This summer a hearing on Capitol Hill saw such strange political bedfellows as the Obama administration, House Republicans, the aviation industry, and labor groups all joined in opposition to cap-and-trade. At issue was the European Union’s decision to extend its emissions-trading program to foreign airlines operating in Europe, requiring them either to reduce pollution or pay a charge.
U.S. air carriers denounced the move as an illegal tax and filed suit with the European Court of Justice. Rep. Tom Petri (R-Wis.), who recently introduced a bill prohibiting U.S. airlines from participating in the program, called it an infringement on U.S. sovereignty. The State Department objected to Europe’s “unilateral inclusion of U.S. air operators” (PDF) in the program, with the department calling it the “wrong way to achieve the right objective.”
Having failed to pass a national cap-and-trade program, the Obama administration faces an awkward choice: resist a policy it once supported or accept unfavorable trade penalties. Twice in the last few months, the administration has sought relief from cap-and-trade requirements in Europe and California.
As more countries and states begin trading emissions, the U.S. will face this question more often.
Nations that adopt cap-and-trade have an economic incentive to bring other countries into the system. As the allowance market expands to include more industries and more countries, there are more opportunities for inexpensively reducing emissions, which lowers the cost of allowances. It also becomes harder for companies to flee to unregulated countries, a phenomenon referred to as “leakage,” and gain a competitive advantage over companies operating within the system.
Of course, nations without trading programs have an economic incentive to hold onto that advantage, which is why China and other countries protested vociferously when the House added a carbon tariff to the U.S. cap-and-trade program. Now the U.S. finds itself in China’s position, fighting the EU over a similar provision.
At the same time, the federal government is asking for an exemption from California’s cap-and-trade program. Late last year the Department of Defense filed a comment with California’s Air Resources Board arguing that it could be illegal for the department to participate in the state’s emissions-trading program. If cap-and-trade counts as a tax, their argument goes, then it could be an unconstitutional tax on the federal government by a state. Even if buying allowances doesn’t count as a tax, it might be illegal for the military to sell them if it ends up with a surplus. For these and other legal reasons, the DOD requested an exemption from the program until the potential snags are worked out.
It’s not the first time the military has butted heads with California environmental regulators. In 2007, the state sued the U.S Navy over its use of powerful sonar that scientists said was harming whales and other coastal wildlife. The Navy argued it was exempt from state regulations. A federal court disagreed. Finally, President George W. Bush issued an order exempting the Navy from California’s regulation.
So far, the dispute over cap-and-trade seems to be on its way to a more amicable resolution. In the latest draft of the regulation, released this month, the Air Resources Board agreed to exempt the military for one year while they work out an agreement.
Steve Cliff, head of the cap-and-trade regulation branch on the board, says the state hopes to find a way for the military to meet the same emissions standards as everyone else.
Ultimately, says Cliff, if the board decides cap-and-trade is the best way to do that, “then we’ll try to bring them into the system.” But for the time being the ARB remains open to “other ways of having them meet the same overall goals as other participants in the program.” Cliff mentioned the possibility of a performance standard, possibly emissions per square foot but said it was premature to discuss alternatives.
Robert Sawyer, a former chairman of the board, says any deal will likely involve finding a way to credit the military for emissions reductions it’s already making.
“A lot of military bases in California are doing things that are consistent with the A.B. 32 program, though they don’t exactly fit in with cap-and-trade,” says Sawyer. Indeed, the Department of Defense pointed to its emissions-reduction efforts in its comment, arguing it was already under executive and internal mandates to reduce emissions, and so doesn’t need the added constraint of California’s regulation.
It’s partly because of the DOD’s efforts to improve energy efficiency that it finds itself subject to the California regulation at all. Cap- and-trade initially only affects energy producers—but the military, in an attempt to separate itself from the vulnerable civilian grid, is building self-sufficient power installations on its bases.
So far only one base, the Marine Corps Air-Ground Combat Center at Twentynine Palms, Calif., exceeds the 25,000-ton-per-year carbon threshold that makes it subject to California’s regulation. But the Pentagon hopes to use Twentynine Palms, with its natural-gas cogeneration plant, solar arrays, and smart-grid pilot projects, as a model for energy self-sufficiency at other bases, which could bring more military facilities under the California regulation.
Environmentalists, while lauding the military’s move toward cleaner energy, are wary of giving them an exemption. “Once you give one entity special treatment it becomes very difficult to deny other entities special treatment,” says Kathryn Phillips, director of Sierra Club California. She says the request reminds her of other cases where federal preemption has prevented stricter environmental regulation by the state. Because the federal government sets standards for locomotives, California is powerless to set its own standards, as the state does for most other diesel vehicles and equipment. Instead, the ARB must work out agreements with the railroads themselves if they wish to go beyond federal regulation.
The Obama administration now faces another choice on cap-and-trade, and it may be its best opportunity yet to promote it. The Environmental Protection Agency is overdue to release its New Source Performance Standards, which were delayed for a second time this month. The new standards will likely set a limit for permissible emissions from certain types of facilities. But they could also allow state cap-and-trade programs to count toward emissions goals.
That’s the hope of California, New York, and Minnesota, which filed a comment with the EPA requesting that the agency allow states to meet federal emissions goals using their own programs. It’s also the hope of many in the energy industry, several members of which joined in the comment. Cap-and-trade gives them more flexibility than the alternative regulation, and if the EPA doesn’t recognize state programs, they might end up being regulated twice. And it’s the hope of environmentalists, who believe such a move by the EPA could galvanize other states to adopt similar emissions-trading programs.
“Industry will favor that approach, states will favor it, environmental groups will favor it—and we believe the EPA has the legal power to do it,” says Michael Livermore, a law professor at New York University and the executive director of the Institute for Policy Integrity. The IPI released a paper (PDF) earlier this year that makes the case that the EPA has power under the Clean Air Act to recognize state cap-and-trade programs. “The only question," says Livermore, "is how risk-averse the EPA is.”