June 14, 2019

Making Fossil Fuels Dormant

Brandon Rattiner

Introduction

A 2014 polar bear sighting in Hawaii set environmental politics ablaze. “Hey Polar Bear,” President Obama shouted to Frostpaw the Polar Bear, minutes before finishing a round of golf in Hawaii. Frostpaw is a creation of the Center for Biological Diversity, and it had followed President Obama across the United States for more than a year prior to the presidential shout out. Frostpaw, or more accurately the activist in a polar bear costume, was protesting the Keystone XL Pipeline as part of the burgeoning “Keep It in the Ground” campaign. The almost cartoonish image of a polar bear holding a pipeline protest sign at a Hawaiian golf course is a fitting characterization of how many perceive those advocating to restrict the supply of fossil fuels. Conventional wisdom asserts that restrictive supply-side (RSS) policies are “economically suboptimal and politically counterproductive.” Parties that support RSS policies are usually labeled as naïve, radical, alarmist, and unsophisticated by other advocates.

Conventional thinking appears to be shifting, although the conversation surrounding RSS is still in its nascent stage. Most RSS scholarship is understandably preoccupied with threshold questions of political economy and policy design. Yet, the implementation of RSS policies is not simply a matter of political will or cost-benefit analysis. RSS faces substantial legal obstacles, and its viability hinges on crafting policies that outmaneuver these legal constraints.

This note supplements scholarship by discussing one of the thorniest constitutional issues facing RSS climate policies—how state RSS climate policies can survive a likely dormant Commerce Clause challenge. The dormant Commerce Clause has proven to be a major obstacle for demand-side strategies like state-level renewable energy portfolios. Yet, state RSS climate policies are much less vulnerable to these challenges. The non-protectionist nature of state RSS climate policies likely immunizes them from dormant Commerce Clause issues. This is in contrast to demand-side policies, which often are justified by protectionist policies.

I.  Defining RSS Climate Policies

Social change campaigns try to replace a negative condition with a more positive alternative. Change is achieved through strategies that operate one of four ways: (1) restricting the supply of whatever enables the negative condition, (2) boosting the supply of whatever enables the positive alternative, (3) reducing the demand for whatever enables the negative condition, and (4) boosting the demand for the positive alternative.

In the climate change context, that negative condition is the atmospheric concentration of greenhouse gases (GHGs). This puts fossil fuel combustion in the crosshairs of advocates. Like other social change campaigns, advocates can use policies from any of the strategy classes to reduce GHG emissions from fossil fuels. Supply-side policies target the exploration, extraction, or transportation of fossil fuels. Demand-side policies regulate consumption, including by private citizens, industry, or wholesale energy providers that burn fossil fuels to generate electricity.

RSS climate policies can be further subdivided into two general categories. Some RSS policies impede the physical movement of fossil fuels—like bans on fossil fuel extraction, fossil fuel production quotas, limits on fossil fuel imports or exports, and thwarting the siting of fossil fuel infrastructure. This category does not include demand-side policies inhibiting the movement of electricity generated by fossil fuel combustion. Other RSS policies increase the cost of fossil fuel production—like taxing fossil fuel extraction, taxing fossil fuel imports, removing existing fossil fuel subsidies, and subsidizing mineral estate owners to forego development. Hundreds of different policy designs are possible within each category. This note refers to these categories as physical impediments and price instruments, respectively.

II.  RSS Climate Policies and the Dormant Commerce Clause

The dormant Commerce Clause prohibits states from disrupting interstate commerce. This area of law is famously unruly, but judicial review of state laws under the dormant Commerce Clause generally proceeds in three steps. First, courts decide if the state law discriminates against interstate commerce on its face, in its purpose, or in its effect. Second, courts assess if the state law regulates extraterritorially. Third, courts adopt a level of review based on the previous steps. Discriminatory or extraterritorial state laws are strictly scrutinized and per se unconstitutional. Otherwise, courts employ the Pike balancing test to determine whether the law unduly burdens interstate commerce.

These steps have important differences, but they coalesce at the margins. The principle animating dormant Commerce Clause jurisprudence is a bar on state protectionism. This is good news for those championing RSS strategies. State RSS climate policies are not protectionist by design; they disadvantage in-state businesses by subjecting them to restrictions other states lack. This alone should inoculate most state RSS climate policies from dormant Commerce Clause challenges, but if advocates want to further bolster their constitutionality, they should vocally embrace climate science. The more seriously courts take the threats posed by climate change, the more likely they are to permit state RSS climate polices under the Pike balancing test.

A.  RSS Climate Policies and the Prohibition on Discrimination

Discrimination is “differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter.” Because “any notion of discrimination assumes a comparison of substantially similar entities,” courts must first identify the economic interests at stake. This section begins by defining the relevant economic interests affected by general RSS climate policies, and next, it examines whether specific RSS climate policies discriminate against those out-of-state economic interests.

1. Situating the Supply of Fossil fuels in Interstate Commerce 
Coal, oil, natural gas, and clean energy companies provide distinct products. This basic “difference in products may mean that the different entities serve different markets, and would continue to do so even if the supposedly discriminatory burden were removed.” Thus, courts must initially decide if distinct fuel sources are similarly situated in a singular market.

If courts do decide that distinct fuel sources compete in a single interstate primary energy generation market, state RSS policies will not be discriminatory. The dormant Commerce Clause only “protects the interstate market, not particular interstate firms” or “market structure.” The Constitution only guards the integrity of the broader primary energy generation market in this scenario—not the comparative fortunes of different fuel sources supplying that market. Because “their products compete against each other in a single market . . . it is irrelevant whether they are made from different materials or if one poses a substantial competitive threat to another.” In fact, it is fully within a state’s police powers to encumber a subset of firms or alter competitive conditions to further environmental and health goals. This means that states have the authority to disadvantage fossil fuel companies in a unified interstate primary energy generation market.

However, courts are more likely to find the interstate primary energy system divided into distinct fuel markets. The Supreme Court has historically siloed distinct primary energy sources from one another, instead comparing fuel sources against their duplicates in dormant Commerce Clause cases. Because fossil fuels producers and clean energy companies are not competing in a single market, they are not similarly situated interests. This renders the most basic dormant Commerce Clause challenge against RSS policies inert; they do not protect in-state clean energy actors at the expense of out-of-state fossil fuel producers. The similarly situated interests are in- state and out-of-state fossil fuel producers. Thus, the key question is whether a state RSS climate policy discriminates against out-of-state fossil fuel producers in order to protect in-state fossil fuel producers. Because RSS policies aspire to reduce the use of all fossil fuels, this is unlikely.

2.  Examining Specific State RSS  Policies under the Anti-Discrimination Step
This subsection describes how to draft physical impediments and price instruments that do not discriminate against out-of-state fossil fuel producers. RSS policies effecting out-of-state interests will be deemed nondiscriminatory if they are accompanied by in-state corollaries.

a.  Physical Impediments
RSS policies impeding in-state fossil fuel production should not be discriminatory. For instance, wholesale extraction bans “affects both interstate and intrastate commerce in the same manner” because all parties are unable to mine or drill. Impeding in-state production also lacks a discriminatory purpose or effect, even if the relevant policies primarily affect out-of-state developers. When states regulate “an industry in which the activities or actors happen to be predominantly (or even exclusively) interstate in nature,” courts do not find discrimination if “no relative advantage is conferred on in-state interests.” States do not protect in-state fossil fuel interests by restricting their access to fossil fuels. Impediments disadvantage in-state actors.

RSS policies impeding the interstate movement of fossil fuels are more exposed to charges of discrimination. Still, states can mitigate exposure by ensuring their impediments are not protectionist. Strictly limiting fossil fuel imports or exports need not benefit in-state actors. A state that restricts the supply of coal from neighboring states, for example, does not prejudice out-of-state interests if it similarly restricts in-state coal production. Protectionism is the relevant touchstone. The Supreme Court found waste export restrictions to be discriminatory in the past, but only because they were enacted “to promote in-state disposal markets at the expense of out- of-state waste disposal competitors.” The Court also held waste import limits discriminatory when they were enacted to isolate states “from the national waste disposal market.”

This may pose challenges for states that want to curb imports of particularly dirty fossil fuels if that restriction incidentally bolsters in-state companies producing the same fossil fuel. However, the Ninth Circuit has recognized that treating similar situated fuel sources differently because of dissimilar carbon footprints is a nondiscriminatory and legitimate classification. The Seventh Circuit is the only other circuit court to tangentially explore this issue. In Alliance for Clean Coal v. Miller, the court did not differentiate between in-state and out-of-state coal on the bases of carbon intensity, but that case involved a prohibition on importing cleaner coal. It is unclear if the court would label a law limiting dirty coal imports as discriminatory. The Supreme Court has not ruled on the legality of a classification based on carbon intensity. Yet, in finding import restrictions discriminatory, it has “focused on the fact that the waste from any particular state was identical and thus, on its own, presented no additional harm to public health or the environment.” This implies that asymmetrical environmental impacts is at least relevant to a state policy differentiating between high carbon and low carbon commodities.

b.  Price Instruments
States are free to tax intrastate fossil fuel production, but their power to tax fossil fuel imports is more limited. It is unconstitutional to levy facially discriminatory import taxes like tariffs or rates that tax fossil fuel imports at higher comparative levels. Taxes levied to protect in-state fossil fuel producers from out-of-state competitors are also discriminatory, but states can levy import taxes that level the playing field. These compensatory import taxes are a useful RSS tool; they allow states to place high taxes on local production, then levy similar taxes on imported fuels to counterbalance the premium paid by local producers.

The dormant Commerce Clause treats subsidies more leniently. Facially protectionist subsidies are constitutional in some instances. A direct subsidy “funded out of general revenue ordinarily imposes no burden on interstate commerce,” even if it is purely “designed to give [in-state] residents an advantage in the marketplace.” This asymmetry is critical as many believe that subsidizing mineral estate owners to forego developing their fossil fuels is the RSS policy best equipped to minimize carbon leakage. Nonuse subsidies are not discriminatory, despite expressly protecting in-state estate holders, if they are funded by the state’s general fund. Of note, courts distinguish direct subsidies from tax credits; even though overly protectionist tax credits work by subsidizing in-state parties, tax credits cannot be facially discriminatory. States cannot subsidize in-state parties with funds collected from out-of-state actors.

B.     RSS Climate Policies and the Extraterritoriality Doctrine
Next, courts analyze if the state law regulates extraterritoriality. Extraterritorial laws tend to impose “one state[’s] regulatory regime into the jurisdiction of another” or force “an out-of- state merchant to seek regulatory approval in one State before undertaking a transaction in another.” Applying the extraterritoriality doctrine is difficult, and different circuits apply it in distinctive ways. Still, circuit case law “appears to draw a real distinction between policies that influence decision-making actors in other states that participate in interstate markets and policies that directly regulate activities that occur wholly in other states.”

To be clear, states are authorized to enact RSS climate policies for the express purpose of influencing choices made by out-of-state fossil fuel producers. The policies must simply avoid directly regulating wholly out-of-state activities. Physical impediments will comply with the doctrine so long as they only burden transactions with an in-state component. Assuming a state is not foolhardy enough to pass a law banning other states from developing their resources, policies like moratoriums and production quotas exclusively target in-state fossil fuels.

Import and export restrictions may appear to be at greater risk, but the Eighth Circuit’s fractured opinion in North Dakota v. Heydinger illustrates how to avoid running afoul of the doctrine. Despite the judges disagreeing about whether a state law banning the import of coal-fired electricity violated the extraterritoriality doctrine, the judges agreed on the underlying law. A policy burdening a one in-state interest—like a company contracting in the state or a product flowing through that state—does not have extraterritorial reach.

Price instruments will comply with the extraterritorially doctrine so long as they do not set out-of-state fossil fuel prices or link in-state prices to out-of-state prices, even if the price instrument raises national compliance costs for fossil fuel producers. Intrastate instruments like a fossil fuel supply tax or fossil fuel subsidy removal remain completely unaffected.

C.     RSS Climate Policies Under the Pike Balancing Test
Because most RSS climate policies are not discriminatory or extraterritorial, they are subject to Pike balancing. Under the Pike test, a state law “will be upheld unless the burden it imposes on [interstate] commerce is clearly excessive in relation to the . . . local benefits.” Pike balancing is a very deferential standard and is rarely used to overturn state laws.

States should be able to easily identify putative local benefits of RSS climate policies. The Supreme Court has held environmental protection, resource conservation, and public health promotion to be qualifying local benefits under Pike. Policies targeting the supply of fossil fuels yield all three benefits. The local benefits of RSS climate policies need not depend on the climate advantages they produce. This is important as states appear to be limited to considering “in-state harms from climate change in attempting to justify their regulations under Pike.” There is a heated debate among scholars about whether Massachusetts v. EPA suggests minimal GHG reductions by states, or the aspirational message a state policy sends, constitutes a meaningful local benefit under Pike. Narrowly tailored RSS policies sidestep this dispute.

Determining whether more aggressive RSS climate policies are clearly excessive burdens on interstate commerce might necessitate factoring in climate benefits. Fossil fuels play a huge role in the broader national economy, so RSS policies that credibly depress the availability of energy or dramatically raise the price of electricity may prove too restrictive for courts. Indeed, cases restricting the flow of resources like natural gas, hydroelectric power, and wildlife were all found to be excessive burdens on interstate commerce under Pike or its predecessor.

In these natural resource cases, the Supreme Court declared that a state “bears the initial burden of demonstrating a close fit between the [state law] and its asserted local purpose.” If that local purpose is fighting climate change, the fit should be suitably close. More importantly, the larger the law’s burden becomes—by presumably restricting more fossil fuel supplies—the larger the law’s climate benefits become. This correlative relationship between RSS and climate change can help ensure the ratio under Pike never flips and becomes unduly burdensome.

Either way, the open secret central to all these natural resource cases is they are still about protectionism. This is best illustrated by the seminal case Hughes v. Oklahoma where the Court struck down a state RSS policy conserving minnows because it was enacted to protect in-state minnow suppliers. Indeed, no court has ever used the Pike balancing test to vacate a state law without first identifying a protectionist defect in that law. In sum, no court has ever found a law to violate the dormant commerce clause for non-protectionist reasons.

Conclusion

Dormant Commerce Clause jurisprudence is exceptionally cluttered, but the hordes of doctrines and tests it involves distills down into a single principle: state economic protectionism is unconstitutional. State RSS climate policies are not protectionist. Accordingly, they should avoid the dormant Commerce Clause issues dogging demand-side efforts.

Comparing the incentives underlying RSS policies and renewable portfolio standards (RPSs) highlights this difference. “A driving interest behind state-level RPSs is exacting local benefits from the construction [and use] of renewable generation facilities.” Maximizing the benefits of RSS, conversely, expressly disadvantages local fossil fuel businesses. RSS policies are motivated by the desire to reduce atmospheric GHG, not grow the industry.

This is not to say that state RSS policies are better than, or a substitute for, demand-side strategies. It merely suggests that RSS policies are a worthy complement to them. They provide unique political, economic, and legal benefits. In an environment that is both rapidly warming and increasingly hostile to environmental regulation, no class of strategies ought to be dismissed.

Brandon Rattiner received his J.D. from Georgetown University Law Center in 2018. Mr. Rattiner placed third in the 2018 energy law student writing competition for this submission. ​