Last week, the Justice Department sued the state of California and nonprofit partner Western Climate Initiative for its partnership with the province of Québec on the linkage of the two governments’ carbon emissions trading scheme.
The lawsuit is the latest in a series of efforts from the administration to dismantle climate policy and environmental protections. California is fighting back, but with WCI being one of the only two cap-and-invest programs in the U.S., the move against the state can have larger implications for subnational carbon trading in the country and around the world.
Crucially, the ability for governments to collaborate and create efficiencies in reducing greenhouse gas emissions is key to the implementation of the Paris Agreement – already in trouble as political unrest forced Chile to announce their inability to host, and the official withdrawal of the U.S. expected next week.
Cap-and-trade in California and WCI
California’s cap-and-trade program, launched in 2013, is one of the major policies in the state to address greenhouse gas emissions reductions. It is the fourth largest program of its kind in the world – following the cap-and-trade programs of the European Union, the Republic of Korea, and the Chinese province of Guangdong – and the largest cap-and-trade system in North America, after the Regional Greenhouse Gas Initiative (RGGI) in the Northeastern United States.
The market is linked to the Canadian province of Québec, allowing for businesses in one jurisdiction to use emission allowances issued by one or the other for compliance. The linkage broadens the number of businesses under the cap, leading to economic efficiencies and a more liquid market.
Western Climate Initiative, Inc. is a 501 non-profit corporation which administers the shared emissions trading market between the American state of California and the Canadian province of Québec. WCI is named in the lawsuit, along with several of its board members, Governor Newsom, The California Air Resources Board, and its Chairwoman.
“The White House continues to prioritize vendettas and self interest in their court cases against California. Their argument against the Governor, Air Resource Board, and Western Climate Initiative holds no legitimacy and is only an attempt to sabotage the progress being made in the state. The President should be promoting businesses, states, and communities to be working together on climate solutions, not attacking it,” says Michael Green, Executive Director of Climate XChange.
Filed in the Eastern District of California, the lawsuit against the state alleges that the cap-and-trade program is unlawful because it includes the Canadian province of Québec – citing the constitutional prohibition on states entering into their own treaties with foreign governments.
“Carbon pollution knows no borders, and the Trump administration’s abysmal record of denying climate change and propping up big polluters makes cross-border collaboration all the more necessary,” the state’s Governor Gavin Newsom said in a statement. “This latest attack shows that the White House has its head in the sand when it comes to climate change and serves no purpose other than continued political retribution.”
The suit rests on a series of claims, the principal one being the constitutional challenge on states entering treaties. However, there is a strong case to be made in defense of this very point. To begin with, the cap-and-trade market links are not a treaty, as parties can voluntarily leave the agreement without any enforceable repercussion (as demonstrated by Ontario pulling out of the program last year).
Moreover, an additional claim rests on the need for approval from Congress to enter into such subnational agreements. However, there is a large precedent for subnational coordination and cooperation across borders, which in many instances, is necessary due to the size of the federal government and the practical matters that need to be dealt with. Historically, there has been no challenge from the federal government as it relates to agreements between the states and provinces on matters relating to environmental concern, border security, and other matters.
We spoke to Nicholas van Aelstyn, a partner in the Real Estate, Land Use and Environmental Practice Group in Sheppard Mullin’s San Francisco office, about the lawsuit and its implications on the program and larger carbon markets. Nicholas has also represented the International Emissions Trading Association (IETA) and others as intervenor defendants in the lawsuit challenging California’s offsets program, Our Children’s Earth Foundation v. California Air Resources Board (2015); and prepared an amicus brief for IETA and others in the lawsuit challenging California’s GHG emission allowance auctions, California Chamber of Commerce, et al. v. California Air Resources Board, (2017).
“I would argue it does not deem [the program] invalid. States across the country have been entering into these types of agreements with Canada and Mexico in order to address localized issues for over 80 years. For example in the Great Lakes, where things also have not needed Congress’s approval to move forward.”
The case, therefore, only challenges the linkage with Québec, not necessarily the programs onto themselves. Therefore, even if the lawsuit does prevail, the programs can continue to operate, as long as they de-link. However, this could potentially result in both markets becoming more inefficient and illiquid.
What this could mean for carbon markets
The most significant consequence of this move could in fact be the chilling effect the litigation sends to the markets more generally, and the pause it might give to other states or jurisdictions looking to move forward with emissions reductions strategies that may be linked with California or other markets.
This could in fact be the worst thing it could do, especially right now. Nicholas added that the lawsuit in itself might in fact be a much less immediate danger than the fundamental signal it sends about the role – and ability – of subnational entities to move forward with climate action in the absence of federal policy. In essence, the federal government is going after the ability of subnational jurisdictions to link up with each other, which would severely imperil the path forward in advancing climate actions around the world.
“Linkage not only creates market efficiency but allows for the opportunity for investment into communities that otherwise would not be able to access capital needed to reduce emissions,” says Michael Green, Executive Director of Climate XChange. Adding, “this is crucially important in the context of equity and accelerating the transition towards a low carbon economy globally.”
This is particularly important in the context of the Paris Agreement. The main mechanism for emissions reductions within it are Nationally Determined Contributions (NDCs). The very premise of the Agreement rests on bottom-up approaches to emissions reductions rather than top-down government action – but achieving those NDCs will require deep cooperation and linkages.
An important step in advancing goals under the Agreement will be the adoption of carbon pollution pricing – one of the most effective policies to directly reduce emissions. Article 6 of the Paris Agreement provides a foundation for international cooperation through markets, and encourages linkage across state boundaries to promote efficiency and share emissions reductions opportunities. The creation of an international trading mechanism that allows for the linking, transfer and trading among different entities is a scalable solution to both help achieve NDCs and finance mitigation and adaptation projects efficiently.
The operational, legal, and logistical aspects of such international markets are set to be a main topic in the upcoming COP negotiation – initially scheduled to take place in Santiago, Chile, but now relocated to Madrid, Span – in December of this year. However, the official U.S. withdrawal, added to the pending litigation against California can easily have ripple effects and implications as parties negotiate these terms.
The rest of the world has already been dealing with the U.S. signaling its intent to withdraw from the Agreement and forfeiting its leadership in the negotiations – but next week on November 4th, is the official date when President Trump can actually send a letter of intent to withdraw the U.S. Under its terms, “a party may withdraw from the Accord one year after providing notice of intent to withdraw, but such notice may be given no earlier than three years after the Accord has entered into force for that country.” This is the clause that has until now, prevented the administration from formally withdrawing the U.S. from the Agreement. Yet this year’s negotiations would be the first time the country is no longer officially part of it.
While the legal challenge continues, it is critical for states considering moving forward with collaborative, smart climate policy to show both the federal administration, and the world, that the United States is more than willing and able to continue participating in ambitious leadership with the world. The alternative, unfortunately, is that the country would forfeit its ability to influence the terms under which these programs are developed.
Moreover, this is a critical moment for states and stakeholders to show willingness to move forward instead of bending to the threats and intimidation of this administration. Solidarity in this moment is crucial, and states here in the U.S. as well as other subnational jurisdictions need to continue to move forward with the plans and ambition necessary to not just comply with the terms of the Paris Agreement, but far exceed them. The rollback of comprehensive legislation and robust programs like the WCI market cannot be set as precedent, and in fact, it is imperative that other states move forward quickly and comprehensively with climate solutions in order to create a critical mass and continue moving forward with the solutions we know we need.