March 29, 2021

Viewing the Environmental Justice Critiques of Greenhouse Gas Auction-Cap-Trade-and-Invest Programs through an Ethical Lens

Robert B. McKinstry Jr.

Abstract

The existing North American regional programs for capping and reducing greenhouse gas (GHG) emissions have come under criticism based on concerns regarding their perceived impact on environmental justice (EJ) communities. This criticism has increased as more states and provinces have taken action to join those regional efforts. There have been three lines of criticism. The first is an ethical criticism of trading altogether that appears to be based on a method for allocating allowances based on prior use or appropriation. The latter two are EJ criticisms of the existing programs specifically. First, EJ critics of these programs argue that the existing GHG programs harm the poor by increasing energy prices, and that this will have a disproportionate impact on disadvantaged populations. Second, the EJ critics argue that the programs will cause hot spots that will concentrate air pollutants harming health in disadvantaged neighborhoods. Neither criticism is founded upon sound technical or ethical analysis. This article will first examine the more general ethical criticism of GHG cap-and-trade and then consider the specific EJ criticism.

I.  The Ethical Case for a Fair Distribution of Permission to Emit GHGs

When viewed through an ethical lens, it appears the basic policy construct employed by the two existing North American GHG cap-and-trade programs is the one most consistent with ethical norms, particularly as expressed in John Rawls’ Theory of Justice. The policy construct used by those programs establishes a descending cap on GHG emissions. Both systems then distribute the allowances of the permission to emit GHGs by way of an auction, open to all and subject to a reserve price under which no allowances will be distributed at a price lower than the reserve price. The allowances may then be freely traded.

This article’s analysis of the EJ criticisms starts with the premise that there is an ethical duty to reduce and limit GHG emissions to a level that will not cause undue disruption to the climate supporting our biosphere. Further, because the principal GHG, carbon dioxide, persists in the atmosphere for millennia, this means that, for the purposes of human lives, there is a finite amount of GHGs that may be removed from long-term (in geological terms) fossil sinks and emitted into the atmosphere. To keep the atmospheric level of GHG below the level at which the most significant disruption of the climate system will occur, the Intergovernmental Panel on Climate Change (IPCC) has determined that world GHG emissions must decline 45 percent from 2010 levels by 2030 and achieve GHG emissions neutrality by 2050. This is the level of reduction that can potentially keep temperature increases within 1.5 °C above pre-industrial levels.

There are ethical issues surrounding the method for allocating the remaining capacity of Earth’s atmosphere to absorb additional GHG emissions among nations and people. However, there does not appear to be any practical means of achieving the necessary consensus on how to accomplish this allocation among nations. At a minimum, there does not seem to be an ethical basis for a developed jurisdiction that has contributed significantly to past emissions to assert that it should be able reduce its own emissions at a pace slower or in an amount less than that required of the world as a whole to keep temperature increases within 1.5 °C. Thus, each developed nation must reduce its emissions annually by at least 3.33 percent of today’s emissions in order to achieve emissions neutrality by 2050.

No matter what assumption one makes regarding the relative responsibilities of various jurisdictions, there is a finite amount of GHG emissions that may be emitted by the world as a whole over the next 30 years. Whenever an individual entity releases GHGs from fossil sources into the atmosphere, it consumes a portion of the finite capacity of the earth’s atmosphere to absorb those emissions. This is true whether the emitter is a company operating a fossil-fired power plant or cement plant or an individual driving a car or heating a home with fossil oil or cooking with fossil fuels.

There does not seem to be any ethical principle that would suggest the existence of an individual or corporate right to consume the limited capacity of that atmospheric commons. This has implications for both the policy mechanism that is used to enforce the requirement for emissions reduction and for the mechanism used to distribute the remaining atmospheric capacity among potential emitters.

The environmental justice critique of auction-cap-and-trade programs does not challenge the need for a descending enforceable emissions cap or the need for a permit system as an enforcement mechanism to assure reductions consistent with the cap. Rather, the critique focuses on auctions and trading of emission allowances. When asked what alternative policy mechanism could be used to implement a descending cap, the critics respond that traditional command-and-control permits could be used. Even assuming that a traditional command-and-control regime could be implemented as a practical matter to a pollutant emitted by millions of sources and individuals in the United States alone, that position is ethically problematic for two reasons. A traditional command-and-control permit presupposes a right to emit a certain quantity of pollutants and gives that right to the emitter free of charge. This is problematic for distribution of a limited resource because it limits the opportunity of others to acquire that resource. This violates the Rawlsian principle of justice that “social and economic inequalities are to be arranged so that they are both (a) reasonably expected to be to everyone’s advantage, and (b) attached to positions and offices open to all.” By contrast, an auction open to all with revenues going to a government satisfies this principle. A traditional command-and-control permit does not. Indeed, most such command-and-control permits are premised on prior appropriation of the right to emit without regard to principles of fairness.

Second, providing a right to emit GHGs free of charge violates the Rawlsian principle of distributive justice requiring consideration of the rights of future generations who are not represented in the current marketplace. At the current levels of GHGs in the atmosphere, any emission will increase the amount of harm that will occur in the future. That harm will affect future generations, that cannot participate in the current political or economic marketplace. The amount of harm caused by the emission of one ton of GHGs is measured by the “social cost of carbon.” When risk is considered that harm could exceed $100/ton. An emitter should be charged at least that amount both to induce current actions that will avoid or limit that harm and to compensate society and make it better able to adapt and mitigate the harm. This suggests that, to satisfy distributive justice concerns, there should not only be an auction, but a reserve price set at the social cost of carbon. The existing North American auction-cap-and-trade systems satisfy these justice criteria by distributing allowances to emit using an auction with a reserve price. However, the existing systems may not set the reserve price sufficiently high to meet the distributive justice criteria with respect to future generations. When examined through an ethical lens, the existing auction-cap-and-trade programs therefore meet environmental justice criteria imperfectly, but better than the alternative.

As long as the initial distribution of the ability to emit is made by way of an auction open to all and subject to a reserve price assuring that society as a whole is compensated, allowing trading does not create injustice but more opportunity to acquire those allowances. Trading therefore makes for a more rather than less just system. Trading disserves environmental justice only where the initial distribution is free of charge and based on a metrics such as existing emissions. Those who have reduced the least or appropriated the greatest portion of the atmosphere would then be rewarded twice.

II.  The EJ Criticisms of the RGGI and California Programs

The critics of the Regional Greenhouse Gas Initiative (RGGI) and California auction-cap-trade-and-invest programs make two more specific arguments upon which the critics base their contention that these programs disserve environmental justice. First, these critics argue that these programs harm the poor by increasing energy prices, and that this will have a disproportionate impact on disadvantaged populations. Second, the critics argue that the programs will cause hot spots that will concentrate air pollutants harming health in disadvantaged neighborhoods. These criticisms suffer because they are unsupported factually and ignore important aspects of the programs that significantly limit any disproportionate impacts on disadvantaged populations.

A. The Criticism Based on Price Impacts
First, critics of GHG emission pricing mechanisms sometimes suggest that GHG emissions pricing is regressive because it will lead to higher energy costs, which hurt disadvantaged communities the most. However, as an empirical matter, it is not at all clear that, for example, RGGI will lead to higher prices. Electricity prices have fallen in RGGI states, and the ways in which costs imposed on fossil fuel generators play through wholesale electricity auction pricing mechanisms for wholesale power, even in a static analysis, are not simple. See, C. Baird Brown & Robert B. McKinstry, Jr., From RPS to Carbon: An Evolutionary Proposal, 50 E.L.R.10755, 10762 (Sept. 2020). Moreover, the all-in cost of new renewable generation is now generally less than new natural gas generation. So as the system evolves to cleaner generation, the overall cost in addition to the marginal costs are most likely to come down. Finally, the general energy price level affects customers primarily through the structure of the utility tariff. If the tariff is regressive, disadvantaged people will bear the brunt of a price rise. That is a matter of concern but falls within the jurisdiction of public utility commissions. It is not an inherent characteristic of auction-cap-trade-and-invest programs and can readily be addressed through traditional utility price regulation.

The other dimension of the auction price effect is the significant GHG allowance auction proceeds that existing states participating in the RGGI and California programs have already directed and will continue to direct to eliminate adverse economic impacts on low-income people. For example, California has raised $14 billion in auctions to date and is required to direct at least 50 percent of those revenues into direct benefits for EJ communities. By directing funds to mechanisms such as subsidizing low-income weatherization, alternative energy, energy efficiency and transportation mechanisms, along with job training, an auction-cap-trade-and-invest program can create a net benefit for disadvantaged communities. This benefit does not consider the considerable benefits to disadvantaged communities resulting from reducing GHG emissions and the disproportionate adverse impacts that climate disruption will have on disadvantaged communities.

B.         EJ Criticism Based on Hot Spot Concerns
The second line of attack suggests that a GHG auction-cap-trade-and-invest program will result in concentration of health-harming pollutants in low-income neighborhoods. This argument could have been true for the attempt by the Bush Administration to replace control of hazardous air pollutants from power plants under section 112 of the Clean Air Act with a cap-and-trade-program for mercury only. It is not at all true for a cap-and-trade program for GHGs.

The existing auction-cap-trade-and-invest programs have the principal and critically important goal of substantially reducing GHG emissions to address climate disruption, which has disproportionately high adverse impacts upon disadvantaged populations worldwide. These programs impose emissions reduction requirements above and beyond the requirements to comply with health-based standards for criteria and hazardous air pollutants. Pricing GHG emissions is one of the most effective tools to reduce those emissions. Carbon dioxide dissipates rapidly in the atmosphere and will not, itself, cause hot spots that can lead to adverse health impacts. To the extent that the GHG programs succeed in discouraging continued operation of fossil fuel fired power plants and other combustion sources, they also reduce emissions of other harmful pollutants. These include reductions in acid gases and acid gas aerosols, fine particulates, and metals––all of which can have significant acute and chronic adverse health impacts. In fact, for example, current modeling shows that the expansion of the RGGI program to Pennsylvania will reduce emissions from fossil fuel–fired power plants and cause the closure of many fossil-fired power plants, which can be located in low-income areas, so that emissions of those pollutants are likely to be reduced.

To cause a hot spot, one would need to show that the programs will cause increases in emissions of these other pollutants or building of new plants that affect low-income neighborhoods. Neither is likely, since the worst polluting plants will shut down and, even if new plants are built, they will be subject to more stringent new source emissions standards under sections. The inclusion of other sectors, such as transportation, in the California program will favor low emission or electric vehicles, which will have disproportionately high beneficial impacts on poorer communities that border highways. Thus, the programs will most likely reduce hot spots.

Moreover, the fact that a power plant or other major emitting plant may be located in a disadvantaged area does not mean that its emissions are felt there. Current air pollution control regulations that base air permit emissions limitations on local air quality impacts, requiring that those limits not exceed health-based National Ambient Air Quality Standards (NAAQS). This results in construction of tall stacks that carry pollutants miles away from the source rather than affecting the neighborhoods near the source. For example, in the Cross-State Air Pollution Rule modeling, EPA determined that emissions from sources in Texas would affect air quality in places as far away as Michigan and Pennsylvania.

The existing empirical evidence strongly suggests that GHG auction-cap-trade-and-invest programs do not result in hot spots of pollutants having adverse health impacts. The California Air Resources Board has reviewed the papers cited as evidence and found the claims unsupported and, in fact, inconsistent with the literature. In fact, a 2020 study by the National Bureau of Economic Research found that “while the EJ gap was widening prior to 2013 [when the California program was initiated], it has since fallen by 21-30% across pollutants due to the policy.” Indeed, most of the significant “cancer alleys” in the United States occur in states that do not participate in GHG trading programs. For example, Louisiana, Texas, Mississippi, and West Virginia include these concentrations of adverse health impacts and do not participate in the existing GHG trading programs.

If emissions of pollutants that adversely affect health could be concentrated as a result of GHG cap-and-trade resulting in hot spots, that effect (for which there is no supporting evidence) should be addressed by tightening the NAAQS or other regulations governing conventional and hazardous air pollutants under the sections of the Clean Air Act governing those pollutants. That effect should not be used as an argument against an effective regulatory mechanism to reduce GHG emissions.

III.       International Context

Although the environmental justice concerns are not warranted when considering impacts within the United States and Canada, this does not mean that there are no ethical problems with respect to the distribution of rights to emit among nations. Revenues from an auction of rights within the United States will go to the governments within the United States and will be disproportionately high due to the United States’ disproportionately high historic and per capita emissions. The benefits arising from use of auction proceeds will accrue to those living in the United States and to future generations, thus creating distributional inequities. Nevertheless, the benefits from emissions reductions will disproportionately benefit the disadvantaged nations of the world, which live in areas of high vulnerability and lack the resources to adapt. Given our system of nation states and sovereignty and the limited authority of the United Nations, it is not currently feasible to craft a truly just international system for the distribution of emissions allowances and auction revenues.

Although the international equity concerns can and should be addressed, these concerns do not suggest that a proven and largely equitable construct for achieving deep decarbonization should be abandoned. Given the severity of the problem of climate disruption, we should not let the perfect be the enemy of the good.

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    Robert B. McKinstry Jr.

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    Robert B. McKinstry, Jr. practices law from Kennett Square, Pennsylvania, doing business as Environmental & Climate Law and Consulting. (Public Interest Law | Robert B. McKinstry Jr. Law and Consulting).  He is a fellow in both the American College of Environmental Lawyers and the American Bar Institute.