Environment & Energy Report

INSIGHT: Is California’s Cap and Trade Agreement With Quebec Constitutional?

Nov. 25, 2019, 9:01 AM

The Department of Justice recently filed a lawsuit against California, alleging that a 2013 agreement between the state and the Province of Quebec to integrate their cap-and-trade programs for reducing greenhouse gas emissions is unconstitutional.

Both programs require companies emitting certain levels of greenhouse gases to report their emissions and to either purchase allowances for the emissions or to secure offset credits. The 2013 agreement links the two programs, allowing companies in California and Quebec to exchange allowances and offset credits.

According to the DOJ complaint, the 2013 agreement runs afoul of Art. I, § 10, cl. [1] of the U.S. Constitution, which prohibits states from “enter[ing] into any Treaty, Alliance, or Confederation,” and Art. I, § 10, cl. [3], which forbids states from “enter[ing] into any Agreement or Compact . . . with a foreign Power” without congressional approval.

The DOJ also claims that the 2013 agreement interferes with the President’s constitutional prerogative to manage the nation’s foreign policy and discriminates against foreign commerce.

California officials denounced the lawsuit as a continuation of a “political vendetta” against the state. They have not yet offered, however, a legal defense of the 2013 agreement.

Constitutional Issues Abound

Although the officials’ caution may be well-founded, the DOJ’s case raises constitutional questions that federal courts have not squarely addressed.

For example, whether the 2013 agreement constitutes a “Treaty, Alliance, or Confederation” is unsettled. Those terms usually signify long-lasting formal instruments between sovereign entities committing to mutual defense, resolving borders, or setting rules for commerce. See Holmes v. Jennison, 39 U.S. 540, 571-72 (1840).

By contrast, the 2013 agreement calls for cooperation in one limited area—coordinating allowance/offset credit markets—and is terminable by either party on 12 months’ notice.

The DOJ also contends that the 2013 agreement is an unconstitutional “Agreement or Compact” with a “foreign Power.”

California may respond that the 2013 agreement is aspirational, as opposed to legally binding, as it has no enforcement provisions and does not restrict the parties’ right to modify their respective laws. The 2013 agreement, however, includes affirmative commitments, such as establishing joint auctions and a common registry, and references being in “full force and effect.”

Rather than contest whether the 2013 agreement is an “Agreement or Compact,” California may argue that an individual Canadian province is not a “foreign Power.” Courts evidently have not defined the term “foreign Power.”

The Constitution sheds little light, as it refers almost interchangeably to “foreign States,” “foreign Nations,” and “foreign Power[s].” The Framers’ intent perhaps can be gleaned from Federalist Papers Nos. 18 and 20, which seem to equate foreign states with their constituent units, including provinces.

But a judicial holding that Quebec is a “foreign Power” would not necessarily invalidate the 2013 agreement. In Virginia v. Tennessee, 148 U.S. 503, 519 (1893), the Supreme Court ruled that Article I, section 10 required congressional consent only for agreements increasing “political power in the states, which may encroach upon or interfere with the just supremacy of the United States.”

Possible California Arguments to Come

California may contend that the 2013 agreement is akin to the many compacts on coordination of roads and borders, police cooperation, and trade rules that states have signed with foreign counterparts without congressional approval.

California may also assert that Quebec and it are merely granting reciprocal legal rights—arrangements that typically have passed constitutional muster.

California likely will further argue that coordinating its cap-and-trade program with Quebec’s does not interfere with U.S. foreign policy. The limited case law, however, is not promising for California.

In Crosby v. National Foreign Trade Council, 530 U.S. 363 (2000), the Supreme Court invalidated a Massachusetts statute imposing sanctions on Burma because the statute could undermine the effectiveness of federal sanctions that Congress had authorized the president to impose.

To be sure, this case is somewhat distinguishable. Congress has not deputized the president to implement a global cap-and-trade agreement. Indeed, the president arguably has gone in the opposite direction by withdrawing the country from the Paris Agreement.

Yet, California’s cap-and-trade agreement, while far more limited in scope than the Paris Agreement, could be viewed as undermining the president’s efforts to find other means of combatting climate change, as the DOJ alleges. Moreover, the 2013 agreement is not necessarily a one off; California is seeking to sign similar cap-and-trade agreements with other foreign counterparts.

Even if the 2013 agreement does not directly interfere with the president’s international climate change policies, it still may be unconstitutional. In Zschernig v. Oregon, 389 U.S. 429 (1968), the Supreme Court invalidated an Oregon law barring aliens from inheriting property absent proof that U.S. citizens could inherit property in the alien’s home country.

Disregarding a DOJ statement that the Oregon law would not disrupt U.S. foreign relations, the court expressed a fear of state courts blocking citizens of Communist countries from inheriting U.S. property. The court expressly disapproved of states seeking to establish their own foreign policy. In this case, the DOJ complaint quotes California officials as espousing that very goal, at least on environmental matters.

In short, California likely faces an uphill fight in contesting the DOJ complaint. The state’s best legal defense may be to minimize the scope, purpose, and effect of the 2013 agreement. But whether California is able—and politically willing—to do that remains in doubt.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Gordon Coffee is a partner at Winston & Strawn LLP and is a commercial litigator, with substantial experience as first chair at trials, arbitrations, and appeals and in handling federal administrative and enforcement proceedings. His success in litigating multi-million dollar claims by and against energy companies has led to repeated recommendations by Legal 500.

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