Carbon and the Constitution


State GHG policies confront federal roadblocks.

Fortnightly Magazine - April 2009

In the absence of federal action in the United States, several states have taken the lead with innovative carbon regulatory schemes. Ten Eastern states have combined into the Regional Greenhouse Gas Initiative (RGGI) to regulate CO2 from their power plants,1 California has initiated a comprehensive regulation of all greenhouse gases (GHGs) from all sources,2 and other Western3 and Midwestern4 states are undertaking global-warming mitigation programs.

However, significant constitutional questions accompany some of the legal designs of the carbon-reduction schemes initiated by these leading states. If not addressed, those could embroil state carbon-reduction efforts in litigation while the world grows hotter. First, there are Commerce Clause issues: Because states do not want the carbon costs that they impose on their in-state power generators to encourage higher-carbon power imports from out-of-state, they are moving to secure their borders, or at least are on the verge of imposing surcharges to dissuade intruding power flows.5 States are trying to restrict leakage past their borders of less-costly power with carbon that isn’t regulated or affected, which easily leaps state boundaries. Because the states may employ point-of-origin regulation to create carbon-regulated islands into which externally-produced wholesale power can’t enter without penalty, they will have to navigate limitations on this under the dormant Commerce Clause of the Constitution.

Second, there are Constitutional Supremacy Clause issues. In the first instance of U.S. carbon regulation, which began in January in the Northeast, RGGI states implemented the first total auction of rights to emit pollutants in the history of environmental regulation. In all former environmental regulation, emission rights were allocated to currently emitting sources without charge.6 States officially have expressed that the purpose of this auction is to increase the price for certain high-emitting carbon power plant operations (coal in particular), as a way to change the dispatch order by the regional independent system operator (ISO), which controls plant operating schedules in order of lowest cost of operation. When states deliberately, even if indirectly, change wholesale electric power dispatch order by use of regulations inflating the otherwise federally jurisdictional wholesale power price at which power plants are approved to operate, those regulations can be questioned constitutionally as not within state power pursuant to the Supremacy Clause.

Legally sustainable carbon policy is imperative and urgent. Some of the most knowledgeable climatologists argue that we have only until 2015 radically to reduce the emission rate of CO2, or face a very different planet.7 The first lawsuit against the East Coast RGGI carbon regulation was initiated by Indeck Energy in 2009. It does little to meet these urgent goals if state carbon restrictions result in protracted litigation.

GHGs in the States

Twenty-three U.S. states have elected to regulate carbon emissions, with all focusing initially on the power sectors. The 10 states that are participating in the RGGI scheme and California are significant because in scale-combined, they approach the entire emissions total of the nation of Japan, one of the largest Kyoto participants. California alone is among the sixteen highest GHG-emitting entities among world nations. California’s GHG emissions are comparable to those of Indonesia, the fourth most populous nation in the world.

Beginning in 2003, Governor George Pataki of New York initiated the effort by inviting neighboring states to participate in a regional cap-and-trade emissions program. The RGGI program8 Guiding Principles Agreement provided: “The initial phase of the cap and trade program will entail the allocation and trading of carbon dioxide allowances to and by sources in the power sector only.” However, the 10 states implementing the RGGI will auction allowances to essentially any bidder, not an allocation to affected facilities as contemplated in the Guiding Principles Agreement. This change is legally significant. In 2009, CO2 emissions from power plants in the region are capped at current levels and the cap will remain in place until 2015. RGGI states then would begin the process of incrementally reducing power-plant emissions, with the goal of achieving a 10-percent reduction by 2019.

It’s unprecedented in U.S. environmental regulation history for emissions allocations to be auctioned rather than given to existing sources.9 Some observers have noted that even five years ago, auctioning allowances for emissions was thought to be a “crazy idea.”10 For Massachusetts, this auction even at only $5 per allowance would raise more than $100 million annually.11

There also is little experience internationally for auctioning any emission allowances. In the history of the European Union (EU) carbon program, allowances have been given away for free, mirroring the U.S. Clean Air Act emission-allowance programs in which almost all allowances have been given away to regulated emitters without charge. The EU European Trading Scheme after 2012 likely will shift to an auction of all power-sector allowances in the EU,12 building on the earlier decisions on RGGI in the United States.

On the other side of the country, California is taking a different approach to regulating GHGs. The California carbon scheme requires that California reduce GHG emissions to 1990 levels by 2020, counting all in-state and out-of-state generation used to serve California’s electric load.13 California’s GHG emissions in 2004 already were almost 15 percent greater than in the 1990s. This equates to an eventual estimated 25-percent reduction from business-as-usual levels.14

In its Final Report, the California Market Advisory Committee (MAC) recommends an initial scheme of free allocation of some allowances and auctioning the other share of allowances, with the percentage of allowances auctioned increasing over time. This final MAC recommendation represents a significant departure from the original legislative scheme, and is legally significant. In its legislation, California intended to regulate GHGs from the utility sector by regulating all retail electric load-serving entities (LSEs), or retailers of power. Legally, all of these LSEs are located in-state or at least doing business in-state, and regulation would be imposed at the retail level on California activities.

However, this MAC recommendation, which in 2008 was accepted to be implemented by the California Air Resources Board (CARB) and California Public Utilities Commission (CPUC), shifts the point of control upstream to encompass power wholesalers at the first-seller transaction.15 This change makes it similar to the RGGI point of regulation. With the restructuring of California’s electric market in 1998 and the subsequent restructuring in 2001 due to an electric energy crisis,16 most of the power retailed in the state first goes through a wholesale sale, which legally isn’t within state regulatory jurisdiction. California’s choice to regulate carbon at the point of generation allows California to get at the problem of high-carbon power leakage into the state.

California’s power comes significantly from outside the state: Roughly one-half of California’s electric-sector GHG emissions are the result of electric power imports from out-of-state, now generated greatly by coal-fired power plants.17 While California has little in-state coal generation, various California LSEs, particularly the Los Angeles Department of Water and Power (LADWP),18 import significant amounts of coal-fired power from various other states. LADWP has argued that it serves a lower-income population and that the change to a first-seller point of CO2 regulation is “unfair treatment” and targets Southern California.19 The California legislation, A.B. 32, specifically requires CARB to consider the cumulative impact of direct and indirect sources of emissions on adversely affected communities.

Southern California Edison proposed coal-fired generators should receive free allowances to shield ratepayers from carbon allowance costs.20 LADWP requested an opt-out option from the cap-and-trade requirements. The utility stated that if it had to comply with California’s carbon cap-and-trade requirements, it either would have to jettison its renewable energy program or raise rates substantially.

If the California MAC recommendations are followed when the program begins in 2012, California also would encompass the individual wholesale generator level. Implementation would have to navigate the Supremacy Clause and the Compact Clause requirements under the U.S. Constitution.

Controlling Leakage

A major practical and policy problem identified by the RGGI states, as well as California, is so-called “leakage.” Leakage occurs when “generators outside of the capped region export[...] power to load-serving entities ... within the region without being covered by the regional carbon cap,”21 and is defined by the RGGI scheme “as the increase in CO2 emissions outside the RGGI region that may ‘net out’ (or partially eliminate) a portion of the emissions reductions made within the RGGI region under the Program.”22

The reality is that leakage will occur as CO2-producing activities that are regulated and limited under a particular region’s program move outside that region, thereby eliminating net reductions in emissions due to the shift of generation location. Developers in non-carbon-regulated states will have economic incentives to build and operate CO2-emitting facilities where they do not have to incur the cost of acquiring allowances and complying with regulations. This results in negating the environmental improvements that would otherwise result from the carbon-reduction program.23 For example, since RGGI includes East Coast states, the plants outside the RGGI region are to the west and south—or upwind in terms of migration of power plant emissions. A shift to out-of-region generation is a shift to additional up-wind pollutants from heavier operating polluting power plants, producing electricity that otherwise would have been generated by cleaner RGGI-region compliant projects.

The results of modeling commissioned by the RGGI Staff Working Group found that a substantial proportion of CO2 emissions avoided by RGGI will be offset by corresponding increases in non-RGGI states. Leakage from neighboring states like Pennsylvania is a significant concern with RGGI. RGGI is projected to have a significant leakage problem even if CO2 allowances sell for only the modest price of $7 per ton of CO2. The early RGGI modeling showed leakage as high as 90 percent of power depending on the programmatic assumptions. The final models predict annual leakage of CO2 of between 40 percent and 57 percent over the life of the RGGI program.

An increase of unregulated power imports from uncapped coal-fired plants in states such as Ohio and Pennsylvania of even 1.5 percent to 2.5 percent would wipe out all scheduled emissions reductions from regulated generators within the carbon-regulated RGGI region.24 RGGI states such as New Jersey, New York, Maryland and Delaware are bordered by states that are not signatories to RGGI and historically produce a large volume of electricity from coal-fired power plants. There are multi-billion dollar projects proceeding to build electric transmission infrastructure that would allow electricity generated by high-carbon-emission coal-fired power plants to travel east into the RGGI region.

The largest of these projects is the American Electric Power (AEP) Interstate Project, which would put in place a 765-kV transmission line stretching from West Virginia to New Jersey. The Trans-Allegheny Interstate Line (TrAIL) Project, being undertaken by Allegheny Power to enhance transmission capability from western Pennsylvania to Maryland and Virginia, and the Meadow Brook-Loudon 500-kV line proposed by Dominion Resources to carry power into the Washington, D.C., metropolitan area, are other examples.

Existing RGGI state leakage-control efforts are underway. The New Jersey energy regulator is required to develop a plan to reduce leakage of power into the state by July 2009. Public Service Electric & Gas Company (PSEG) proposed a plan to have New Jersey curtail imports of high-carbon power from out-of-state cheaper power suppliers by requiring regulated retailers to purchase a certain amount of power from RGGI-covered suppliers.25 Even at a modest auction price of $6.35 per ton for RGGI allowances, the rationale is that leakage into the state would stop RGGI’s goal of fostering low-carbon power by increasing the import of less expensive high-carbon power into the state by 26 percent to 35 percent. The New Jersey Public Advocate responded that it would require a subsidy to gas plants of about $50 per MWh to make state gas-fired plants as cost-efficient as out-of-state coal-fired plants.

While these regulatory responses would deal with leakage, they also would enact a form of regulation that discriminates against power based on geographic point of origin. New Jersey state legislation prohibits energy-efficiency measures from being deployed to mitigate potential leakage, unless other methods are found to violate the Constitution. It thus favors regulation of conduct, rather than incentives for demand-side management (DSM) alternatives or conservation. The New Jersey Public Advocate criticized, as creating Commerce Clause violations, another proposal for New Jersey to extend the state’s RGGI cap to cover imported generation. To stem this inflow of power from outside the RGGI control region, the RGGI states now are discussing implementing some type of control, regulation, or tax to discourage cheaper power imports to LSEs from unregulated states external to the RGGI regions.26 Such regulation by the RGGI states will have to target power flows based on their state of power generation origin, distinguishing between those from RGGI states and non-RGGI states. Such controls on the free flow of electricity from other states, where electricity is a commodity or service that is a quintessential article in interstate commerce, run up against the dormant Commerce Clause.

The effort against leakage by the early states is ultimately a fight of “us” (a state regulating carbon from its power generators) versus “them” (neighboring states or foreign countries that do not similarly regulate carbon emissions from their power sectors). This raises dormant Commerce Clause concerns, and invokes the most exacting strict-scrutiny legal standard, under which few similar state regulations have survived.

Commerce Clause Requirements

The specific mechanism for structuring and protecting state RGGI or California carbon regulations must not run afoul of constitutional Commerce Clause requirements. The Supreme Court has recognized that “it is difficult to conceive of a more basic element of interstate commerce than electric energy, a product used in virtually every home and every commercial or manufacturing facility.”27 Therefore, although states are permitted to promote in-state businesses, they are not permitted to protect those businesses from out-of-state competition by enacting laws that “benefit in-state economic interests by burdening out-of-state competitors.”28 The power of the Commerce Clause “has long been understood to have a ‘negative’ aspect that denies the States the power unjustifiably to discriminate against or burden the interstate flow of articles of commerce.”29

Geographically-based discrimination is evaluated under a strict-scrutiny test applied by the federal courts, and such a statute, with rare exceptions, is found to be per se a violation of the dormant Commerce Clause.30 Unless the state can identify a legitimate and compelling local interest that can be served by no other means, any statute or regulation that facially discriminates against interstate commerce by giving “differential treatment [to] in-state and out-of-state economic interests that benefits the former and burdens the latter” will be “virtually per se invalid.”31

In the U.S. Supreme Court decision in West Lynn Creamery, Inc. v. Healy,32 the court found a violation of the dormant Commerce Clause in the state regulatory scheme. The combination of tax on interstate articles and subsidized projects together violated the Commerce Clause. RGGI states will use the proceeds of their carbon auction for in-state purposes or relief. In Healy, the environmental purpose of the Massachusetts state regulation did not save the regulation from being struck by the Supreme Court. The state argued that any incidental burden on interstate commerce resulting from the pricing order in Healy is outweighed by local benefits, including “protecting unique open space and related benefits.”33 The Court states that “even if environmental preservation were the central purpose of the pricing order, that would not be sufficient to uphold a discriminatory regulation.”34

The use of facially discriminatory economic means taints an otherwise laudable end and violates the dormant Commerce Clause. In New Jersey v. Philadelphia, the Court held that however legitimate a state’s ultimate environmental protection purpose, such may not be accomplished by discriminating against out-of-state articles of commerce, unless justified by some rationale apart from place of origin.35 The Court consistently has maintained that a Commerce Clause violation occurs from either discriminatory purpose or discriminatory effect—either by the design or application of regulation.36

The narrow quarantine exception was recognized in Maine v. Taylor.37 The state demonstrated in that case a distinct danger to the ecosystem and no less discriminatory way to realize the state interest than quarantining the commodity out-of-state.38 Even in applying this exception, the Supreme Court stated that the “Commerce Clause significantly limits the ability of States and localities to regulate or otherwise burden the flow of interstate commerce, but it does not elevate free trade above all other values.”39

Problems exist, however, in extending the holding of Maine v. Taylor to a carbon-regulating scheme for out-of-state electricity. First, in contrast to a key fact in Taylor, in-state CO2 is identical to out-of-region CO2. Second, CO2 impact isn’t local and isolated as is the environmental toxin in Taylor; cumulatively, climate change poses an international problem. Third, the state can pursue less discriminatory alternatives to achieve CO2 reductions,40 including some proposed by committees associated with RGGI. Therefore, the state has a hard time legally transfiguring carbon-emission regulation into the judicially limited last-resort quarantine exception recognized in Taylor.

Whether electricity is a “good” under state law is debatable,41 but it shouldn’t fundamentally alter the Commerce Clause analysis, even though no one has examined whether power-plant emissions are articles in commerce. A surcharge on higher-carbon, out-of-state, wholesale power also won’t pass muster. While the state can segment the market among resources, a state can’t discriminate in price or require an arbitrary price be paid for wholesale power.

The U.S. utility industry and its policymakers have constructed a series of legal paradigms that, for contractual, tort, and other commercial purposes, make assumptions about how electricity is transacted commercially.42 In New England Power Co. v. New Hampshire, the Supreme Court overturned a New Hampshire PUC regulation that restricted the export of privately-owned hydroelectric energy produced within the state by a multi-state wholesale company.43 The New Hampshire regulation of the benefits of in-state hydroelectric power, based exclusively on its point of origin, attempted to reserve cheaper hydroelectric power for consumers within the state. The Supreme Court held such discriminatory pricing of interstate power through state regulation to be facially discriminatory and a violation of the dormant Commerce Clause, in spite of the states’ traditional power to regulate the retail electric market. It’s also clear that regulation in one state can’t affect the actual physical flow of power from, or in, another state.

Federal Preemption and State Regulation

Even putting aside regulatory mechanisms to address leakage that triggers dormant Commerce Clause concerns, carbon regulatory schemes can trigger other constitutional issues involving federal preemption. This is a function of how state regulators choose to implement state carbon regulation programs by electing to auction allowances necessary to operate power plants, rather than provide them as per all other historical allowance regimes. Terry Tamminen, an energy advisor to California Governor Schwarzenegger, stated that the “potential legal challenges could pose the biggest stumbling block” to California’s climate-change initiatives.44

The RGGI Guiding Principles Agreement provided that “[t]he initial phase of the cap and trade program will entail the allocation and trading of carbon dioxide allowances to and by sources in the power sector only.”45 However, the RGGI states now include an auction of available allowances to the highest bidder, not an allocation to affected facilities requiring allowances as contemplated in the Guiding Principles Agreement.

Auctioning 100 percent of allowances will impose higher costs (via the requirement to purchase allowances) on certain high-carbon coal and oil-fired power plants. This will change the trading price of all wholesale power in the region. Because power prices are set in the three control regions of the RGGI states [New York Independent System Operator (ISO), ISO-New England, and Pennsylvania-New Jersey-Maryland ISO, also known as PJM] and in California (Cal-ISO) through a second-price auction where the highest accepted bid price for wholesale power supply for a given hour determines the price of all power (including lower bid power),46 the marginal, highest-cost unit sets the price for all power. That highest-cost unit for many hours of the day likely will come from the higher-carbon units that have to buy more allowances per kilowatt of power produced than other units.

However, this higher price will be earned by all wholesaling power suppliers under the controlling regulations, and the resulting price impact will reverberate through all power sales.47 This clearing price will be paid to every power plant that is dispatched during the hour. The marginal cost of the most expensive power purchased determines the price paid for all power at each hour, with the second price auction system employed in the control regions of each of the RGGI states.48 Those facilities that do not have to purchase allowances in order to operate and sell wholesale power (e.g., unregulated out-of-state carbon-emitting power plants selling power into an RGGI-regulated state) thus will collect a price for their wholesale power reflecting the cost of RGGI allowances embedded in the highest hourly clearing price paid for power, even though they have no RGGI compliance costs.

Major fights have erupted in California over the allocation and auction of CO2 emission allowances. One battle is whether allowances will be dispersed without charge to load-serving entities, and if so, whether the traditional load served or the traditional level of emissions should constitute the basis for distribution.49 The California investor-owned utilities in May 2008 submitted comments to regulators, urging California to allocate carbon allowances to all emission sources based on historical power output, rather than emissions output, employing a uniform GHG baseline.50 This would favor the award of allowances to less-carbon intensive sources and utilities. Surplus allowances could be sold. Dynegy and other independent power providers in California that operate higher-carbon electricity generators, believe that allowances should be distributed based on historic emissions levels, rather than power output, to “recognize the reliability benefits conferred by such sources,” and the “loss of market value of these resources.”51 However, environmental groups charge that any allocation based on historic emissions “[g]randfathering ... rewards historical polluters, penalizes early actors, could lead to windfall profits, and asks the biggest polluters to reduce their emissions the least.”52

The concept of auctioning carbon allowances and capturing substantial payments has been extremely attractive to carbon regulators across the United States. Seven Western states participating in the Western Climate Initiative also recommended that 25 percent to 75 percent of total emission allowances be auctioned in their own proposed regional market design.53 But several state regulators, including those from California and Washington, also have acknowledged that the states could be legally preempted in their efforts to regulate carbon.54

Motives for Auctioning Allowances

Environmental officials in the various carbon-regulating states have declared that the rationale for auctioning 100 percent of the carbon allowances is to increase the cost of carbon-emitting power generation and capture of profits as state revenues. In New York, for example, the lead RGGI state, the New York Department of Environmental Conservation (NYDEC) has issued public statements claiming that the decision and purpose of the auction of 100 percent of carbon allocations is to prevent affected electric generators to reduce the rate of return that power generators receive pursuant to their FERC-approved market rates, which NYDEC considers to include “excess” profits.55 Thus, the auction policy is designed to alter, through state regulation, the “just” and “reasonable wholesale interstate” rates previously established pursuant to FERC-approved tariff or market design. Thus, the auction is designed to impose and regulate carbon costs by altering the market prices at which power from different generation sources trades at the wholesale level from wholesaler to retailer.

Various documents and reports issued by the regional RGGI staff working group state that an expressed objective of the RGGI MOU is to modify the dispatch order and the carbon intensity of the existing portfolio of power generation units.56 Insofar as the state RGGI regulations are designed to change wholesale pricing of power and thus “modify the dispatch” of generating units in the wholesale market operating pursuant to FERC-approved tariffs, the system raises questions pursuant to the Federal Power Act’s grant of exclusive federal jurisdiction over such wholesale interstate matters under the Supremacy Clause and the filed-rate doctrine. Here again, motive matters. As the Supreme Court articulated in Pacific Gas & Electric Co. v. California Energy Resources Conservation and Development Commission, the stated motive of the agency regulating power resources will be taken at face value as the true motive for purposes of constitutional preemption analysis.57 The first lawsuit against the East Coast RGGI carbon regulation was initiated by Indeck Energy in 2009, and raises some Constitutional issues.

Sections 205 and 206 of the Federal Power Act empower FERC to regulate rates for the interstate or wholesale sale and transmission of electricity. In doing so, the act bestows upon FERC broad power to shape the energy markets and affect all stakeholders, including generators. The act creates a bright line between state and federal jurisdiction with wholesale power sales falling clearly and unequivocally on the federal side of the line. FERC jurisdiction preempts state regulation of wholesale power transactions and prices. The Federal Power Act defines “sale at wholesale” as any sale to any person for resale.58 FERC’s exclusive power is even broader than just wholesale power sales. FERC also regulates power transmission in interstate commerce and interstate power sales.

FERC jurisdiction is exclusive and preempts state regulation of the rates for transmission that occurs in interstate commerce. If a utility or independent power producer is subject to FERC jurisdiction and regulation, state regulation of the same operational aspects is preempted as a matter of federal law.59 Principles of preemption require a state regulatory agency to accept and pass through in retail rates all cost items deemed by FERC to be “just and reasonable,” and which otherwise are allowed.60

The “filed-rate doctrine” holds that state regulatory agencies may not second-guess or overrule on any grounds a wholesale rate determination made pursuant to federal jurisdiction.61 The Supreme Court in 1986, and again in 1988 and 2003, articulated and enforced the filed-rate doctrine.62 Therefore, states may not retain residual authority to alter the wholesale market cost of power, regardless of carbon content of that power. The court found states had no ability to tamper, directly or indirectly, with wholesale market operations approved by a FERC order or operating subject to FERC-approved tariffs.

Moreover, attempts by states indirectly or directly to promote higher wholesale energy prices for certain higher-cost low-carbon renewable energy projects have been stricken by the courts. In 1994, the Ninth Circuit Court of Appeals rejected the CPUC’s claim that it had independent authority to regulate the prices and terms for such low-carbon renewable power sales.63 Promotion of certain types of low-carbon renewable fuels for power supply, via a price preference above and beyond the FERC-established price of other wholesale power transactions, was held preempted by the Federal Power Act and stricken.

Precedent holds that a higher price set by California for renewable low-carbon electric power supply sources isn’t permissible.64 If a state is prohibited from inflating the quantity of certain renewable resources by setting higher wholesale prices for such favored technologies, it also could be prohibited from accomplishing the same tilt in wholesale prices by the opposite mechanism: inflating the wholesale operating costs of what it deems less desirable high-carbon-emitting generation resources via carbon-emission allowances. This same relative tilt in the wholesale market is achieved if high-carbon sources of power have their costs of operation increased, which decreases their ultimate position in the operation dispatch order.

A state law may not frustrate the operation of federal law, even if the state legislature has a valid purposes for the legislation.65 The wholesale price determination is reserved exclusively to federal authority.66 In Snohomish County Public Utility District No. 1 v. F.E.R.C., 471 F.3d 1053, 1080 (2006) aff’d in part and rev’d in part sub nom. Morgan Stanley Capital Group, Inc. v. Public Utility District No. 1 et al., 128 S. Ct. 2733 (2008), the court affirmed that the federal government, through FERC, must protect all stakeholders in the electric wholesale market against any state regulatory actions or mistakes. FERC has an ongoing obligation to continually monitor and police wholesale markets against impermissible actions or mistakes. Id. at 1066-67, 1080.

The RGGI states and California operate under FERC-approved terms and conditions for ISOs.67 The respective ISOs manage the electricity transmission grid and oversee wholesale electricity markets. All power sold into the grid, which is managed by the ISO, is sold under wholesale terms and conditions that are part of its approved FERC tariff.

Bullet-Proof Carbon Regulation

First, because states do not want the carbon-reduction costs they impose on their in-state generators to attract higher-carbon power from out-of-state power imports, they seek virtually to secure the borders, or at least surcharge and dissuade the intruding power flows. Because the states are attempting not only to regulate carbon produced within their borders, but also create carbon-regulated islands into which externally-produced wholesale power can no longer enter freely without penalty, there are Commerce Clause issues. Wholesale electricity moves in interstate commerce at near the speed of light. While it’s perfectly understandable why certain states see this as a policy imperative, their actions trip over historic legal prohibitions against impeding the free flow of articles in commerce based on the geographic point of origin of that commerce.

Second, the decision of most of these states to maximize associated revenues by auctioning all of their newly created allocations to emit carbon triggers Supremacy Clause concerns. Again here, the motives may be worthy: public money is limited, carbon emissions loom large on the policy landscape, and auctioning allocations to emit carbon maximizes public income while rationing the emissions. The motive appears even more integrated when states propose to utilize the revenues earned from this auction to fund a variety of programs that could reduce GHG production within the state.

However, jurisprudentially, motive matters according to the Supreme Court. RGGI lead states officially have expressed their purpose of this auction is to increase the price for certain high-carbon-emitting power plant operations (coal in particular), as a way to change the dispatch order of which plants are allowed to run by the FERC-regulated ISO. The announced objective is to make the operation of certain high-carbon-emitting plants so expensive that they become the last plants called on or allowed to operate by the regional ISO.

When unit dispatch order and operation, solely a function of federal jurisdictional pricing in modern electricity markets, is manipulated indirectly by states that attempt to inflate the federally-approved wholesale price at which certain facilities operate, it becomes constitutionally at issue under the Supremacy Clause. Nowhere is the line of demarcation of federal-state responsibility pursuant to the Supremacy Clause more firmly etched in the legal precedent than in power-sector regulation. In fact, Supremacy Clause jurisprudence in the power area has its own distinct nomenclature—the filed-rate doctrine. This bright line between federal and state jurisdiction has been firmly and consistently carved in the judicial firmament over three-quarters of a century.

Legally defensible and bullet-proof carbon policy is imperative. Some of the most respected climatologists argue that we have until 2015 to radically reduce the emission of CO2, or face a very different planet.68 But it does little toward this imperative to accelerate carbon restrictions at the state level, only to walk into protracted constitutional conflicts that could truncate or halt the implementation of these initiatives. Both Governor Schwarzenegger’s energy advisor and industry groups looking at RGGI implementation forecast litigation.69 In the end, it may be that either carefully designed state regulation or federal carbon legislation is necessary not only for certainty, but to eliminate the issues of Constitutional conflict surrounding state carbon-regulation methods.



1.  See Reg’l Greenhouse Gas Initiative, Participating States, (last visited Nov. 30, 2008).

2. Cal. Health & Safety Code §§ 38500-38599 (West 2007).

3. The Western Climate Initiative is a group of six western states and two Canadian provinces aiming to reduce GHG emissions 15 percent below 2005 levels. Lisa Weinzimer, California Regulators Call for ‘First-Seller’ Variation of Cap-and-Trade GHG Approach, Electric Util. Week, Feb. 18, 2008, at 17.

4. See generally, Midwestern Governor’s Ass’n, Midwestern Greenhouse Gas Accord, 2007 (Nov. 15, 2007). Mike Granstaff,, Cap and Trade-A Primer (Jan. 21, 2008), These states include Iowa, Illinois, Kansas, Michigan, Minnesota and Wisconsin, and the Canadian province of Manitoba. Indiana, Ohio and South Dakota have opted out of the Midwestern Greenhouse Gas Reduction Accord and are now observers.

5. See RGGI Emissions Leakage Multi-State Staff Working Group, Reg’l. Greenhouse Gas Initiative (RGGI), Potential Emissions Leakage and the Regional Greenhouse Gas Initiative: Evaluating Market Dynamics, Monitoring Options, and Possible Mitigation Mechanisms (2007) [hereinafter RGGI Working Group].

6. Lisa Wood, RGGI Effect Goes Beyond Mandates, Brings Wave of Changes to New England Energy Policy, Electric Util. Week, Sept. 1, 2008 at 1.

7. McKibben, supra, at 23 (quoting Jim Hansen, The Threat to the Planet, N.Y. Rev. Books, July 13, 2006).

8. See Reg’l Greenhouse Gas Initiative, Goals, Proposed Tasks, Short-Term Action Items (2003).

9. Roman Kramarchuk, All Out Auctions?, ENVTL. FIN., Mar. 2007, at 45, 45 (noting that EPA auctions only 1 percent of total SO2 allowances and this doesn’t include any auction to pre-existing sources, which are freely allocated to electric power generators).

10. See Harvard Electric Policy Group, Rapporteur’s Summary at the Harvard Electric Policy Group 49th Plenary Session 34, at 38. (Dec. 6-7, 2007).

11. Cathy Cash & Paul Whitehead, All-Auction Allowances Get Promoted on Capitol Hill, as Europe Heads that Way, Electric Util. Week, Jan. 28, 2008, at 1.

12. Comm’n of the European Communities, Proposal for a Directive of the European Parliament and of the Council Amending Directive 2003/87/EC, so as to Improve and Extend the Greenhouse Gas Emission Allowance Trading System of the Community 15 (2008).

13. California Global Warming Solutions Act of 2006, Cal. Health & Safety Code §§ 38500-38599 (West 2007).

14. Cal. Energy Comm’n., History of California’s Involvement in Air Pollution and Global Climate Change (2008).

15. Lisa Weinzimer, California Regulators Call for ‘First-Seller’ Variation of Cap-and-Trade GHG Approach, Electric Util. Week, Feb. 18, 2008, at 17. See generally, Midwestern Governor’s Ass’n, Midwestern Greenhouse Gas Accord, 2007 (Nov. 15, 2007); Mike Granstaff,, Cap and Trade-A Primer (Jan. 21, 2008).

16. Steven Ferrey, Soft Paths, Hard Choices: Environmental Lessons in the Aftermath of California’s Electric Deregulation Debacle, 23 Va. Envtl.J. 251, 297 (2004).

17. Order Instituting Rulemaking to Implement the Commission’s Procurement Incentive Framework and to Examine the Integration of Greenhouse Gas Emissions Standards into Procurement Policies, R.06-04-009, D.07-09-017, 2007 Cal. P.U.C. LEXIS 330 (Cal. Pub. Utils. Comm’n. Sept. 6, 2007).; Al Alvarado & Karen Griffen, Cal. Energy Comm’n., Revised Methodology to Estimate the Generation Resource Mix of California Electricity Imports: Update to the May 2006 Staff Paper 1, 1, 3 (2007).

18. See Seth Hilton, The Impact of California’s Global Warming Legislation on the Electric Utility Industry, Electricity J., Nov. 2006, at 13. The three major investor-owned utilities import 3-15 percent of their total supply in the form of out-of-state coal-fired power. Id. The Los Angeles DWP imports half its power from such sources. Id.

19. Weinzimer, supra.

20. Lisa Weinzimer, Debate Heats up over Allocating CO2 Allowances in Calif., Generators Deny Windfall is Possible, Electric Util. Week, April 28, 2008, at 13. Load served and historical emissions both would be factors in determining the amount of allowances given. Id.

21. Richard Cowart, Regulatory Assistance Project, Addressing Leakage In a Cap-and-Trade System, 1 (2006).

22. N.Y. State Dep’t. of Envtl. Conservation, Final Generic Environmental Impact Statement 107 (2008).

23. See Regional Greenhouse Gas Initiative Stakeholder Meeting, Stakeholder Comments 17-18 (Mar. 12, 2007); Morgan Hansen, Emissions Trading: EU ETS, U.S. Voluntary Market & Carbon Credit Projects as Offsets 21 (Apr. 2008) (unpublished Master’s thesis, Duke University).

24. Cowart, supra, at 3.

25. Mary Powers, PSEG ‘Leakage’ Plan Would Cost New Jersey Ratepayers $50 Million Annually, Group Says, Electric Util. Week, July 14, 2008, at 8.

26. See Bolster, supra, at 745.

27. Fed. Energy Reg. Comm’n v. Mississippi, 456 U.S. 742, 757 (1982).

28. New Energy Co. of Ind. v. Limbach, 486 U.S. 269, 273 (1988) (citing Bacchus Imports, Ltd. v. Dias, 468 U.S. 263, 270-273 (1984); H.P. Hood & Sons, 336 U.S. 525, 532-533 (1949).

29. Or. Waste Sys., 511 U.S. at 98 [citing Wyoming v. Oklahoma, 502 U.S. 437 (1992); Welton v. Missouri, 91 U.S. 275 (1876)].

30. Steven Ferrey, Environmental Law: Examples & Explanations 148-49 (4th ed. 2007).

31. Or. Waste Sys., Inc. v. Dep’t of Envtl. Quality, 511 U.S. 93, 99 (1995).

32. 512 U.S. 186 (1994).

33. Id. at 207 n.20 (quoting Brief for Respondent at 40).

34. Healy, 512 U.S. at 207 n.20 (quoting City of Philadelphia, 437 U.S. at 626-27) (“[W]hatever New Jersey’s ultimate purpose, it may not be accomplished by discriminating against articles of commerce coming from outside the State unless there is some reason, apart from their origin, to treat them differently.”).

35. City of Philadelphia v. New Jersey, 437 U.S. 617, 626-27 (1978); see also C. & A. Carbone, Inc., v. Town of Clarkstown, 511 U.S. 383, 393 (1994) (holding that the town can’t “justify the flow-control ordinance as a way to steer solid waste away from out-of-town disposal sites that it might deem harmful to the environment. To do so would extend the town’s police power beyond its jurisdictional bounds”).

36. Bacchus Imports, Ltd. v. Dias, 468 U.S. 263, 270 (1984); Minnesota v. Clover Leaf Creamery Co., 449 U.S. 456, 471 n.15 (1981).

37. Maine. v. Taylor, 477 U.S. 131 (1986).

38. Id at 151-52 (1986).

39. Id. at 151.

40. See Dean Milk Co. v. City of Madison, 340 U.S. 349 (1951) (holding that a state must pursue first reasonable nondiscriminatory regulatory alternatives); Fort Gratiot Sanitary Landfill, Inc. v. Mich. Dep’t of Natural Res., 504 U.S. 353 (1992).

41. Steven Ferrey, Inverting Choice of Law in the Wired Universe: Thermodynamics, Mass and Energy, 45 WM. & MARY L. REV. 1839, 1865-1888 (2004) [hereinafter Ferrey, Inverting Choice].

42. See Ferrey, Law of Independent Power, supra, § 10.79; Ferrey, Inverting Choice, supra, at 1843, 1908-14 .

43. 455 U.S. 331 (1982).

44. Lisa Weinzimer, Schwarzenegger Advisor says States, Regions will Take Lead on Climate Program, Electric Util. Week, June 16, 2008, at 7.

45. See Reg’l. Greenhouse Gas Initiative, Goals, Proposed Tasks, Short-Term Action Items (2003) at 1. Reg’l. Greenhouse Gas Initiative.

46. For a discussion of various power auction practices and theories, see generally Ferrey, Law of Independent Power, supra, § 9.

47. ISO New England, Inc., ISO New England Manual for Market Operations: Manual M-11 passim (2008) (taking effect Oct. 1, 2008).

48. Ferrey, Law of Independent Power, supra, § 9.26.

49. Julie A. Fitch, Dir. of Policy and Planning, Cal. Pub. Utils. Comm’n, Address at the Joint Workshop of the CPUC and California Energy Commission: Context, Principles, and Key Questions for Allowance Allocation in the Electricity Sector (Apr. 21-22, 2008), available at: (Attachment 15) .

50. “Emissions Deepen over California Emissions-Allowance Plan,” Carbon Control News, June 9, 2008, at 3-4 (available at:

51. Pre-Workshop Comments of Dynegy on Allocation Issues at 8, Order Instituting Rulemaking to Implement the Commission’s Procurement Incentive Framework and to Examine the Integration of Greenhouse Gas Emission Standards into Procurement Policies, R.06-04-009, D.07-07-018, 2007 Cal. P.U.C. LEXIS 330 (2007).

52. Kristin Grenfell, Nautral Res. Def. Counsel, Memorandum to California Air Resources Board Staff Re: NRDC Comments on Allowance Allocation Issues (2008).

53. See generally Carolyn Whetzel, Western States Release Draft Policies for Allocating Emissions Alowances, 39 Env’t Rep. (BNA) 702 (Apr. 11, 2008); Western Climate Initiative (2008), available at:

54. States for Preemption?, Carbon Control News, March 26, 2008.

55. N.Y. State Dep’t. of Envt’l. Conservation, Notice of Pre-Proposal of New York RGGI Rule (2006).

56. Id.

57. 461 U.S. 190, 216 (1983).

58. 16 U.S.C. § 824(d) (2006).

59. E.g., Ark. Power & Light Co. v. Fed. Power Comm’n, 368 F.2d 376 (8th Cir. 1966); Nantahala Power & Light Co. v. Thornburg, 476 U.S. 953 (1986); New England Power Co. v. New Hampshire, 455 U.S. 331 (1982).

60. In re Sinclair Mach. Prods., Inc., 498 A.2d 696, 706 (N.H. 1985).

61. However, the Supreme Court has determined that Congress, in enacting the Federal Power Act, intended to vest exclusive jurisdiction in the FERC to regulate interstate wholesale utility rates. Fed. Power Comm’n v. S. Cal. Edison Co., 376 U.S. 205, 216 (1964).

62. See Nantahala Power & Light Co. v. Thornburg, 476 U.S. 953, 963 (1986); Miss. Power & Light Co. v. Mississippi ex rel. Moore, 487 U.S. 354, 372 (1988)); Entergy La., Inc., v. La. Pub. Serv. Comm’n, 539 U.S. 39 (2003).

63. Indep. Energy Producers Ass’n v. Cal. Pub. Utils. Comm’n, 36 F.3d 848 (9th Cir. 1994) (finding no separate basis for the state PUC to act to establish a premium price for renewable low-carbon power projects).

64. S. Cal. Edison Co., 70 F.E.R.C. ¶ 61,215 (1995).

65. See, e.g., Perez v. Campbell, 402 U.S. 637 (1971), superseded by statute, Act of Nov. 6, 1978, Pub. L. 95-598, 92 Stat. 2593.

66. Entergy La., Inc., v. La. Pub. Serv. Comm’n, 539 U.S. 39 (2003).

67. See Ferry, Law of Independent Power, supra, § 10:87, at 10-406 (describing FERC-approved tariffs for ISO operations in these states).

68. See McKibben, supra, at 23 (citing Jim Hansen, The Threat to the Planet, N.Y. REV., July 13, 2006).

69. Lisa Weinzimer, Economy-Wide Draft GHG Plan Released by California Air Resources Board, Electric Util. Week, June 30, 2008, at 7, 8. Curt Barry, First RGGI Allowance Auction may Trigger Coal Industry Lawsuits, Carbon Control News, July 21, 2008.