Will Other States Join California's International Climate Pact?

The same day President Trump withdrew the United States from the Paris climate agreement, the governors of New York, California, and Washington announced a domestic effort to combat global warming, the U.S. Climate Alliance. Though the group’s exact plans are still unclear, New York Governor Andrew Cuomo defiantly declared that it would uphold the terms reached in Paris, “regardless of [Trump’s] irresponsible actions.”

But what of the United States’ role in international climate policy? At least in the near future, it may come down to the people working in a small office in a beige high-rise next door to the Sacramento Central Public Library.

That office is home to the Western Climate Initiative, Inc., a private, nonprofit corporation whose board includes the governments of California and several Canadian provinces. Incorporated in Delaware, it “was established to provide administrative infrastructure for emissions trading programs,” said former board member Michael Gibbs, the recently retired assistant executive officer of the California Air Resources Board.

While WCI, Inc. was created during the Obama administration, it seems well suited for the Trump era. The U.S. Climate Alliance wants to keep the United States relevant in a domain the federal government has ceded. Those states, and others, could use WCI, Inc. to combine their efforts and extend them beyond U.S. borders.

The company’s primary function to date has been providing support for a joint cap-and-trade program between California and Quebec. Through that initiative, both regions’ energy sectors and other heavy industries have to cut carbon emissions, and individual polluters can buy and sell credits among themselves as an incentive to do so. This program is the only one in the world in which subnational governments in different countries operate a carbon market. Once Ontario joins them, as is expected, WCI, Inc. will undergird programs responsible for reducing the emissions of 60 million citizens between the United States and Canada.

The implications here are significant: Using a corporation and supporting legislation, these regions have formed an international agreement that’s structured to result in ambitious emissions cuts. Because the company itself doesn’t dictate policy—the individual governments passed their own set of standardized laws in order to join together—it hasn’t, so far, overstepped any constitutional boundaries. What’s more, the regions have built a system that other states and provinces, and even nations, can plug into.

The cap-and-trade program was designed from the start to accept other participants. The corporation has an “auction platform, an independent market monitor, and a help desk,” Gibbs said—three tools that constitute the lifeblood of cap-and-trade auctions and make it possible for participants to link and expand their markets to their benefit. As Gibbs explained: “Having a larger number of emitters, power plants, factories, [and] fuel providers increases the diversity of opportunities to reduce emissions at a lower cost than you would be able to do on your own, which enables [participants] to adopt more ambitious targets.” A bigger, linked market is also more efficient and stable than individual ones would be in each region. Indeed, this sharing is what allowed lightly populated Quebec to have a cap-and-trade program at all.

The beginnings of WCI, Inc. date back a decade, to when California and Quebec both passed climate laws and wanted to coordinate. By 2011, both regions, along with British Columbia, had formed the corporation. It was based on a framework for reducing emissions they’d built together, at a time when neither national government was poised to move forward on climate regulation. Because of the company, California and Quebec could join their respective cap-and-trade markets. Now, it also provides support for British Columbia’s carbon tax and the cap-and-trade program operated in Ontario that will soon link with California and Quebec’s. That province joined the corporation a few years after the others.

The idea to start an independent corporation came from the East Coast-based Regional Greenhouse Gas Initiative, which had decided in 2009 to incorporate rather than establish an interstate compact—a kind of treaty between states. “You can’t set up a multimillion-dollar structure based on a memorandum of understanding,” said Clifford Case, counsel at Carter, Ledyard, & Milburn LLP in New York. “Something was needed.” Case and his firm had helped the 10 member states form RGGI, Inc., and WCI, Inc.’s founders “decided to do it the same way.”

Case said it was natural to incorporate in Delaware, because the state’s laws allow flexibility in how companies structure themselves. As he noted, “Delaware is going to give you as much as you’re going to get anywhere to set up your organization as you would like.” WCI, Inc., for example, was designed so all participants are equals—an essential element when doing something as complicated as creating a joint-international program. “We’re on the board, and so we have the ability to understand and weigh in as appropriate,” said Heather Pearson, the director of the Air Policy Instruments and Program Design branch at the Ontario Ministry of the Environment and Climate Change.

Before California and Quebec could share a market, they had identical homework to do: pass the legislation necessary to link up, standardize auction prices, and set the exchange rate for the auctions. Every word of every regulation had to be scrutinized and evaluated with an eye toward two different languages, two different constitutions, and two different sets of federal laws. “We define[d] those things that need to be identical, those that need to be harmonized but not identical, and those things that are not needed to be harmonized,” Gibbs said.

The market is otherwise fairly traditional. California and Quebec hold an auction for “allowances,” each of which permits its owner to emit one ton of carbon. The governments set their minimum, or reserve, price, and only sell a limited number of them to registered buyers, including members of the regulated industries. Each year, the number of allowances drops by about 3 percent while the reserve price rises, creating incentives for companies to cut down on emissions. At the same time, companies who have made additional cuts can sell their surplus allowances on the trading platform to others at market rates, which are often much higher than auction prices. They can then use those funds for bigger carbon cuts, leading to more sales of their surpluses and even more money.

California’s cap-and-trade program has had its setbacks. The state’s Chamber of Commerce filed a lawsuit four years ago alleging that it was an unconstitutional tax on businesses, as it was passed without a legislative supermajority. Until a state appeals-court victory for the program in June, the lawsuit had “been a cloud over the state’s efforts to fight global warming,” the Los Angeles Times reported. In part to prevent an unfavorable opinion from the California Supreme Court, the legislature just passed a new, sweeping authorization of the program, extending it to 2030. This latest authorization had a supermajority, and is thus insulated from those legal challenges.

That’s important, because the market has had growing pains in California. While it has been successful in lowering emissions, few allowances were sold for several years. For instance, in the May 2016 auction, a little more than 10 percent were sold, and the market price did not go above the floor price. This translated to less money than expected for the programs that cap-and-trade was supposed to fund. In part, the Chamber of Commerce lawsuit cast doubt on the future of the market, and made businesses wary of spending money on allowances for a program that could be considered unconstitutional. Indeed, when the most recent auction took place after a favorable oral argument in the lawsuit, current allowances sold out, and the average auction price climbed above the floor price.

California’s participation in WCI, Inc. could suggest the state has a climate-related foreign policy that’s parallel to, and perhaps even competitive with, that of the federal government. Gibbs and others are quick to point out that the company itself creates no policy, and that “we each run our own programs with our own authority and own statutes and regulations.” Had they instead signed a formal accord binding California to Quebec, the program could theoretically be found in violation of the Constitution’s treaty clause—so California’s representatives are adamant that’s not what this is.

Nevertheless, the fact remains that they have created an international agreement—one with specific climate-change mitigation goals, but without national governments’ support. In effect if not in intention, the program does set states and provinces up to engage in a parallel foreign policy. The governments involved, for example, standardized their regulations—an important process nations use in international regulation policy, said Jean Galbraith, professor of public international law at the University of Pennsylvania. “That goes on all the time between our federal agencies and other entities abroad,” she noted. Even though states have often been players in international standardization—including in the insurance industry—they usually have federal support. WCI, Inc. represents something different.

Galbraith said states have a lot more flexibility forming transnational agreements than it may seem. “Because getting international agreements through Congress is so challenging … we see a world in which state action internationally is tolerated,” she said. “These are things that reflect a pragmatic need.”

Galbraith noted that it isn’t necessarily a problem if California’s approach does compete with federal policies, though there is a small risk a hostile Congress or executive branch could try to intervene. “When you’re operating in these separation-of-powers areas generally, and where the Supreme Court has stayed out of these issues, there is a considerable zone of uncertainty,” she said. That “allows states to take advantage of this uncertainty, but creates the possibility for things to move quickly if the courts enter.”

The bigger risk to the corporation’s survival comes from the participants themselves. Though none have signaled that they plan to pull out, the loss of a participant would weaken the agreement and the market. New Mexico had agreed to the same emissions-reduction framework that California did roughly 10 years ago, but Susana Martinez, the Republican governor, abandoned it before WCI, Inc. was incorporated. That risk could be amplified if California’s new, more stringent emissions standards make others hesitant to adopt them.

Despite these challenges, federal inaction may encourage more states to jump in anyway. Gibbs said that creating “a tool that works well and that others would want to use” had always been the goal. “By creating a system that is plug-in ready,” he said, “it enables additional jurisdictions to join in and take more aggressive climate action.”

The time may be right for it, particularly for those involved in the U.S. Climate Alliance, which has swelled to more than a dozen states. Massachusetts, for example, could position itself to link up with WCI, Inc. It joined the alliance in early June, and its state Senate is considering an ambitious carbon cap-and-trade market. The state seems to align with others in the corporation: Its proposed carbon price is similar to California’s, and it would gain the same benefit of a larger market that Quebec has.

For Climate Alliance states like Washington and New York, whose planning is far less advanced than Massachusetts’s, they may need to decide whether verbal commitments are enough to uphold the goals of the Paris agreement, or if additional steps are necessary. Case puts it bluntly: Joining an organization like WCI, Inc. means “we can do things at the state level no matter what Washington does.”