Trump vs California round 1: A dive into the legal case on the linkage between the carbon markets of California and Québec

A post by Albert Ferrari


President Donald Trump’s decision to withdraw from the Paris Agreement was followed by many States, cities and companies across the US pledging to increase their climate ambition to compensate for his unilateralism. California, being amongst the most ambitious American States on the climate action front, became a prime target for criticism by the Trump Administration regarding their overly ‘restrictive’ environmental measures in the areas of transport, water and climate. One concrete example is the linkage between the cap-and-trade schemes of California and Québec, which was legally contested by the Trump administration. The Department of Justice (DOJ) filed a complaint on the 23rd October 2019 against California, the Clean Air Resources Board and the Western Climate Initiative (WCI Inc.) for having signed an agreement going beyond their powers. In the eyes of the DOJ, this is a violation of the sovereignty of the Federal State.

The cap-and-trade mechanisms in California and Québec were both established in 2011. When in 2007, eleven US States and Canadian Provinces pledged to take cooperative actions to address climate change, they planned to develop a coordinated regional strategy to reduce greenhouse gas emissions called the Western Climate Initiative. One of the main collaboration tools of this political initiative was to “make regional [emissions] trading operational”. In that perspective, WCI, Inc., a non-profit corporation, was founded in 2011 to provide administrative and technical support to governments implementing emission trading programs. WCI, Inc. currently supports California, Québec, and Nova Scotia in the administration of their ETSs and provides the operational basis for the linkage between Québec and California, which, in turn, is active since 2014.

Given that a political and judicial success for Washington on the pending legal case may have important implications for the future linkage between subnational carbon markets as well as for subnational governments’ climate mitigation contributions more generally, it is worth diving deeper into it. Understanding, in particular, the first decision on the case provides helpful elements for future linkages between subnational jurisdictions. Even if the lawsuit does not question the existence of the individual emission trading systems (ETSs), it does put at risk the linkage between them, and thereby creates uncertainty in the carbon market, which, in turn, may lead to lower and instable allowance prices.

The filed complaint of the DOJ states that the agreement between California and Québec, linking the two carbon markets, is unlawful and goes beyond the State’s competences. For the DOJ, the cap-and-trade linkage undermines the Federal State, ‘which must be able to speak with one voice in the area of U.S. foreign policy’ and is the only one who can enter into or approve agreements with foreign powers under the Treaty Clause, the Compact Clause, and Foreign Commerce Clause of the US Constitution and the Foreign Affairs Doctrine. The first ruling on the case, published on the 12th March 2020, was partial, only addressing the Treaty Clause and Compact Clause, both of which are defined below.

In his ruling, judge William B. Schubb of the District Court of the Eastern District of California stated that the agreement between California and Québec cannot be considered as a Treaty as it is not an “alliance for peace or war”, not an “agreement for mutual government”, and does not represent a “loss of sovereignty”.

The agreement explicitly recognizes that Québec and California adopted their own greenhouse gas emissions reduction targets, their own regulation on greenhouse gas emissions reporting programs and their own regulation(s) on their cap-and-trade programs.

Judge William B. Schubb of the District Court of the Eastern District of California

The schemes have different scopes, environmental ambition levels and can be operated, modified, and revoked by each party independently (i.e. without each other’s agreement). The linkage agreement cannot be considered as a Treaty for General Commercial Privilege either, because of its very limited and targeted content. If it were recognised by the Court as a Treaty, it would have been automatically illegal as only the Federal level can enter into agreements with foreign countries through Treaties.

As a second ground for the complaint, the DOJ claimed that the California Québec Linkage agreement should be defined as a Compact, which is a formal agreement between a State with another State, or with a foreign power, that needs the formal approval of the Congress. However, the District Court disqualified this claim as well for several reasons.

First, both ETSs are independent and do not need reciprocal actions to exist: the existence of each ETS in its own jurisdiction is independent of the other’s recognition. Secondly, WCI Inc. has no regional limitation: the WCI aims to include any State and party interested via WCI Inc. Thirdly, there is not one single regulatory authority governing the agreement: WCI Inc is an operational body in charge of technical and administrative support. Finally, there is no binding prohibition on unilateral modifications or termination since each jurisdiction is sovereign to repeal its own regulation and to join the agreement. Consequently, California  can unilaterally exit the contract following the delinking provisions, as Ontario did in 2018 following their Provincial elections.

Moreover, for a Compact to fall under the Compact Clause, it must increase political power in the States and interfere with the supremacy of the USA. This first decision states that the establishment of an ETS is “well within California’s police powers to enact legislation to regulate greenhouse gas emissions and air pollution”.

Following this reasoning, the District Court concluded that the agreement is to be considered legal by not being a Treaty nor a Compact. However, in the coming months, possibly after the US elections in November 2020, the Court is yet to rule on whether the WCI linkage agreement infringes the Foreign Affairs Doctrine or the Foreign Commerce Clause. Even then, these decisions may be appealed.

While the outcome of the legal process is not yet definitive, and its replicability in different jurisdictions across the world may be limited, one key take-away would be that the linkage of carbon markets should be thought through in a simple and operational manner, without undermining the sovereignty of actors included and not included in the agreement.

Read more:

Press Release United States Files Lawsuit Against State of California for Unlawful Cap and Trade Agreement with the Canadian Province of Québec, Department of Justice, October 23, 2019

Memorandum, Opinion and Order No. 2:19-cv-02142 WBS EFB – Case USA vs State of California, United States District Court Eastern District of California, March 12, 2020

Justice Dept. Sues California to Stop Climate Initiative from Extending to Canada, The New York Times, October 23, 2019

How Trump Is Using Environment Law to Attack California. It’s Not Just About Auto Standards Anymore, Inside Climate News, November 5, 2019

Cap-and-trade feud may chill cross-border pacts, E&E News, March 11, 2020