The Essential Role of State Enforcement in the Brave New World of Greenhouse Gas Emission Limits

Abstract

I. INTRODUCTION II. THE NATURE AND EXTENT OF THE GREENHOUSE GAS EMISSION REDUCTION EFFORT REQUIRES THE FULL PANOPLY OF ENFORCEMENT TOOLS III. THE CAP-AND-TRADE MARKET POSES SIGNIFICANT ENFORCEMENT CHALLENGES IV. CALIFORNIA'S EXPERIENCE WITH ENERGY MARKETS PROVIDES IMPORTANT LESSONS V. FEDERAL PREEMPTION OF STATE ENFORCEMENT POSES SIGNIFICANT RISKS VI. THE FILED RATE DOCTRINE HAS NO PLACE IN A CAP-AND-TRADE MARKET VII. OTHER LESSONS LEARNED FROM THE ENERGY CRISIS VIII. CONCLUSION I. INTRODUCTION In June 2005, Governor Schwarzenegger addressed the United Nations on the topic of global warming and famously declared, I say the debate is over. We know the science. We see the threat, and we know that the time for action is now. (1) Convinced by overwhelming scientific evidence, the California Legislature passed, and the Governor signed, a landmark law, referred to as 32, which requires the State to reduce greenhouse gas emissions to 1990 levels by 2020. (2) AB 32 poses significant, even daunting, requirements. By 2012, the California Air Resources Board will have issued extensive regulations for virtually every sector of the State's economy across all geographic regions that set forth specific actions for the reduction of greenhouse gas emissions. (3) The new regulations will use multiple mechanisms to achieve the reduction requirements, including the traditional command and control approach, market mechanisms, and regional targeting. (4) While the potential regulations and mechanisms have received a great deal of attention, much less attention has been given to an essential element of achieving the reductions: enforcement. We know from extensive experience that enforcement must be integrated into the process of creating regulations. Further, we must have enough regulators and prosecutors to ensure that enforcement is viable, appropriate and effective. The Air Resources Board's Scoping Plan for AB 32 identifies as a key mechanism for reduction of greenhouse gases the creation and implementation of a cap-and-trade market, in which electricity generators and other significant sources of greenhouse gas emissions will be allowed to buy and sell emission units to meet an ever-diminishing cap on overall emissions. (5) This market may involve hundreds of millions of dollars worth of trades, which will create significant incentives for fraud, manipulation and other misconduct. We know from California's energy crisis and the recent national mortgage meltdown that market abuse combined with insufficient market oversight is a recipe for disaster. (6) Thus, when creating the rules for a cap-and-trade market, we must apply the lessons learned from these experiences and integrate market monitoring and enforcement into the market itself. By requiring market participants to sufficiently fund monitoring and enforcement efforts, the few participants tempted to try to manipulate the market will understand from the outset that market misconduct will not be tolerated. While ensuring market fairness in a market of this expected size and complexity is a tall task, it will be far more manageable if we heed the painful lesson from the California energy crisis and the recent mortgage meltdown: relying exclusively on federal market enforcement can lead to disaster. Significant reduction of greenhouse gas emissions is a massive undertaking and a tremendous challenge. California's multi-layered and often decentralized enforcement network needs to be allowed to continue its historic enforcement role if we are to meet the challenge. In the new world of carbon constraint, California's experience with environmental enforcement provides a useful road map for effective measures, while malfunctioning energy markets and the difficulties posed by federal preemption are significant roadblocks to avoid. For our greenhouse gas reduction efforts to be successful, we must intelligently apply the lessons California has learned to ensure effective monitoring and enforcement approaches. …