• 28 October 2009

The Case for Limiting Federal Preemption of State Environmental Regulations

Brian T. Burgess - Law Clerk to Judge Guido Calabresi

States have exhibited leadership in environmental policy, addressing issues of national and global scope.  But this leadership is threatened by federal ceiling preemption—federal laws that prevent states from adopting regulations that are stricter than federal standards.

Environmental law scholars argue that federal ceiling preemption has pernicious effects.1 These scholars fail, however, to adequately address the risk that states may adopt tough environmental regulations because they can externalize costs to other states, which may allow large pro-regulatory states like California to effectively dictate suboptimally stringent national standards.  Cost externalization—an inevitable byproduct of dividing the nation into fifty geographic zones—refers to instances where states and their residents do not bear the full cost of the regulations they pass because significant costs are borne by out-of-state consumers and producers.  This Editorial contends that the case for federal ceiling preemption in the area of environmental law based on cost-externalization arguments is weak.  It does so through a case study of California’s regulations of greenhouse gas emissions from motor vehicles.

California’s emissions regulations were initially preempted under the Clean Air Act by the Bush administration’s decision to deny its waiver request.  The Obama administration has reversed this denial and has also taken steps to combine California’s emissions regulations with the federal corporate average fuel economy program.2 If the program succeeds, it will again impose a single national fuel economy standard.  Yet the history of motor vehicle regulation strongly suggests that any equipoise between federal and state regulations may be temporary, and that California (and states that choose to follow California) might again impose motor vehicle regulations that outpace the rest of the nation.  This Editorial addresses the costs consumers and producers in other states face from such leadership.

This Editorial argues that state regulations that provide manufacturers with sufficient flexibility to meet standards without disrupting economies of scale can largely avoid externalizing costs to out-of-state consumers, and that states often also have to consider, at least indirectly, the interests of out-of-state producers when issuing regulations.

 
I.
State Environmental Regulation and Federal Ceiling Preemption

States have developed innovative environmental policies.  Perhaps most prominently, every state has now taken some action to address climate change, adopting strategies ranging from targeted measures to increase energy efficiency and promote alternative energy to far broader proposals to cap greenhouse gas emissions across entire state economies.

California has also led an effort to regulate greenhouse gas emissions from motor vehicles, relying on its unique authority under the Clean Air Act.  The Clean Air Act preempts states from enforcing their own motor vehicle emissions standards, but makes an exception for California, which may petition the Administrator of the Environmental Protection Agency (EPA) for a preemption waiver.  In 2002, California’s legislature passed the nation’s first law to regulate motor vehicle greenhouse gas emissions, and the California Air Resources Board (CARB) subsequently promulgated regulations in 2004 establishing specific greenhouse gas reduction standards.  While other states cannot adopt their own emissions standards, they can opt into California’s program, and sixteen states have chosen to do so to regulate greenhouse gases.

Before California’s emissions regulations can become effective, the EPA must approve California’s waiver petition.  In December 2007, under the Bush administration, the EPA denied California’s waiver petition—the first time it had done so in decades and the only waiver request it ever denied in full.  Upon taking office, the Obama administration immediately decided to review this determination, and the new EPA Administrator granted California’s petition after completing formal reconsideration.3 The Obama administration also plans—through joint action of the EPA and Department of Transportation—to increase federal fuel economy standards, and harmonize them with California’s stricter standards.4

For now, then, it seems that those favoring more stringent regulation of motor vehicles to help combat global warming have won.  But the gains may be temporary and they do not resolve the structural question of the proper role for the states in environmental regulation.  As exemplified by the initial denial of California’s waiver petition, federal ceiling preemption in environmental law threatens state regulatory activity.  Over the past decade, federal ceiling preemption has expanded in environmental law as the result of broad interpretations of existing statutes by courts and agencies, as well as the enactment of new legislation by Congress.  Even presuming a Democratic Congress and presidential administration will be more interested in preserving the states’ ability to adopt stringent environmental regulations, questions about the proper scope of federal ceiling preemption are sure to arise.  For instance, business leaders have argued that preemptive federal policies are necessary to address climate change, while state leaders have supported federal action but have lobbied against federal ceiling preemption that would disable the many state, regional, and local programs under development.  In fact, a provision in the Waxman-Markey Bill, a leading climate change and energy bill that passed the House on June 26, 2009,5 imposes a five-year moratorium on state cap-and-trade programs for greenhouse gas reduction.6 Properly analyzing such questions requires precision about the tradeoffs involved in either permitting or preempting more stringent state environmental policies.

 
II.
Cost Externalization and Federal Preemption

Federal ceiling preemption has costs, but preemption may be justified when state regulation externalizes costs.  Cost externalization is undesirable because it distorts the incentives of state governments and regulators, leading them to enact stringent environmental regulations to gain benefits like environmental protection for their constituents at the expense of others.  Federal ceiling preemption is proffered as a solution to this problem, as it allows the federal government to consider and balance all of the costs and benefits of regulation.

A principled argument against the use of federal ceiling preemption in environmental law must therefore address whether and when state environmental regulations externalize costs.  Proponents of the extensive use of federal ceiling preemption suggest state regulations may often externalize costs, particularly when states regulate products with national markets and economies of scale in production.  California’s regulation of motor vehicle emissions is referenced as a paradigm example.  These regulations, the argument goes, may externalize costs to both out-of-state consumers and out-of-state producers.  Consumers are adversely affected if the regulations increase the cost of motor vehicles in their state, either by reducing economies of scale and increasing marginal production costs, or by forcing manufacturers to adapt vehicles to meet more expensive California standards nationally.  Producers and their workers may be harmed if the regulations make automobiles more expensive, which could decrease sales, reduce profits, and negatively affect employment rates.

This Editorial’s case study of California’s regulations suggests, however, that these fears may be overblown.  California’s regulations are designed in a way that minimizes disruption to economies of scale and mitigates cost externalization, and the argument that California is insulated from the costs it imposes on producers beyond its borders seems exaggerated.

 
III.
California’s Greenhouse Gas Regulations for Vehicle Emissions

California’s regulations under Assembly Bill 1493 (A.B. 1493),7 which limits tailpipe emission of greenhouse gases, grew out of the state’s preexisting Low Emission Vehicle Program (LEV).  Following the model of prior LEV regulations, the A.B. 1493 regulations set emissions standards for two different categories of new vehicles sold within the state (determined by vehicle weight) based on grams of carbon dioxide emitted per mile driven (calculated on a fleet-average basis).  The regulations do not directly impose fuel economy standards—and indeed, legally they may not under the federal Energy Policy and Conservation Act8—but the majority of emissions reductions are accomplished through enhanced fuel economy, and greenhouse gas emissions standards can be converted to approximate miles-per-gallon requirements.

As discussed above, in 2007 the EPA denied California’s Clean Air Act waiver request, preventing, at the time, the implementation of California’s vehicle emissions regulations.  In 2009, the EPA pivoted, as it withdrew its earlier denial and granted the waiver.  Assuming that both actions were within the EPA’s legal discretion, which is the better policy?  The answer ultimately turns, at least in part, on whether the initial waiver denial can be justified on cost-externalization grounds.  In other words, do California’s greenhouse gas emissions regulations enable it, as a single large state, to impose substantial costs to consumers and producers beyond its borders and effectively dictate national policy?

Looking first at the regulation’s potential impact on out-of-state consumers, the vehicle emissions standards’ reliance on fleet-wide averages—rather than vehicle-specific mandates—allow manufacturers to meet California standards without having to make modifications across product lines, minimizing the impact on out-of-state consumers.  Manufacturers do not have to build new “California cars.”  Instead, they can comply by altering the mix of car models sold in a jurisdiction.  Even for 2009 model-year cars—2009 being the first model year to which California’s regulations were scheduled to apply—most leading automobile manufacturers had at least some vehicle models in their fleet that comply with California’s standards.  California’s regulations admittedly may increase the cost of less fuel efficient vehicles by altering patterns of production and diminishing economies of scale.  However, they should also correspondingly increase the market for high fuel efficiency vehicles, creating additional economies of scale for these vehicles and making them less expensive both in California and in other states.

The car industry has actually recognized the possibility that California’s regulations could be satisfied by adjusting in-state sales.  In Green Mountain Chrysler Plymouth Dodge Jeep v. Crombie9—a case brought in federal district court by members of the car industry to enjoin on preemption grounds Vermont’s adoption of California’s standards—a General Motors executive director testified that the company might have to gradually restrict products offered in jurisdictions like Vermont that adopted the more stringent emissions regulations.  While this prediction was offered as an argument against the state regulations, the case for preemption is thin when states primarily restrict the consumption options of their own constituents.  If state residents become dissatisfied with their consumer options or come to believe the regulations are ineffective,10 they can pressure their state government officials to change them.

Commentators have also suggested that California’s greenhouse gas regulations will negatively affect out-of-state producers.  It is reasonable to presume that the regulations will impose initial additional costs on the already struggling car industry, though the regulations might also benefit the industry in the long term.11 In any case, the fact that California’s regulations may affect Michigan’s economy does not establish that the regulations are suboptimally stringent, and it is not sufficient to justify federal ceiling preemption.  The key issue is whether stringent regulations result from cost externalization or whether state regulators and politicians properly consider the interests of other states.

To this end, the argument that California voters have little incentive to protect Michigan’s interests is appealing in the abstract, but the case is overstated.  First, California voters do bear some of the costs of their more stringent vehicle emissions regulations in the form of increased prices and possibly reduced consumer options. If producers can pass on their increased production costs to consumers within the jurisdiction, then the cost of the regulation will be at least partly internalized. Second, the notion of a complete “free lunch” for legislators is rather idealized.  Out-of-state interests often lobby state governments, and they may have the support of in-state groups with whom their interests align, such as car dealerships supporting automobile manufacturers.  Additionally, the line between in-state and out-of-state interests is blurred by the widely dispersed ownership of large public companies like Ford Motor Company.

 
Conclusion

Despite broad suggestions to the contrary, the scope of cost externalization for particular state environmental regulations may turn out to be fairly minimal.  As the magnitude of any regulatory cost externalization decreases, it becomes increasingly doubtful that federal ceiling preemption is desirable in light of the benefits of state-based environmental regulation, including the value of tailoring standards to local preferences and conditions, the importance of state-level experiment for technology development, and the desirability of decentralized democratic decisionmaking.  Policy makers should therefore look closely at the realities of cost externalization before determining whether federal ceiling preemption is appropriate.dingbat

 

Acknowledgments:

Copyright © 2009 New York University Law Review.

Brian T. Burgess is a Law Clerk for Judge Guido Calabresi. He wrote this piece while he was a J.D. Candidate at New York University School of Law.

This Legal Workshop Editorial is based on the following Student Note: Brian T. Burgess, Limiting Preemption in Environmental Law: An Analysis of the Cost-Externalization Argument and California Assembly Bill 1493, 84 N.Y.U. L. REV. 258 (2009).

  1. See, e.g., David E. Adelman & Kirsten H. Engel, Adaptive Federalism: The Case Against Reallocating Environmental Regulatory Authority, 92 MINN. L. REV. 1796, 1832-39 (2008) (arguing that federal ceiling preemption undercuts diversity and adaptability of federal system by preventing robust state and local regulation); William W. Buzbee, Asymmetrical Regulation: Risk, Preemption, and the Floor/Ceiling Distinction, 82 N.Y.U. L. REV. 1547, 1597 (2007) (“Assessed in light of . . . common regulatory failures . . . , unitary federal choice preemption looks likely to be a disaster.”); Robert L. Glicksman & Richard E. Levy, A Collective Action Perspective on Ceiling Preemption by Federal Environmental Regulation: The Case of Global Climate Change, 102 NW. U. L. REV. 579, 647 (2008) (noting that ceiling preemption “displaces the states’ traditional authority to protect the health and safety of their citizens” and thus “{t}he principles of federalism caution against {it} absent compelling justification”).
  2. See John M. Broder, Obama to Toughen Rules On Emissions and Mileage, N.Y. TIMES, May 19, 2009, at A1 (reporting President Obama’s intention to “put in place a federal standard for fuel efficiency that is as tough as the California program”).
  3. See California State Motor Vehicle Pollution Control Standards: Notice of Decision Granting a Waiver of Clean Air Act Preemption for California’s 2009 and Subsequent Model Year Greenhouse Gas Emission Standards for New Motor Vehicles, 74 Fed. Reg. 32,744 (July 8, 2009).
  4. See Proposed Rulemaking to Establish Light-Duty Vehicle Greenhouse Gas Emissions Standards and Corporate Average Fuel Economy Standards, 74 Fed. Reg. 49,454 (Sept. 28, 2009).
  5. American Clean Energy and Security Act of 2009, H.R. 2454, 111th Cong.
  6. See Ari Natter, House Climate Legislation Would Prohibit State Cap-and-Trade Programs for Five Years, 40 Env’t Rep. (BNA) 1284 (June 5, 2009) (reporting that bill’s five-year moratorium on state cap-and-trade programs was drawing criticism from state environmental agencies).
  7. A.B. 1493, 2001-2002 Leg., Reg. Sess., 2002 Cal. Stat. ch. 200 (codified as amended at CAL. HEALTH & SAFETY CODE § 43018.5(a) (West 2006 & Supp. 2009)).
  8. Pub. L. No. 94-163, 89 Stat. 871 (1975) (codified as amended at 49 U.S.C. §§ 32901-32919 (2000 & Supp. V 2005)).
  9. 508 F. Supp. 2d 295, 342 & n.49 (D. Vt. 2007).
  10. For instance, some commentators argue that separate California regulations would produce no national environmental benefit because car companies could offset the mandate for higher fuel economy in California by selling even lower fuel economy cars in other states than they otherwise would. See Raymond B. Ludwiszewski & Charles H. Haake, Cars, Carbon, and Climate Change, 102 NW. U. L. REV. 665, 682-83 (2008) (predicting “little or no net decrease in CO2 emissions nationwide”).
  11. Certainly the Obama administration believes this, as its efforts to rescue American car companies have focused in part on promoting increased fuel efficiency. See John M. Broder, Obama Directs Regulators to Tighten Auto Rules, N.Y. TIMES, Jan. 27, 2009, http://nytimes.com/2009/01/27/us/politics/27calif.html (describing President Obama’s annoucement directing EPA to reconsider application by California and other states to set emissions standards and instructing Department of Transportation to draft stricter fuel efficiency standards).

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