California’s cap and trade agreement with Quebec: Treaty with a foreign government?

California has long been at the forefront of national environmental regulation, and its actions to cap greenhouse gas emissions is no exception. California's cap-and-trade program, known as Assembly Bill 32, enacted in 2006 and signed into law by Gov. Arnold Schwarzenegger, was a bold effort that sought by 2020 to reduce GHG emissions to 1990 levels. That law has since been amended to seek to reduce by 40% overall GHG emissions by 2030.

One of the primary mechanisms by which AB 32 is intended to effect a reduction in emissions is through a complex cap-and-trade program, whereby industry in multiple sectors can sell and trade the GHG emissions they are permitted, with emissions offsets also part of the mix. As part of that cap-and-trade program, California entered into an agreement with the Province of Quebec, Canada, to link the state's and province's respective cap-and-trade programs. The Agreement on Harmonization and Integration of Cap-and-Trade Programs for Reducing Greenhouse Gas Emissions provides that it is in California's and Quebec's "common interest in working jointly and collaboratively" to harmonize and integrate their respective programs for reducing GHG emissions, and to expand the cap-and-trade market.

AB 32 has been subject to various legal challenges, most notably in California Chamber of Commerce v. State Air Resources Board, which alleged that the law was actually an illegal tax and use of the funds was illegal because the funded programs did not relate to GHG reduction. That lawsuit, as with the others, was not successful. Now, it faces yet another challenge.

The Trump administration, through the Department of Justice, has sued California, alleging that the state's Quebec agreement is a "Treaty, Alliance, or Confederation," and therefore runs afoul of the U.S. Constitution's treaty clause prohibition on a state entering into such agreement. The complaint further alleges among other things that even if the Quebec agreement is not a "Treaty, Alliance, of Confederation," it is nonetheless an "Agreement or Compact" with a foreign power that similarly runs contrary to the Constitution's compact clause, which also prohibits a state entering into such agreements.

This is not the administration's first bout with California and pushing back on California's environmental regulations. Only recently, the U.S. Environmental Protection Agency rescinded California's special status under the Clean Air Act, which permits California to establish alternative emissions standards. That action is being challenged by California and other states, and has even pitted automobile manufacturers against each other on opposite sides of the issue (with those supporting California being accused by the president of banding together in violation of antitrust regulations!). EPA has alleged that California violates the Clean Water Act as a result of discharges to waters of the United States from homeless encampments. And as the California wildfires continue to rage, the president tweeted that he will cut funds to California used to fight wildfires.

Now, in this most recent complaint, the Trump administration alleges that California, by entering into the Quebec agreement, "undermines the President's ability to negotiate competitive agreements with other nations, as the President sees fit." However, there is a significant question as to whether California has, with Quebec, entered into a "Treaty, Alliance, or Confederation," or other "Agreement or Compact."

The Supreme Court has weighed from time to time on the question of whether a state is overstepping its boundaries in imposing requirements on foreign governments or nationals, or wading into issues reserved under the Constitution for the executive. For example, in 1968 the court ruled that Oregon could not implement a law that barred heirs from receiving bequests from the intestate estate of an Oregon resident, where the heir was a citizen of a country that could confiscate some of proceeds, i.e., this was a cold war law intended to keep bequests from flowing to a communist county. In another case, the court invalidated a California law that imposed sanctions on insurers who did not comply with state disclosure laws regarding claims by Holocaust survivors, holding that was clearly a province of the federal executive branch, and that the state law conflicted with federal law and policy.

Although there is no dispute that a state cannot enter into a treaty or the like with a foreign government, or otherwise intrude on the executive branch's constitutional powers, it not certain that California entering into the Quebec agreement does that. Rather, it appears that the Quebec agreement was carefully crafted to specifically avoid that problem.

The agreement is generally voluntary in nature. It expressly provides that it "does not, will not and cannot be interpreted to restrict, limit, or otherwise prevail over relevant national obligations of each Party." The "Supervision and Enforcement" section of the agreement has no actionable enforcement mechanism, but rather speaks to cooperation and facilitation. Moreover, by its terms, the Quebec agreement does not modify any existing statues or regulations. Nor, other than a 12-month waiting period, is there a limitation on a party's ability to unilaterally withdraw from the agreement. In essence, the Quebec agreement bears little resemblance to formal treaties, compacts or other agreements between national governments. Instead, it is an agreement by which California and Quebec cooperate to link their respective GHG credits and trading systems in recognition of cross-border impacts of GHG emissions.

What is also unclear is the federal government's contention that California's entry into the Quebec agreement undermines the president's ability to negotiate competitive international environmental agreements, nor it is clear with what federal policy the California action conflicts. The president has stated that he believes climate change is a "hoax," and has initiated the process of disengaging the United States from the Paris Climate Accord. Although the absence of a specific federal policy is not in all instances fatal to a finding of preemption, the federal policy here presumably is that climate change should not be regulated, or at the least, not regulated heavily in the United States. However, if that were truly a basis for a preemption argument, it would mean that the California program itself, with or without Quebec would conflict with federal policy, and no one has made that argument.

It cannot be easily predicted how this case will end, but it does appear that the administration has a tougher road. Ironically, and a point not lost on a number of parties interested in this litigation, is that if the administration is not successful in its endeavor, and is on the losing end of the litigation, it may encourage both California and other states to extend the reach of these types of agreements, both inter-state and with jurisdictions of other nations. Always beware of unintended consequences. 