, Brown and in Anticipation of the Forthcoming Kerry-Graham-Lieberman Bill

Federalism battles over state roles under federal climate legislation may have appeared settled, but they are once again under debate. The previous leading bills–the Waxman-Markey bill passed by the House, and the Boxer-Kerry bill passed out of a committee in the Senate–lost momentum several months ago. After several months of legislative inaction, Senators Kerry, Graham, and Lieberman have been working on a new piece of climate legislation. After the senators’ comments indicated that this bill might broadly undercut state and local government actions to address climate risks, fourteen senators and a group of leaders of state environmental agencies recently sent letters to Kerry, Graham, and Lieberman arguing for preservation of state authority to address climate ills. These letters show that some national and state leaders appreciate the importance of climate federalism choices and the value of state action. However, despite historical lessons, a decade of state and local climate leadership, and risks of federal climate policy shortcomings, it is not clear if many environmentalists or enough legislators see preserving state roles as a battle worth fighting. This essay explains the federalism choices, their implications, and the main arguments for broadly and clearly preserving state and local roles.

I. Key Federalism Choices in Leading Bills and Proposed Amendments

The leading House and a Senate bills differed in some of their details, but in many respects shared similar architecture and regulatory strategies. Their key provisions would set up a greenhouse gas (GHG) cap-and-trade regime, under which GHG allowances and offset credits could be bought and sold, provided the aggregate GHG levels stayed below a declining, federally set cap. In addition, an array of other measures would either mandate or encourage lower pollution by large emitters, greater efficiency of energy-draining appliances, and smarter uses of transportation and urban planning. A smattering of provisions also would try to reward technological innovations that help address climate change causes and resulting harms.

Both of the previous leading climate bills ended up largely preserving the power of state and local governments to take their own additional actions to address climate change, with the major exception that for six years only a federal cap-and-trade regime would exist. The leading bills also confirmed with clear language that states could retire GHG allowances or perhaps charge more per in allowances per unit of GHG emissions. The net effect of the leading bills was broad preservation of state authority. States really could undertake additional steps to reduce GHG emissions, steps that would result in greater GHG emissions reductions than would be achieved by federal law alone. In addition, the previous leading bills preserved the Clean Air Act’s broad savings clause and thus would be applicable to those portions of climate legislation that amended the Clean Air Act. The net result of such bills would be creation of a federal cap and trade market, but states could regulate GHGs through other regulatory strategies. The climate bills would thus act as a regulatory “floor,” prohibiting states from pursuing a strategy of greater laxity. In short, states could clamp down on polluters more than federally required, but would not have the option to allow additional pollution. The only significant restriction would be the six year preemptive period, during which only a federal cap-and-trade regime could exist.

The Kerry-Graham-Lieberman proposal is not yet public, but advance discussions indicate that these senators, especially Senator Graham, are sympathetic to preemption of state climate efforts, alluding to concerns with a “patchwork” of state requirements and “fifty different standards,” as well as concern with “EPA regulation on top of congressional action.” One provision reportedly under consideration would even eliminate California’s longstanding authority to require motor vehicle emissions below that set as the national standard. California has been seeking authority to set standards for a low GHG emission car. It appears that many GHG emitters hope that a federal climate bill would place all climate related regulation with the federal government, and under one bill. Early indications are that the Kerry-Graham-Lieberman bill would not go this far, but might permanently preclude state, local or regional trading regimes and might also constrain EPA’s ability to rely on the CAA to regulate GHGs. In contrast, the earlier leading bills utilized only a temporary preemptive period for while the federal program was getting underway. Basically, the success or failure of US climate regulation under this new bill could be far more dependent on the integrity and rigor of the federal cap-and-trade regime than under the earlier Waxman-Markey or Boxer-Kerry bills. Of course, many questions about state and local roles remain unanswered, pending release of the bill itself.

II. Why Climate Federalism Matters: The Value of State and Local Climate Authority

Such amendments or new bills could substantially undercut additional state and local GHG regulation. Why should anyone care?

A. States have been climate leaders: Since many states have long been environmental laggards, tending to favor weakening of environmental requirements as a means to attract industry and associated employment and tax benefits, at first the battle over climate federalism and preemption choices seems like much ado about nothing. Some states will have little interest in more zealously regulating GHG emitters. But many states from time to time have come up with creative ways to improve on federal environmental law, address a risk that federal law misses, or find more effective means to achieve federal ends. In addition, in the climate regulation area, numerous states have over the past decade taken substantial steps to regulate GHGs, including creation of state-wide and regional cap-and-trade regimes. California, in particular, has been a national leader. Many states have adopted “renewable portfolio standards” and other energy efficiency measures, thereby reducing GHG emissions and also reducing other harms associated with energy production and use. Many states have also joined regional GHG cap-and-trade regimes as well.

None of these efforts are broad enough to supplant the need for federal legislation, but what is important is the benefits that such state efforts provide. As shown below, preserving state roles could, in the long run, prove essential to climate change regulatory success. The remainder of this essay sketches out in brief form the most substantial reasons for preserving state authority. It briefly touches on questions of EPA’s retained or displaced CAA authority.

B. Laxity risks: Probably the biggest risk of federal climate legislation is that it proves too lax in its cap or too slow to ratchet down GHG emissions. In such a circumstance, state action could reduce GHGs and help the nation make needed progress. States would likely only act if it became apparent that there were major political benefits accruing to that state or climate change reached crisis levels and federal efforts were clearly inadequate.

C. State and local regulation can catalyze movement for legal improvement: The possibility of state climate regulation would help maintain pressure for federal legislative improvement. State environmental regulation has long been critical in catalyzing support for federal regulation. If states are barred from regulation, or face substantial hurdles, state action as a catalyst for more stringent and effective federal statutory amendments would be lost. If a federal law was falling short, but state and local governments simply could not act at all, or were barred from taking the most attractive regulatory steps, then no one could turn to state and local governments to press for action. Polluters would likely block efforts to make federal law more stringent, but no other venue for climate action would exist. In contrast, if polluters were faced with a weak federal law and the possibility of more rigorous state regulation, then they might be willing to support more effective federal law over a wave of potential disparate state regulation.

D. State and local authority can foster innovation: Retaining state climate roles could prove critical to create conditions conducive to innovations on both the technological and regulatory front. A cap-and-trade market could create innovation incentives, but only if its cap were low enough to create economic pressure and rewards for innovations reducing emissions. Until a cap’s stringency is on the immediate horizon, innovation incentives will be weak. In contrast, states still allowed to utilize old-fashioned “best available technology” based performance standards could at a far earlier date require polluters to emit at levels no higher than that performance standard. That regulatory pressure would create market rewards for sellers of low-cost means to reduce GHG pollution.

In addition, somewhat counterintuitively, allowing for the possibility of federal, state and local climate regulation, and even different cap-and-trade regimes, could provide greater market stability and rewards for climate investment than under an exclusively federal regime. Political science literature on “policy diffusion” notes how diffusing policy authority results in more stable policy. The logic behind this insight is easily seen. With federal, state and local governments sharing climate change regulatory authority, universal change or deregulation is harder to achieve, plus regulatory efforts tailored to the capacities and interests of the different levels of government could reduce risks of misfitting regulation. Furthermore, with federal, state and local regulatory authority, incremental adjustment at each level of regulation can provide regulatory lessons and reduce regulatory inefficiencies. For an investor in GHG allowances or products that reduce GHG emissions, the critical impetus is profits. And apart from some efficiency technologies that could generate value even without climate regulation and companies whose success hinges in part of their “green” reputation, most climate-related businesses depend in substantial part on a regulation-driven market. The pressures of a stringent cap, or an impending cap decline, or mandate of lowered emissions, create the rewards for the creator of valuable innovations.

In contrast, if under a preemptive climate regime opponents of climate regulation could pull the plug on the entire body of climate regulation by creating exemptions to federal law, or barring implementation spending, or on a wholesale basis by repealing a federal law, the market would be destroyed. The risk of wholesale abandonment of climate regulation and GHG allowance markets would lead all to discount the value of interests traded under a cap-and-trade scheme. If, however, state and local regulations and state and regional cap-and-trade regimes remained in place or a possibility, then innovators would have a backstop body of regulation that would ensure some market stability, even if the market were weakened. California alone is a massive economy and market; if California, a few other states and other nations continued to regulate GHG emissions and provided alternative carbon markets, market rewards would remain. In addition, incentives for industry to seek federal exemptions or repeal would be lessened if state and local regulation remained a possibility; the rewards for that political investment in deregulatory outcomes would be far less since regulatory burdens could nevertheless remain.

E. State and local climate authority can foster international trust, thereby helping both domestic and international regulatory efforts: Relatedly, government and private actors all agree that if there is to be climate legislation, it ideally would be linked to an international regime that would mandate or encourage other nations also to reduce their GHG emissions. Such international efforts have been foundering, with distrust and concerns about one country regulating with rigor and others doing nothing undercutting an international deal. Concern with the lack of an international deal also undercuts domestic legislative efforts. Both basic logic and game theory analysis reveal that international agreement will hinge on finding ways for countries to signal their commitments to each other. Much as investors in climate-related innovations need assurance that regulation will be stable, nations need to know they can trust each other. A federal climate bill that preempts state and local efforts would be far more vulnerable to wholesale implementation failure or repeal than a law that left state and local authority intact. Protected state and local climate authority would signal confidence in the federal bill and instill confidence in other nations about the United States commitment to regulate GHGs. F. State and local climate authority reduces the rewards to efforts to derail a climate law: Recent events illuminate these risks of a federal climate regulation monopoly and reasons to preserve state and local climate turf. If the federal legislature took an anti-environmental swing, or remained divided, or the legislature and White House were controlled by different parties, federal efforts to weaken or create exemptions to climate obligations would be likely. In recent months, with Senator Brown’s election to Senator Kennedy’s long-held seat, we are reminded of the tenuous and temporary nature of political majorities. In addition, during recent months Senator Murkowski has pushed hard for a focused piece of federal legislation that would bar US EPA from regulating GHGs from motor vehicles and might have even broader regulation-precluding impact. That particular effort appears unlikely to succeed, but if climate regulation is all federal, then similar future efforts to provide legislative carveouts and exemptions are a near certainty. The political gain from such efforts would be greatly lessened if state and local regulation remained in place or at least a possibility. Thus, retaining state and local authority would foster regulatory innovation, technological innovation, and foster trust with other nations.

G. State and local governments really can serve as regulatory laboratories: Relatedly, states may come up with additional and innovative regulatory ideas long before federal legislators or regulators. After all, different states will see different sorts of climate harms and also different possible upsides of efforts to combat climate change, especially for businesses seeing profit in reduced pollution. By allowing state experimentation, a non-preemptive climate law would harness the benefits of states as laboratories of innovation. All it takes is a state innovator, or several state innovators, to demonstrate new means to further regulatory ends.

The experience of state brownfield law innovations when the federal Superfund law proved dysfunctional provides an important analogous lesson. States innovated following enactment of a federal Superfund law that frustrated both private sector and state and local goals. States came up with improvements, other states learned and imitated, and the federal government through regulatory measures sought to reduce the harshness and liability uncertainty under the federal law. Ultimately, a federal legislative amendment encouraging brownfields reuse was passed. It modeled improvements on those state innovations. Retaining latitude for such state and local climate-related incremental improvement, experimentation and innovation would be of even greater value.

H. With implementation delays, state and local authority can serve to maintain progress and undercut regulatory derailment efforts: Even without changes in legislative coalitions or piecemeal efforts to weaken a federal climate bill, regulatory failure by implementing federal agencies is a substantial risk. Agencies with implementing obligations under a large climate bill are likely to be swamped and fall way behind. Swamped federal regulators would likely oppose new work and mandates, especially if such work also required them to concede errors or the inadequacy of earlier efforts; little political reward exists for such confessions of error and imprudence. Furthermore, prompting large collective institutions to overcome inertia is always hard. Adjusting a regulation-created market would be especially difficult once stakeholders invested in its choices, or perhaps invested in light on anticipated implementation failure. Retaining state and local climate authority would serve to check such inertia and resistance to legal change. It would also undercut the value of efforts to derail implementation of a federal climate law.

If a federal climate bill strongly preserved state and local authority, then legislative inertia would work in favor of retaining those state roles. Anyone seeking to derail climate efforts would not only have to repeal federal law, but they would have to gain support of legislators to disempower the states. Federalism politics are far more complicated and less predictable along party lines than are pro or anti-environmental lines, or pro or anti-climate legislation lines.

I. What would be preempted when GHGs are ubiquitous? Furthermore, efforts to preempt state and local climate efforts would invariably create difficult line-drawing challenges. What sorts of regulation would be preempted? GHGs are seldom regulated just for their climate effects. Either they cause other harms or they are emitted with other co-pollutants. And sometimes a pollution source will be the logical subject of additional regulation due to the combination of such pollution effects, or perhaps due to other state and local goals.

For example, energy production tends to use vast amounts of water. States vulnerable to water shortages might push hard for greater energy efficiency at both the supply and consumer end to reduce water usage, but in so doing also clamp down on GHG emissions. Polluters might seek to preempt such regulation. Litigation over partially preemptive provisions is a near certainty.

Finally, the “patchwork” and “fifty different states” arguments demand attention. The very ubiquity of GHG sources undercuts this argument. With a diversity of sources, and dozens of different sorts of regulation directly or indirectly influencing GHG emission levels, a truly preemptive federal law would have a massive disabling effect on the states.

And if one turns to large stationary sources of pollution, regulatory uniformity is not actually necessary; large stationary source pollution control requirements have always been individualized, even if set with reference to assessment of federal information clearinghouses. Perhaps more important, in the areas where stationary source emissions are subject to emissions levels based on uniform federal regulatory requirements, those requirements have historically only been a regulatory “floor.” States and local governments have always had latitude to require those sources to do better than under federal regulations that are often outdated and far from reflective of state-of-the-art emission controls. Far more important have been individually set emission limitation under strategies such as the Clean Air Act’s New Source Review (NSR) program. Under the NSR program, each new or modified facility’s required level of control is set on a permit-by-permit basis based on referenced best performers or most stringent limitations imposed on other sources. Such permit-by-permit review reduces the risk of stale and lax requirements and keeps progress moving. In the area of climate change, where innovation and pollution reductions are critical, imposing true federal uniformity of obligations could thus be a huge mistake. For similar reasons, EPA’s authority to address climate risks under the CAA provides a similar beneficial institutional diversity. Even if climate legislation ends up weak, flawed, or delayed in implementation, EPA authority to regulate GHGs under the CAA would speed up climate progress and investment. That possibility would also serve to check polluters who might otherwise devote major resources to derail implementation of a federal climate bill.

Conclusion

Monopolies are always problematic. Recently floated proposals to preclude state climate efforts or create hurdles to such actions would leave this nation’s climate change efforts almost completely dependent on a federal regulatory monopoly. Large polluters would of course prefer less regulation, and ideally more lax regulation, so predictably would favor such a change. However, the costs of such a fundamental change in federal climate legislation could be huge. Over the past decade, numerous states and local governments have been climate change innovators, prompting greater interest in federal legislation. State and local efforts have also provided lessons for the federal government, other nations, and international negotiators, devising new strategies and even creating statewide and regional cap-and-trade regimes. Federal law should harness, not destroy, incentives for ongoing adjustment and improvement in reducing GHG emissions. Positive incentives for climate progress and innovation would be substantially undercut if only the federal government could play a climate change role.

Climate preemption arguments should be seen clearly for what they are—they are fundamentally efforts to undercut climate progress. The more a federal climate law uses preemptive strategies, the more all hopes for climate progress will rest on one vulnerable and imperfect federal vessel. Institutional diversity retaining federal, state and local roles would be more stable and conducive to market and regulatory innovation, and even an international climate agreement.