There is no dormant Commerce Clause violation---because a carbon tax is both necessary and cannot succeed without a BTA it will not be stuck down

IV. FEDERAL VS. STATE REGULATION OF BORDER MEASURES A. Legal Challenges As yet, there has been no in-depth economic analysis of state border measures such as those proposed in California’s Senate Bill 775. However, both legal and economic observers have suggested that any border measure will likely be subject to legal challenge from within the state, under the dormant Commerce Clause, and potentially from the WTO.102 In terms of federal versus state regulation, the dormant Commerce Clause and associated dormant Foreign Commerce Clause are the two potential constitutional constraints to state-level border measures.103 The interstate version of the dormant Commerce Clause can be used to invalidate a measure, such as a BTA, as being unconstitutional in three ways.104 First, it would be considered per se invalid if it facially discriminates against out-of-state commerce, unless it can be shown that there is no other means of accomplishing a legitimate state objective.105 Second, if it is not found to be facially discriminatory, the law would still be considered invalid if its purpose or effect is still discriminatory.106 Third, even if it is facially neutral, it would be invalid if it creates an undue burden on interstate commerce.107 The legal logic of the dormant Commerce Clause is very straightforward: it is designed to invalidate any protectionist state laws, represent the interests of out-of-staters, and promote national unity.108 The dormant Foreign Commerce Clause is the logical requirement that state laws must be held constitutional when applied to foreign trade–essentially, such laws should neither increase the risk of multiple taxation nor should they undermine the ability of the United States to speak “with one voice in foreign affairs.”109 In the case of multiple taxation, the argument is that in imposing a tax at the state level that affects foreign trade, there is the risk of double taxation because of taxes already being imposed abroad.110 The second argument focuses on the idea that there should be uniformity in the Federal Government’s dealings with other countries and that state-level taxation could frustrate the goal of federal uniformity with the potential for foreign retaliation.111 On the face of it, it would seem likely that border measures would be struck down by the U.S. Supreme Court. For example, it has been argued that because state level climate policy, such as the Regional Greenhouse Gas Initiative (RGGI), necessarily requires a border measure in order to solve the problem of leakage, it would be considered facially discriminatory under the dormant Commerce Clause.112 There is also doubt about whether the so-called “compensatory” (or “complementary”) tax doctrine would be a legitimate defense of any border measures.113 The compensatory tax doctrine allows a state to apply a discriminatory tax if it is designed to achieve a legitimate state objective that cannot be achieved in a way that is non-discriminatory.114 To satisfy this doctrine, the tax on interstate commerce would have to be “substantially equivalent” to that imposed on intrastate trade.115 Some legal observers argue that it would be challenging to establish a uniform way of measuring emissions from in-state electricity generation as compared to out-of-state generation in order to satisfy the “equivalent burdens” dimension of the compensatory tax doctrine.116

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Other legal commentators take a different view, arguing that BTAs might be legally defensible under the dormant Commerce Clause.117 They suggest there are three questions of legal doctrine that have to be answered: first, is it possible to apply a BTA on all state imports, even if it is non-discriminatory; second, is it possible for a state to have a BTA that discriminates between imported goods based on approximations of their carbon intensity, where approximations take geography into account, i.e., the source of the imported good(s); and third, if the answers to the first and second questions are yes, how much approximation of the carbon-intensity of imports would be allowed in calculation of a BTA?118 If a state tax discriminates between in-state and out-of-state taxpayers, then the possibility of applying different BTAs based on the carbon footprint of imports seems unlikely to satisfy the U.S. Supreme Court, in which case the two other questions are moot.119 Notwithstanding this initial conclusion, there is a counterargument that no facial discrimination exists in the case of a BTA.120 The argument draws on a case concerning California’s existing cap-and-trade program AB 32, where the California Air Resources Board (CARB) adopted a low carbon fuel standard, the standard differentiating fuels by region on the basis of their carbon intensity.121 Initially the standard was struck down in federal district court on the grounds that applying the standard based on regional source was a facial discrimination.122 A Ninth Circuit panel then overturned the district court, arguing that there was no facial discrimination due to the California standard targeting imports not because they were from out-of-state, but because of their carbon intensity.123 The conclusion drawn is that because a carbon tax is necessary to resolve a market failure, and one that cannot succeed without BTAs, it should not be struck down by the courts as per se discrimination under the dormant Commerce Clause.124