‘Uncharted territory’
The Trump administration has been in battle with California over its right to take actions to cut carbon pollution, announcing it would revoke California’s authority, enshrined in federal law for nearly half a century, to set air-pollution standards that are stricter than the country’s.
The administration also threatened to pull billions of dollars in federal highway funding from California because of the state’s chronic air-pollution problems.
In the Oct. 23 lawsuit, the administration is claiming that in creating a cap-and-trade agreement with a foreign jurisdiction, California violated the country’s constitution, which enables the federal government “to speak with one voice on behalf of the United States in matters of foreign policy.” It claims the agreement could interfere with the decision to pull out of the Paris Agreement.
"Defendants’ actions individually and collectively interfere with the United States’ foreign policy on greenhouse gas regulation, including but not limited to the United States’ announcement of its intention to withdraw from the accord, and are therefore pre-empted," the lawsuit said.
Nicolas Girod, managing director of the carbon consultancy ClearBlue Markets, said that, if successful, the lawsuit could result in a delinking of the Quebec-California markets, which will affect the prices of pollution permits.
But the outcome of this litigation remains uncertain at present — and uncertainty is never good for markets.
“This is uncharted territory,” Girod said of the lawsuit.
“When this kind of thing happens, companies become unsure if they can monetize from emissions reductions, so they take a step back and wait and see,” Girod said. “This means delayed investments.”
That happened when Ontario pulled out of the cap-and-trade agreement with California and Quebec in June — the business impact of which is still to be fully seen.
“This is not good for emissions reductions,” Girod said. “People invest and take advantage of incentives to reduce emissions. But if they have no certainty, they won’t do that.
“It’s never good when politics gets involved in markets.”
Busch was more optimistic. Irrespective of the outcome of the lawsuit, he says, the effect will be minimal, as California and Quebec are both on track to meet their emissions-reduction targets.
There’s also the fact that the state of California has defeated the Trump administration in court over a dozen times to date.
“The politics is difficult,” Busch said. “But over time, politicians are realizing (cap and trade) is an efficient way to make money for public goods and public investments at a time when that’s needed on all fronts.”
“The politics seems to be interfering with this window of opportunity we have to fight climate change with technology and sound policy.”