Category: Law Review Articles

“The Rebirth of Social Licence”

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Kristen van de Biezenbos has an interesting new article out that explains how energy companies can make agreements with local communities to win wider acceptance of their work. The article also explains why a common Canadian buzzword, “social license,” has become “an impossible-to-achieve normative sledgehammer.”

This new article builds on Kristen’s previous work on “Contracted Fracking” in the United States. Here’s the abstract:

Canada’s energy industry and the agencies that regulate it are suffering a crisis of legitimacy. Both are battered by shifting public opinion, opposition from powerful NGOs, a troubled history with many communities and Indigenous groups, and the actions of political parties that consider opposition to oil and gas projects to be central to their platforms. In such an environment, the concept of social licence to operate, or simply social licence, seems more important than ever to the energy industry. This Article argues, however, that it is not the ability or inability to obtain social licence, as the term is currently used, that will allow the fossil fuel industry to maintain some measure of public good will and to lower municipal and provincial resistance to energy projects. That is because, while social licence has some value as a normative concept, it is functionally meaningless. Not only has the term itself been hollowed out by overuse and fluctuating definitions, but what it represents in popular discourse — a broad public acceptance or approval — is probably not achievable. For too long, the national debate over social licence has obscured the very real concerns over the local impacts of energy projects, and this has eroded the trust and support of communities. This Article proposes that the concept of social licence should be understood as descriptive only, and what should matter instead is what measures companies can take to earn that descriptor. This Article also argues that, in order to obtain acceptance from local and community groups and thus to obtain social licence, Canadian energy companies should follow the lead of companies in other jurisdictions and employ community agreements to demonstrate their commitment to responsible resource development and to earn local buy-in for projects.

The article, titled “The Rebirth of Social Licence” is in the McGill Journal of Sustainable Development Law and is available here: https://ssrn.com/abstract=3366361

“NGOs and the Politics of Energy Market Entry”

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David Spence has posted a fascinating new study of how nongovernmental organizations (NGOs) oppose new energy projects—not just pipelines and fossil fuel projects, but also new wind and solar power and power-lines to support renewable power. He builds a database of NGO action on energy projects and shows how social media and polarization are driving increased opposition to new energy projects.

Here’s the abstract:

The modern regulatory state is a creature of 20th century politics, and the New Deal consensus that dominated thinking about the relationship between government regulation and the market for most of that century. That regime exists now in a very different political environment, one in which parties and voters are more ideologically polarized and digitally connected than at any time in the modern regulatory era. This article examines the influence of this new politics on one such 20th century regulatory system — the regulation of energy market entry — through the lens of nongovernmental organizations (NGOs) that participate in energy infrastructure siting conflicts. The analysis is built around a data set comprising information about more than 400 nongovernmental organizations (NGOs) whose missions include active opposition to one or more of nine different types of energy projects between 2000 and 2017, including various types of fossil fuel infrastructure, renewable energy facilities, and smart grid technology. The focus is on the tactics and the issue arguments each NGO uses to oppose energy projects. The results are consistent with the notion that ideological polarization and digital communication are affecting the nature of siting conflicts over energy infrastructure. NGOs devote the lion’s share of their efforts not to inside strategies like formal lobbying, but rather to mobilizing the broader public to lobby decision-makers, and organize those mobilization efforts focus overwhelmingly around environmental and health risk issues. This holds true not only for dirty energy projects like coal-fired power plants whose health and environmental risks are well-known; but for clean energy projects like wind farms as well.

From NGOs’ point of view, this form of mass mobilization is efficient: digital communication tools enable NGOs to transmit messages almost costlessly, and to target audiences that are particularly receptive to their messaging. NGOs may prefer risk-based appeals because they resonate. We find that local NGOs in particular tend to make more hyperbolic risk claims than national NGOs. If local NGOs need to build a broader base of support for their cause in order to improve the probability of victory, this approach is rational. The article explores some of the implications of this increasingly fraught regulatory environment. To be sure, the regulatory process grants agencies plenty of autonomy, and regulators continue to be responsible for balancing energy security, affordability and environmental performance concerns in making siting decisions. However, the new politics of energy market entry holds out the possibility that the use of sophisticated digital communication tools to exploit risk perception biases (to more effectively amplify perceived risk) may slow efforts to green the energy supply and produce siting decisions that have other economically and environmentally counterproductive consequences.

The piece is titled “NGOs and the Politics of (Energy) Market Entry.” It is forthcoming in the Notre Dame Law Review and available here: https:// https://ssrn.com/abstract=3337957

History’s Biggest Oil Boom: “The Third Age Of Oil & Gas Law”

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The oil boom happening now in Texas is the biggest commodity boom the world has ever seen. We all know the stories of history’s oil and gold rushes—the heroes and villains, fortunes made and lost. But this boom dwarfs every previous commodity boom.

I’ve just posted my new Indiana Law Journal article, which shows how this new boom is transforming oil and gas law; it’s titled The Third Age of Oil and Gas Law. But it starts by explaining how oil and gas has always been the crucible and catalyst for the most important legal trends of the modern world: the transition from common law to regulatory state, the rise of private governance, and the shift to a multi- polar international order.

The article shows how modern oil and gas law was born on private land in the United States, explaining the economic logic of the oil and gas lease, which was the legal innovation that made the modern world possible. It shows how the center of gravity shifted overseas as the Middle East came to dominate oil production. Finally, the article concludes by showing how public and private landowners can ensure maximum benefit from the unprecedented oil boom now transforming the United States.

As you read the article, keep the following visualizations handy. The first shows how the oil and gas industry started in the United States, spread to Russia and the Middle East, and is now shifting back to the United States.

The second shows how the new boom has transformed the U.S. oil and gas industry, with new production concentrated in Texas.

Here are chart versions of those two visualizations, which focus on more recent years.

Here’s production by country since 1950.

Here’s production by state since 2005.

Here is the abstract for the article.

History’s biggest oil boom is happening right now, in the United States, ushering in the third age of oil and gas law. The first age of oil and gas law also began in the United States a century ago when landowners and oil companies developed the oil and gas lease. The lease made the modern oil and gas industry possible and soon spread as the model for development around the world. In the second age of oil and gas law, landowners and nations across the globe developed new legal agreements that improved upon the lease and won these resource owners a larger share of the benefits of oil and gas production. The third age of oil and gas law, which is now beginning, will be defined by three forces. First, fracking is transforming the common law doctrines that underlie oil and gas law and policy. Second, both private and public landowners are perfecting agreements that can win them a greater share of the oil and gas under their land. Third, public landowners are beginning to seek ways to balance their efforts to extract maximum value from their oil with their efforts to limit climate change.

This Article is the first to identify these ages of oil and gas law, which have been central to the development of law, the global economy, and the modern world. It also reveals the legal and economic logic of agreements between oil and gas companies and public and private landowners, and how they have evolved over the past century. And it describes how landowners can ensure maximum benefit from the unprecedented oil boom now transforming global oil production.

Cite as: James W. Coleman, The Third Age of Oil and Gas Law, 95 Ind. L.J. _, _ (forthcoming 2020) https://ssrn.com/abstract=3367921.

Encouraging Energy Companies to Inform Their Investors About Risks They Face From Climate Regulation

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Screen Shot 2015-04-23 at 5.00.29 PMMy recent study compared what oil companies told two audiences—regulators and investors—about how new environmental rules would affect them. It showed that the companies told the two audiences two very different stories: companies warned the Environmental Protection Agency (EPA) that the rules would be unworkable but securities disclosures reassured investors that the rules would be manageable.

To give EPA industry’s honest view on whether rules are manageable, I suggested that companies should file excerpts from their securities disclosures with their comments.

But what if the comments to EPA are accurate—companies really are terrified about new regulations—and they’re just not telling their investors? After all, shareholder groups and proxy advisory firms have complained that energy companies are ignoring Securities and Exchange Commission (SEC) guidance on disclosing risks from climate regulation.

In a new post at Columbia Law School’s blog on corporations and capital markets, I explain how industry’s comments to regulators can be used to encourage companies to inform their investors of real risks that they face from regulation. Here’s the end of the post:

Investors should use company comments to identify risks that companies may be minimizing in their 10-K disclosures. And the SEC should insist that companies tell investors about any risks that they are stressing to regulators. …

In the meantime, corporate counsel should get ahead of regulators and investors by aligning comments and securities disclosures. When a company’s comments and 10-K disclosures are revealed to be inconsistent, it has put itself in a lose-lose situation. Regulators will discount the company’s pessimistic comments. But if a new rule does harm the company, investors will have evidence to support a Rule 10b-5 lawsuit. Although it is harder to sue a company for “soft” information or predictions about the future, in this case company comments would support an inference that the company did not even believe its own assurances. See Omnicare v. Laborers Dist. Council Constr. Ind. Pension Fund, 575 U.S. _ (2015) (slip op. at 6-9). And few companies would relish the prospect of having to prove in court that their dire warnings to EPA were entirely insincere.

Proactive companies could even bolster their credibility by voluntarily filing excerpts from their securities disclosures along with their comments. If they did so, regulators might be more inclined to take their concerns seriously in crafting final rules.

Thus, aligning corporate comments with corporate securities disclosures would not only improve the information available to regulators; it would also protect companies from liability and enhance industry’s credibility in notice-and-comment rulemaking.

Do Corporations Cry Wolf? — Comparing What Companies Tell Regulators With What They Tell Investors

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6721834473_83e3b6cb95Corporations regularly complain that new regulations will harm their business and the broader economy. How seriously should we take those warnings? I’ve just posted a paper that presents a way of answering this perennial question.

It’s often said that corporations, “Cry Wolf,” falsely predicting that rules will be very costly. A prime example comes from 1970 when Ford’s President, Lee Iacocca warned that the Clean Air Act “could prevent continued production of automobiles” and was “a threat to the entire American economy and to every person in America.” So when industry says that new regulations such as the Environmental Protection Agency (EPA) Clean Power Plan will be unworkable, many suggest that regulators should just ignore those warnings.

But the problem with crying wolf is that there are wolves. That is, false alarms are dangerous because they mean we won’t respond to true threats. And from time to time, regulations really are unworkable, and industry might be the first to recognize this, which is why regulators don’t just ignore industry warnings.

So regulators face a dilemma: they need industry to tell them whether a rule is workable, but they suspect industry will exaggerate the cost of regulation. How can regulators tell how much companies really expect rules to cost?

My paper, titled “How Cheap is Corporate Talk?” compares companies’ comments on proposed rules with what the same companies told their investors about the same proposals. After all, companies have no reason to trick their investors into thinking that a rule might harm the company. In fact, they may want to reassure investors by minimizing the danger from proposed rules. So if regulators want to know how much a company worries about a proposed rule, they should compare the company’s comments on the rule with what it told its investors.

Take Lee Iacocca’s famous warning that the Clean Air Act could “prevent continued production” of cars in America. In its annual report for that year, 1970, Ford told its investors that “the automobile industry has survived and grown even in countries where government policies have made the cost of car ownership several times higher than it is in the United States” and assured them it had “no doubt that our industry will continue to grow.” Who signed that prediction on behalf of Ford’s board of directors? Henry Ford II and . . . Lee Iacocca.

This paper focuses on a contemporary example of the regulator’s dilemma: the EPA’s Renewable Fuel Standard. The Standard requires oil companies to blend ethanol into the fuel they sell, and it requires more ethanol each year. EPA proposes and sets a required percentage of ethanol annually, which gives oil companies plenty of opportunities to comment. The paper matches those comments up with contemporary Form 10-K securities disclosures from the same companies.

The study finds that oil companies made significantly more predictions about how the Renewable Fuel Standard would harm them in comments than they disclosed in their 10-K statements. For example, one oil company told the EPA that if the rules weren’t changed, they would “limit the supply of gasoline and diesel fuel” and cause “severe economic harm.” In its securities disclosure, the only thing its parent company told its investors was that rules like the Renewable Fuel Standard were creating a strong market for biofuels. And it even implied that that was a good thing because of its side business as a biofuel producer.

Regulators should ask public companies to attach relevant excerpts from their securities disclosures to their comments on proposed rules. This would help regulators assess when a proposed rule might present a true threat to an industry or the economy. In the meantime, securities regulators should scrutinize company comments to find regulatory risks that companies may be concealing in their disclosures to investors. By comparing what companies tell their regulators with what they tell their investors, we’ll all know whether to come running when a corporation cries, “Wolf!”

FERC’s Demand Response Strategy Hits a Snag: D.C. Circuit Vacates Order 745 in Electric Power Supply Association v. FERC

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  • I am delighted to welcome guest blogger Sharon Jacobs. Sharon was my colleague at Harvard Law School and will be an Associate Professor at Colorado Law beginning this summer.  Sharon’s scholarship focuses on administrative, energy and environmental law and she has a forthcoming article on federalism and demand response programs, so she is the perfect person to discuss the D.C. Circuit’s recent decision in Electric Power Supply Association v. FERC, which invalidated a federal order designed to encourage demand response. -James Coleman

By Sharon B. Jacobs

It is a poorly kept secret that D.C. Circuit judges do not exactly clamor to be assigned Federal Energy Regulatory Commission (FERC) cases. The notable exception is now-Senior Judge Stephen Williams, who loves them. His grasp of the intricacies of energy regulation is unparalleled on any court in the country. It is unfortunate, therefore, that Judge Williams was not assigned to the D.C. Circuit panel that recently handed down Electric Power Supply Association v. FERC. In a 2-1 opinion authored by Judge Janice Rogers Brown and joined by Judge Laurence Silberman, the panel vacated FERC’s final rule on compensation for demand response resources in wholesale energy markets. Judge Harry Edwards offered a well-reasoned and ultimately more persuasive dissent.

Demand response is the reduction of electricity use in response to a price signal. In other words, customers are paid not to consume energy. Demand response has been called the sale of “negawatts,” although the phrase is an imperfect description of the actual transaction. Where demand response bids are accepted, market administrators need not purchase as much generation (supply) to meet aggregate demand. Because the cost of electricity goes up as demand increases, especially at times of peak consumption, demand response can lead to significant savings.

Electricity markets are divided into two spheres: retail (sales to end-use customers) and wholesale (sales for resale). For the most part, states regulate the former, while FERC controls the latter. FERC’s demand response strategy affects both markets. In an earlier order, FERC allowed aggregating companies to bid retail customers’ demand response commitments directly into wholesale markets. In the rule challenged in this case, Order 745, FERC sought to further eliminate barriers to demand response participation in wholesale markets by requiring market administrators to pay demand resources the “locational marginal price” or “LMP” for each megawatt not consumed. The locational marginal price is the same price that generators receive when they bid their megawatts of power into wholesale markets. It reflects the value of energy at a specific location at the time of delivery. PJM, the market administrator for the mid-Atlantic region, explains that the LMP fluctuates like taxi fares—lighter electricity traffic yields a lower, steadier fare, whereas congestion on the wires causes the fare to rise. FERC included a caveat in its rule: demand response resources would only receive the LMP when their participation in wholesale markets would be cost effective, as determined by a specified “net benefits” test.

The bulk of the opinion concerned a threshold question: whether FERC acted within the scope of its jurisdiction under the Federal Power Act when it established compensation and other rules for retail demand response resources participating in wholesale markets. Under the Act, FERC has clear jurisdiction over rates for wholesale sales of electric energy in interstate commerce as well as rules, regulations and practices affecting those rates. FERC argued that it could set wholesale rates and other rules for demand response in wholesale markets because they were practices “directly affecting” wholesale sales. The panel majority disagreed, instead characterizing what FERC did as indirect regulation of the retail market for electricity.

There were three major problems with the opinion.  First, the majority found the Federal Power Act’s jurisdictional provisions much clearer than they are in fact.  It applied the normally deferential Chevron test, under which the court will defer to the agency’s reasonable interpretation of an ambiguous statutory provision it is authorized to administer, to FERC’s jurisdictional claims. Though some have argued that allowing the agency to determine the scope of its own jurisdiction when statutory language is ambiguous is analogous to permitting the fox to guard the henhouse, the Supreme Court recently affirmed the propriety of this practice in City of Arlington v. FCC. The Federal Power Act’s grants of jurisdiction did not anticipate demand response and the statute’s application to the phenomenon, as the dissent recognized, is unclear. In other words, the statutory provisions at issue, as applied to demand response, are ambiguous. Thus, the court should have deferred to FERC’s reasonable interpretation of those provisions at Chevron step two.

Second, Judge Brown found that the Federal Power Act foreclosed FERC’s reading because the Commission’s interpretation “has no limiting principle.” In an argument reminiscent of Justice Scalia’s warning in his Massachusetts v. EPA dissent that Frisbees and flatulence could be regulated under EPA’s capacious definition of “air pollutant,” Judge Brown warned that FERC’s interpretation of its “affecting” jurisdiction would authorize it to regulate “steel, fuel, and labor markets.” As the dissent pointed out, however, the limiting principle could not be clearer. Under the D.C. Circuit’s own holding in CAISO v. FERC, FERC may only regulate practices that “directly affect” wholesale rates or are “closely related” to those rates, “not all those remote things beyond the rate structure that might in some sense indirectly or ultimately do so.” As Judge Edwards pointed out in his dissent, this language clearly precludes regulation of “steel, fuel, and labor markets.”

Third, to the extent that the true motivation for the decision was general unease about federal encroachment on traditional areas of state regulatory power, the decision overlooked a key aspect of FERC’s demand response rules that mitigate any unwanted impact on state authority. An earlier FERC order, Order 719, offered state and local regulatory authorities an “opt-out”: those who did not want their retail customers participating in wholesale markets for demand response could prohibit them from doing so via legislation or regulation. Order 745’s pricing scheme was layered on top of this jurisdictional compromise. In Judge Edwards’s words, “[t]his is hardly the stuff of grand agency overreach.”

The most controversial part of Order 745, and the real reason the rule was the subject of such concerted opposition, got the least airtime in the opinion. In what was billed as an alternate holding in Part IV (but felt more like dicta), the panel found that Order 745’s locational marginal pricing scheme was arbitrary and capricious. In under two pages of text, the opinion declined to “delve now into the dispute among experts” yet asserted that the Commission had not “adequately explained how their system results in just compensation.” “If FERC thinks its jurisdictional struggles are its only concern with Order 745,” the opinion cautioned, “it is mistaken.” In a much more nuanced discussion of the Commission’s choice and the deference due to FERC “in light of the highly technical regulatory landscape that is its purview,” Judge Edwards concluded that the Commission provided a “thorough explanation” for selecting the locational marginal price as the appropriate level of compensation. In a nutshell, FERC’s argument was that the compensation level was necessary to overcome barriers to participation by demand response resources in wholesale markets and that it accurately reflected the value demand response provided to those markets.

Prior to this ruling, FERC had been successfully pursuing a policy of what I call, in a forthcoming article, “bypassing federalism”:  working a de facto rather than a de jure reallocation of regulatory power by extending its influence through the expansion of wholesale markets. In the context of demand response, that strategy was undermined by the Commission’s aggressive posture on pricing in Order 745. It was the idea that demand response resources would be paid the LMP for their “negawatts,” thereby competing directly with generation in wholesale markets, that triggered the groundswell of opposition from generation resources. The decision will not go into effect until seven days after the disposition of any motion for rehearing, and FERC is still considering its options as well as the decision’s impact on its rules and related programs. The panel’s decision may yet be reversed by the D.C. Circuit en banc or by the Supreme Court. But, as a policy matter, the Commission might have avoided a direct confrontation over its demand response rules by moving more deliberately on the pricing question.  As I have written elsewhere, for agencies whose regulatory schemes face concerted opposition, discretion is sometimes the better part of valor.

Federal Court Strikes Down Minnesota’s Limits on Coal Power Imports: A Critical Moment for State Regulation of Imported Fuel & Electricity

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State of North Dakota, et al., v. Beverly Heydinger, et al., Case No. 11-cv-3232, (D. Minn., Apr. 18, 2014).

On April 18, the U.S. District Court for the District of Minnesota struck down the State of Minnesota’s restrictions on importing electricity from coal power plants in other states. The court held that these restrictions improperly regulated electric generators and utilities outside the state. The decision sets a precedent that could threaten state regulations of imported fuel and electricity, such as the numerous renewable power standards and California’s low carbon fuel standard. These regulations have been a flashpoint for conflicts between in-state and out-of-state interests, including Canadian energy producers who believe that the standards discriminate against them.

Minnesota adopted the restriction on electricity imports in its 2007 Next Generation Energy Act, which placed a moratorium on construction of new coal power plants within the state. The point of the moratorium was to limit greenhouse gas emissions from coal burning, which contributes to climate change. Without the import restriction, Minnesota’s moratorium might have little effect: companies looking to build a new coal plant could simply build in neighboring states, exporting electricity to Minnesota and increasing greenhouse gas emissions. So Minnesota declared that “no person shall . . . import or commit to import from outside the state power from” new coal plants or “enter into a new long-term power purchase agreement that would increase statewide power sector carbon dioxide emissions.” Minn. Stat. § 216H.03, subd. 3. New coal plants could only avoid this ban if they paid to reduce emissions elsewhere or qualified for an exception.

North Dakota and utilities with coal power plants brought a lawsuit alleging that Minnesota’s restrictions unconstitutionally regulated outside of Minnesota’s territory, and the court agreed. The U.S. Constitution’s Commerce Clause gives the federal government the authority to regulate interstate commerce and implies that states cannot “discriminate against or unduly burden interstate commerce” without congressional authorization. This rule is called the “dormant commerce clause” because it applies when congress has not authorized state regulation. One aspect of this rule is that states cannot adopt a regulation that “has the practical effect of controlling conduct beyond the boundaries of the state.”

The court held that the import restriction necessarily regulated out-of-state conduct because electricity on the grid “does not recognize state boundaries.” Electricity is not like a package that is shipped from a seller to a buyer. Instead, the interstate electric grid creates a pool of power. Electric generators contribute electricity and consumers withdraw electricity. It is as though one group was emptying buckets of water into a lake and another group was filling buckets of water from a lake. Companies may talk about purchasing electricity “from” a specific utility, but that is an accounting convention, not a description of a physical process—the electricity purchased comes from an undifferentiated pool. Thus, when a North Dakota utility sells to a North Dakota customer some of the electricity might be diverted into Minnesota, violating Minnesota’s import restriction. So Minnesota’s law regulates out-of-state conduct, and the court held that it violated the U.S. Constitution and enjoined any enforcement.

The decision raises two potential problems for state regulation of imported electricity and fuel. First, more than half of the fifty states have renewable power standards that apply to imported electricity. Under the court’s decision these standards would be invalid unless they exempted incidental imports from out-of-state utilities serving out-of-state customers. The Harvard Environmental Law Program’s Policy Initiative’s Energy Fellow Ari Peskoe has suggested some ways that states could try to insulate their regulations from a similar challenge.

Second, the court suggested that there may be strict limits on a state’s ability to regulate imported fuel and electricity through renewable portfolio standards or low carbon fuel standards. The usual rule under the dormant commerce clause is that states “may not attach restrictions to exports or imports to control commerce in other states” or otherwise “project” their regulation into other states. But the entire point of state restrictions on imported fuel and electricity is to affect out-of-state greenhouse emissions. States want to regulate imported fuel and electricity because they are concerned that out-of-state energy producers are contributing to climate change—they don’t want to import oil from places where it takes a lot of greenhouse gas emissions to produce oil and they don’t want to import electricity from states that are producing it using a lot of greenhouse gas emissions. And that concern makes sense: even if those greenhouse gas emissions take place in other states or countries, they’re just as bad for the entire world’s climate. As a result, the U.S. Court of Appeals for the Ninth Circuit recently suggested that the dormant commerce clause’s prohibition on extraterritorial regulation is only meant for extraterritorial price-regulation, so it doesn’t threaten California’s low carbon fuel standard or, presumably, state renewable power standards.

The Minnesota court, however, rejected the Ninth Circuit’s reasoning, noting that the Supreme Court and several appellate courts have held that states may not project their regulation into neighboring states, even when the regulation was not about prices. This conflicting reasoning comes at an important moment for state regulation of imported fuel and electricity. There is still no legal consensus on the validity of these regulations, which are being challenged in several lawsuits around the country. Statepowerproject.org, a website created by the Harvard Environmental Law Program’s Policy Initiative, is tracking these lawsuits.

Second, there is no consensus on whether these state import restrictions are a wise way to make climate policy. Although states have good reason to be concerned about the fossil-fuel industry in their trading partners, other states and countries worry that these import regulations are aimed at burdening out-of-state industry. Canada doesn’t think California should tell it how to produce oil, and is concerned that California’s regulation has been rigged to harm it. Quebec believes that state renewable portfolio standards discriminate by refusing to credit its hydropower exports as renewable. And states like North Dakota have the same concerns about Minnesota’s regulation. These conflicting interests may create conflicting regulations and state-to-state trade wars that would splinter interstate energy markets. In a forthcoming article in Fordham Law Review, titled “Importing Energy, Exporting Regulation,” I argue that the federal government should address this problem by supervising state regulation of imported energy, exempting non-discriminatory regulations from dormant commerce clause review.

No one yet knows how this legal and policy debate will be resolved. The Minnesota decision frames the legal debate through its searching dormant commerce clause review and clarifies the stakes by striking down a closely watched state electricity regulation. The one certainty is that the debate will continue.

Smooth It Out Now (or We Need Analog Climate Policy Analysis)

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In my first year after university, I had five roommates who were extremely smart basketball fans.  I’m your typical Minnesotan hockey player, so I had a lot to learn about basketball.  I often asked my roommates questions like: Is Scott Pollard a good center? Are the Hornets hard to beat?  Does zone defense work?  They made fun of me, noting that all my questions reduced to: is X good or bad?
At the time, I thought: “Fine-grained knowledge can come later, right now I need the basics, and good versus bad is important info.”  But over the years I’ve grown to appreciate how digital thinking–i.e. 0 versus 1, on versus off, good versus bad–can lead conversations astray.
Climate policy thinking is in need of more analog thinking.  That is, we need to be more careful to note the continuous gradations between total climate policy failure and climate policy success.  Analog climate policy thinking would give us a 1) clearer picture of current climate policies and likely future policies, and 2) let us design more effective climate regulations going forward.  Let me give two examples.
1. Current and Future Climate Policies: A Continuous Spectrum
 
When you talk climate policy you’re usually talking about unilateral national, state, provincial, or local regulations, because there’s no enforceable international greenhouse gas treaty.  At the same time, greenhouse gas emissions are global, so one of the primary goals of these domestic regulations is to encourage other countries to adopt stricter climate regulations.
When I present research on domestic climate regulations around the world, I almost always get a very digital question: “How can you encourage other countries to act?  Good countries will help out voluntarily, and you’ll never convince the bad actors.”  When I present to an audience of U.S. generalists, they generally mention China as an example of a bad actor, and when I present outside the U.S. (or to U.S. environmentalists) they usually mention the U.S. as a bad actor.  Almost everyone mentions Europe as a good actor.
This question makes clear that the good actor/bad actor frame is actively confusing the questioner.   Even if we could say that some countries are doing better than others, every country is constantly striking a balance between climate and economic goals, and each could regulate incrementally more or less.  Europe has a cap & trade system, it’s true; but it doesn’t cover all emissions, and its permit price to emit a ton of carbon has fallen below 5 EUR.  (That’s less than half Alberta’s 15 CAD carbon price, although Alberta’s regulation applies to far fewer emissions.)  And on the flip side, China has adopted numerous policies that will slow its rising greenhouse gas emissions, including massive deployment of renewable energy.  (Here’s a useful Congressional Research Service summary from 2011: http://bit.ly/1dIi1Je).  Even Saudi Arabia is planning a gigantic expansion of clean energy. (http://bit.ly/1dIi1Je).  Digital thinking is giving academics an inaccurate view of the world.
2. Climate Policy Mechanisms: Encouraging More Action in a Continuous Climate Policy World
 
Digital on/off thinking has infected our climate policy design as well.  Again, one of the most important goals for unilateral climate regulations is encouraging action elsewhere.  And one of the most promising ways to do that is with matching commitments: adopting climate regulations that automatically grow more strict when other countries strengthen their own climate regulations.  As I explain in this paper, http://bit.ly/uniclimreg (see pp. 15-21), these matching policies would encourage other countries to act by rewarding them with increased environmental benefits.

But the limited attempts at using matching commitments so far have been fatally flawed by on/off thinking.  For instance, the EU has said it will increase its greenhouse gas reductions from 20% to 30% if developed nations adopt “comparable” reductions through a “global agreement.”  And Australia has a similar scheme.  But these matching commitments provide no incentive to the actual policymakers around the world who are struggling with decisions to marginally tighten or loosen greenhouse gas regulation almost every day, because no individual regulator can secure a global agreement.  These on/off commitments should be replaced with matching commitments that target climate regulations that foreign regulators can actually deliver, and smoothly ratchet up in response to stricter commitments.  Perhaps the EU could commit to match a specific percentage of reductions in the US, Canada, or Australia.  And these commitments could even target regulators in important states or provinces like California and Alberta that are calibrating the strictness of their climate policies.

Analog thinking also reveals the problems with the current global treaty paradigm. No country can credibly commit to years of “good” climate regulation in a single treaty.  Climate policy is too complex and covers too many politically-charged areas.  Often even countries that have “model” policies, like Australia’s ill-fated carbon tax, have found loopholes with major climate impacts, such as coal exports.  (See also, British Columbia’s tax and its proposed LNG exports.)  And even on their own terms emissions pledges will always be fragile in a democracy, as has been repeatedly shown in Australia, Canada, and Japan.
This same problem will likely hamper more modest plans for climate clubs.  I share the general interest in the recent climate pact between California, Oregon, Washington, and British Columbia.  But remember the Western Climate Initiative: it was formed by Arizona, California, New Mexico, Oregon, and Washington in 2007 . . . and then abandoned by Arizona, New Mexico, Oregon, and Washington in 2011.  Fool me twice, shame on me:  analog climate thinking says we cannot be surprised when other states and countries do not live up to their climate commitments.  We need to find ways to continuously encourage them to adopt somewhat stricter regulation, whether or not they are living up to the terms of these commitments.  We need to focus more on analog matching commitments and less on promises to be good.
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And yes, I’m still working on my analog basketball analysis.  But my former roommates still make fun of me.  After watching this recent clip (starting at 1:30), one told me I was simply ahead of my time: http://watch.thecomedynetwork.ca/the-daily-show-with-jon-stewart/full-episodes/the-daily-show-with-jon-stewart—october-29-2013/#clip1033595. (U.S. version: http://huff.to/18Tm0xu.)
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