• 05 July 2009

Iterative Federalism and Climate Change

Ann E. Carlson - UCLA School of Law

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With the election of Barack Obama as President, national and global attention on climate change will turn to the federal government.  Though the looming economic crisis may slow a federal response, President Obama has made clear his support for ambitious action on climate change with a cap and trade scheme as the regulatory centerpiece.  Obama’s position is in obvious contrast to the Bush Administration’s, which advocated only voluntary efforts for the eight years of Bush’s governance. 

Yet the United States has hardly been inactive on climate change policy.  During the eight years of federal inaction, a surprisingly large number of states have stepped in to fill the policy void.  States have enacted renewable portfolio standards; created incentives for carbon capture and sequestration; mandated energy efficiency standards; and established public benefit funds to support energy efficiency and renewable energy.  Some states have gone even further, enacting overall greenhouse gas emissions caps, adopting greenhouse gas emissions standards for new automobiles, and capping utility emissions. 

 Several scholars have puzzled over why many states have chosen to regulate climate change given the lack of obvious economic incentive to do so.  State actors are part of a classic collective action problem: no single state can solve the problem absent action by other states—including nation-states, in the case of global climate change.  Moreover, states cannot fully realize the benefits of their regulatory actions to regulate carbon emissions.  The free rider incentives are large.  Theories about why states have acted to reduce carbon emissions include that states are simply responding to electorate preferences to gain political advantage,1 and that competition among states for economic development drives state behavior.2 

I contend that accounts of state involvement on climate change miss a large part of the story.  By emphasizing how the states have partly filled the regulatory void created by federal inaction, this conventional story misses the important, indeed critical, backdrop of the federal government and federal law.   The most innovative state responses to climate change are neither the product of state regulation alone nor are they exclusively the result of federal action.  Instead, such regulations are the results of repeated, sustained, and dynamic lawmaking efforts involving both levels of government—”iterative federalism.”      

Iterative federalism, I argue, is the best label for describing two of the most significant climate change initiatives to come from the states—California’s mobile source emissions standards and the Regional Greenhouse Gas Initiative (RGGI).  While the national government has failed to lead, the federal government’s long history of environmental policymaking has shaped and enabled state responses to climate change.  But the concept of iterative federalism extends even further: without the role played by the federal government in enabling the particular states or regions to act, these two state initiatives would not have occurred.  Understanding the important federal role in these state initiatives requires looking not only at the inactive federal government and its active state counterparts but also at the interaction between state and federal law—iterative federalism.

These examples of iterative environmental federalism share two characteristics.    First, rather than treating all fifty states as legally homogenous, federal law has singled out a state or group of states for special regulatory power.  California’s special status in regulating automobile emissions under the Clean Air Act—which the state used to enact its greenhouse gas emissions legislation—provides one example.   The establishment of the Ozone Transport Commission (OTC) in the 1990 amendments to the Clean Air Act provides another.  For the ten northeastern states comprising the OTC, this federal creation served as the impetus for the Regional Greenhouse Gas Initiative (RGGI).  Second, federal law harnesses this special state regulatory power by requiring the state regulator to comply with national environmental standards.  Out of this dynamic, in which the federal government has not acted itself but has quasi-deputized a state or region to act while simultaneously regulating its actions, a distinct version of federalism emerges.  Under this system, one level of government—either the singled-out state actor or the national government—moves to regulate a particular environmental policy area.  The initial policymaking then triggers a series of iterations adopted in turn by the higher or lower level of government.  The process then extends back to the policy originator, and so forth. 

In identifying and analyzing examples of iterative federalism, I mean to distinguish iterative federalism from federalism schemes that involve areas where state and federal areas of jurisdiction merely overlap through independent exercises of policymaking authority.  Instead I focus on schemes of federalism where federal law consciously designates a particular and distinct state or group of states to regulate and relies on that regulatory arrangement to enhance compliance with federal standards. 

In both the California and OTC examples, the regulatory exceptionalism contained in the Clean Air Act has produced a robust series of policy iterations that has resulted not only in large air pollution reductions but has also expanded the initial regulatory experimentation beyond the borders of the super-regulator jurisdictions to other states and the federal government.  And both iterative federalism schemes have produced two ambitious and interesting legislative initiatives to reduce carbon emissions.  California has enacted greenhouse gas emissions standards for passenger automobiles and the OTC states have entered a memorandum of understanding to impose a cap and trade scheme on electric utilities to regulate carbon dioxide emissions.3  Just as the air pollution iterations have expanded beyond the super-regulator’s borders, it is likely that the climate change regulatory schemes will do so as well.

In order to put the regulatory efforts of California and the OTC into context, a bit of brief background about the operation of the Clean Air Act is necessary.  The basic framework for controlling air pollution since the enactment of the modern Clean Air Act in 1970 is one of cooperative federalism: the Environmental Protection Agency, through its delegated authority under the Act, has issued National Ambient Air Quality Standards (“NAAQS”) for harmful air pollutants.  The EPA has designated six “criteria” pollutants for which NAAQS are established, including carbon monoxide, lead, nitrogen dioxide, ozone, and particulate matter.  The standards (set as allowable parts per million) are designed to protect human health and, in some instances, the physical environment. 

Section 110(k) of the Clean Air Act delegates to states the authority to implement the NAAQS through the adoption of State Implementation Plans (SIPs).  States are given a fair amount of discretion to devise their plans in a manner that takes into account local geographic and economic conditions, voter preferences, and the like, so long as a state’s SIP contains measures that will either attain or maintain the NAAQS and, importantly, mitigate the transport of interstate air pollution.  Though states were supposed to meet the NAAQS by 1975, Congress has twice extended the NAAQS deadlines and numerous areas of the country—principally the cities of the northeast, parts of Texas, and California—remain out of compliance for ozone and particulate matter.   In addition to the central features of the Clean Air Act, two provisions are of special interest to my claims here.   One grants California special authority to regulate motor vehicle standards.  The other provision establishes the northeast’s Ozone Transport Commission.  I describe these special provisions and the resulting regulatory activity next.

Iterative Federalism and Motor Vehicle Standards

California is the only state in the country authorized to enact its own vehicle emissions standards.  Section 209 of the Clean Air Act preempts all other states from enacting their own standards.  Other states can, however, opt into the California standards or remain subject to federal standards, which are typically less stringent than California’s.

The California experience as a “super regulator” under a scheme of iterative federalism has been a rather remarkable one, leading to at least nine separate iterations of emissions standards.  Typically, the pattern has been that California enacts ambitious motor vehicle standards and within a year or two the federal government follows suit. A number of states, typically in the northeast and Pacific northwest, have opted into the California standards.

The various iterations include the first tail pipe standards in the mid-1960s, which were tightened numerous times between that time and 1990.  Over that twenty-five year period California’s efforts led to standards that cut nitrous oxide, carbon monoxide, and hydrocarbons emissions by over ninety percent.  Post 1990, California shifted its mode of regulation to create extremely low emissions vehicles based on fleet standards.  The regulatory program has been so successful that the state’s past Air Resources Board chairman describes the program as follows: “We’ve seen the near impossible accomplished with gasoline vehicles: zero evaporative emissions, exceedingly clean exhaust—cleaner, in some cases, than the outside air entering the cabin for ventilation purposes and emission control systems that are twice as durable as their conventional forebearers, forecasted to last an astonishing 150,000 miles.”4  Slightly less stringent low emissions vehicle standards—modeled after the California program—have been adopted at the federal level.

Iterative Federalism and Cap and Trade Schemes

While California has been the first mover on mobile source emissions standards, the northeastern part of the country has quite successfully experimented with regulating air pollution by adopting cap and trade schemes.  Generally speaking these schemes set an overall cap on a particular pollutant and then allocate to major polluters allowances or credits.  Each credit typically allows its holder to emit one ton of the regulated pollutant.  If a polluter pollutes less than the amount its credits allow, the polluter can sell excess credits to polluters who need more.  If a polluter lacks sufficient credits, it can purchase unused credits. 

Unlike with mobile source emissions, the first level of government to enact a cap and trade program was the federal government in passing the 1990 Acid Rain Program. The Acid Raid Program regulates sulfur dioxide.   Based on that experience and under authority granted to them by a separate provision of the Clean Air Act, eleven northeastern states and the District of Columbia enacted a cap and trade program to regulate ozone pollution.   These states, acting under the auspices of the Ozone Transport Commission, worked together in an attempt to combat cross border ozone pollution.  The cap and trade scheme they adopted was a smashing success by virtually all measures.  Each year of the program—from 1999 through 2002—saw double digit declines in NOx emissions below allocation levels (twenty percent in 1999, eleven percent in 2000, twelve percent in 2001, and eleven percent in 2002).5  Moreover, emissions fell during the peak ozone season and on particularly hot days (a problem for smog formation not only because of the temperature but because electricity generation soars as temperatures increase).  The emissions trading program also achieved almost perfect compliance rates and very little “leakage”—emissions migrating from a regulated area to a non-regulated area—as a result of the program.  The program was so successful that it led to a third iteration, called the NOx Budget Trading Program.  The NOx Budget Trading Program, adopted by the EPA, used the Ozone Transport Commission’s cap and trade program and expanded it to include eleven states, in addition to the northeastern participants, many of them Midwestern and southern states that have caused significant cross border pollution in the northeast.   Preliminary results show that the new program has also succeeded in significantly reducing ozone pollution.

Air Quality, Climate Change, and Iterative Federalism

The deployment of federal law to create “super regulators” has succeeded in creating a particularly robust and dynamic series of iterations that have resulted in two separate and impressive achievements.  First, the California and OTC provisions have led to large reductions in air pollution.  Second, the provisions have created regulatory capacity in California and the OTC states that have led to major state initiatives on climate change, more thoroughgoing and significant than the states would have been likely to produce without the federal role. 

California has used its special authority to enact the country’s first greenhouse gas emissions standards for passenger automobiles.  These standards are modeled directly on the state’s most recent air pollution regulations establishing extremely low emissions vehicle tiers.  And the state’s influence has expanded well beyond its borders: at least fifteen states have indicated that if the California standards are allowed to go into effect they will enact them.  The northeastern states have used their regulatory expertise to enact the first greenhouse gas emissions cap and trade scheme in the country.  The greenhouse gas emissions scheme looks almost identical in operation to the cap and trade scheme the same states adopted to tackle ozone pollution.  Other states are using the northeastern state experience to craft their own cap and trade programs, including California.

Lessons for Environmental Federalism

An examination of iterative federalism schemes also contributes to ongoing theoretical debates about federalism within the environmental context.  Identifying iterative federalism as a significant factor in state climate change leadership moves the federalism debate beyond two key claims that have emerged in legal scholarship. The first claim is that a flurry of state environmental regulatory activity can lead to uniform federal legislation as a result of pressure from the regulated community.  The second is that states are more likely to produce efficient levels of environmental regulation because of interstate competition for capital and residents.  Here I identify a third pattern.

In their seminal paper, Donald Elliott, Bruce Ackerman, and John Millian argued more than twenty years ago that a flurry of state regulatory activity often spurs a federal response as industry clamors for centralized regulation.    They claimed that a high degree of state environmental regulatory activity can spur uniform federal legislation as a result of pressure from the regulated community.  While this dynamic may explain certain developments in environmental law, it cannot fully explain the breadth of state climate change action to date.  Instead, the reverse is also true: federal law has spurred state regulatory activity by bolstering state regulatory capacity and leadership, ultimately leading to climate change regulation.

Iterative federalism schemes also shed light on the ongoing debate about devolution versus centralization in environmental policymaking.  In an influential article, Richard Revesz argued that states are more likely to produce efficient levels of environmental regulation because of interstate competition for capital and residents.  Revesz’s article led to a robust academic debate about federalism and environmental law, focused to a large extent on which level of government—state or national—will provide the optimal level of environmental services.  Proponents of state devolution base their preference for state regulation principally on Tieboutian-influenced economic models about interstate competition, which predict that states will compete among themselves to produce an efficient level of regulation.  Centralization proponents, by contrast, argue that the nationalization of environmental law overcomes various market failures, including lax environmental standards among states that “race to the bottom” in an attempt to attract business, economies of scale in federal regulation, and interstate externalities.   

A close examination of iterative federalism schemes suggests that innovative regulatory mechanisms can achieve the best of both worlds.  These schemes facilitate some of the chief benefits of devolution—policy experimentation, avoidance of untested and potentially expensive national mandates—while simultaneously addressing interstate externalities, national product market economies of scale, and the race to the bottom.   These iterative federalism schemes also test empirically the contrasting hypotheses about devolution and centralization.  For example, California’s experience in regulating mobile sources bolsters claims of centralization proponents that regulators often operate under conditions of scientific uncertainty and with poor information about the economic effects of their regulatory proposals.  This particular regulation thus offers illustrative evidence suggesting that claims about a working competitive regulatory market among states are overstated.  But these examples challenge the pro-centralization camp’s assumptions as well.  The California experience demonstrates a significant benefit of devolution: minimizing the risk of overly stringent national regulation while allowing individual states to experiment and take risks.  Premature federal adoption of California’s rigorous emissions standards might have proven much costlier than allowing California first to experiment and then having the federal government act.  Similarly, the experience with the OTC—which adopted a ten state regional cap and trade scheme to regulate nitrogen oxides—provided an experimental base for persuading the federal government to expand the program’s reach to areas of the country much less politically supportive of regulation.  The state regulation also enabled the program to overcome potential public choice pathologies at the federal level.  By the same token, the OTC states were pushed to develop stringent strategies for reducing air pollution through their need to comply with national air standards—standards that form the linchpin of the centralized federal role in controlling air pollution.

The iterative federalism schemes analyzed here raise interesting possibilities for other pollution problems and for regulatory experimentation outside the environmental arena.  Federal preemption, for example, has occurred in numerous substantive areas in recent years—including securities regulation; pension benefits; predatory lending; cigarette labeling and advertising; tort law; and liability for oil spills—often at the behest of industry.  Though the case for uniform national standards in product markets has some intuitive appeal, one can imagine iterative federalism schemes in various substantive areas in which a particular state or states might be singled out to continue to play a regulatory leadership role, as California has, while preempting other states from regulating in order to avoid the chaos of fifty separate regulatory schemes.  In the environmental arena, for example, all fifty states are preempted from setting energy efficiency standards for many appliances.  Why not provide super-regulator status for California and let the state experiment with tighter standards?   Similarly, regional problems like the management and transport of waste, water pollution, and traffic and land use might benefit from the regional approach embodied in the OTC, with strong state involvement bolstered by significant technical and leadership support from the federal government.  In short, iterative federalism ought to expand our regulatory horizons.dingbat 



Copyright © 2009 Northwestern University Law Review.

Ann E. Carlson is Professor of Law, UCLA School of Law; Faculty Director, Emmett Center on Climate Change and the Environment.

This Editorial is based on the following full-length Article:  Ann E. Carlson, Iterative Federalism and Climate Change, 103 NW. U. L. REV. ___ (forthcoming 2009).

  1. J.R. DeShazo & Jody Freeman, Timing and Form of Federal Regulation: The Case of Climate Change, 155 U. PA. L. REV. 1499, 1516-21; Kirsten H. Engel & Scott Saleska, Subglobal Regulation of the Global Commons: The Case of Climate Change, 32 ECOLOGY L.Q. 183, 190-94 (2005).
  2. See Barry G. Rabe, Mikáel Roman & Arthur N. Dobelis, State Competition as a Source Driving Climate Change Mitigation, 14 N.Y.U. ENVTL. L.J. 1, 12-43 (2005).
  3. See Regional Greenhouse Gas Initiative: An Initiative of the Northeast & Mid-Atlantic States of the U.S., http://www.rggi.org/about.htm (last visited Jan. 23, 2009).
  4. Press Release, Cal. Envtl. Prot. Agency Air Res. Bd., ARB Modifies Zero-Emission Vehicle (ZEV) Regulation (Apr. 24, 2003), available at http://www.arb.ca.gov/newsrel/nr042403.htm.
  5. See CLEAN AIR MKTS. DIV., OFFICE OF AIR & RADITIATION, U.S. ENVTL. PROT. AGENCY, 2002 OTC NOX BUDGET PROGRAM COMPLIANCE REPORT 2, 3 exhibit 1 (2003), http://www.otcair.org/document.asp?fview=Report (follow “2002 OTC NOx Budget Program Compliance Report” hyperlink). Though these emissions reductions are impressive, it is unclear to what degree NOx emissions would have declined by similar amounts had each state individually regulated sources using more traditional command and control measures.


  • This article, or at least this condensation of it (I have not read the article in its entirety), seems to ignore the elephant in the room: the quasi-monopsony power of California or of a ten-state compact. If a business wished to deal with either (and presumably the largest would given the populations and quantity of consumers at stake), it had to conform there, leading to spill-over into other states simply because multiple production processes would be less profitable. Once that step has been made federal change is more likely because those who have previously changed have an incentive to encourage more, to hurt their competitors who chose not to produce in either region. With industry not standing in the way, perhaps also supporting, such policies have an easier time of being enacted. The phenomenon at work here seems somewhat analogous to adverse selection, in that the more painful policy choices eventually result in the entire market being subjected to them.

    I also question why section II mentioned only the positive effects of California’s policy choices and not the negative ones. Certainly it has had to spend more to enforce stricter standards. It likely has deterred some businesses from expanding or forming, at the margin. Fewer job opportunities might also predict a decline in state population, a decline happening today (although whether or not there is causality is a separate question). Certainly these issues deserve at least some analysis in determining the overall effect of these policy choices, don’t they?

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