Federalism solves warming – regulation, innovation

INTRODUCTION Advocating a new body of regulation with the explicit concession of likely error and risks of regulatory derailment may seem self-defeating. Nevertheless, effective regulatory design, like effective investment strategies, must be designed for success yet anticipate unfavorable developments and error risks.1 And in the United States, due to our constitutional structures and linked political norms, any major regulatory choice must include decisions about how to utilize the regulatory roles demarked by federalism. What roles should be allocated to or preserved for federal, state, and local actors, or perhaps a combination of them all? Climate change policy choices remain the subject of partisan and rancorous contestation, including disputes over the right federalism choice. By leavening idealized policy solutions with attention to political and legal discord and regulation-market linkages, this Article illuminates the effects and dynamics of federalism hedging, a largely overlooked value of federalism structures retaining concurrent and often interacting federal and state roles. Federalism hedging refers to the regulatory choice to retain overlapping, interacting, and often intertwined federal and state roles even in a setting where the apparently ideal regulatory regime would rely on exclusive federal regulation that would preempt state roles. This Article argues that both federalism discourse and climate change policy debates have failed to analyze adequately how choices about federal and state roles can serve to hedge and even reduce risks of regulatory reversal and implementation failure. This Article’s analysis of federalism hedging operates at three levels. First, it introduces federalism hedging as a theory, explaining the attributes and dynamics of federalism hedging and situating it within recent scholarly and policy debates about the values and functioning of federalism. Second, it then illuminates federalism hedging with analysis of the regulatory challenges posed by climate change and the history of climate and clean energy progress and contestation. And, third, drawing on this theoretical and historical analysis, the Article makes a normative and prescriptive claim that retaining latitude for state and federal overlap can provide an array of benefits and, especially, reduce risks of disruptive policy reversals that could, in turn, undercut linked markets and regulatory progress. Such a hedging role is of especial importance where a body of regulation provides a crucial underpinning of a market and that market is itself essential to regulatory success. Retaining latitude for both federal and state roles also can serve in a valuable precautionary role conducive both to innovation and pragmatic adjustment in regulatory settings characterized by rapid change in business models and technology.2 This Article, like much federalism discourse, is actually not about what is constitutionally required. Instead, the Article builds on an increasingly robust body of scholarship analyzing how federal and state roles recognized by the Constitution should be utilized to further particular regulatory policy goals or political ends.3 Although federalism scholars often mention the benefits of federalism “redundancy” in risk regulation and benefits of dynamic interjurisdictional learning, little of this pro-overlap and interaction federalism literature devotes attention to the regulation-business link, regulatory risks of error, implementation failures, and political reversal risks.4 Another strain of federalism scholarship documents and analyzes the logic and legality of state and local climate and clean energy initiatives undertaken without a broader national agreement. Before comprehensive federal climate legislative proposals went down to defeat in 2009 and 2010, they spurred an important but truncated debate over what roles should be retained by states if the nation enacted a climate-focused federal cap-and-trade bill.6 Prominent scholars and stakeholders argued that because climate regulation addresses a global ill and logically must embrace market-based regulatory tools—most likely cap-and-trade-based regulation or use of pollution taxes—regulation should be structured to draw on the largest markets possible in order to facilitate the business search for costeffective means to reduce emissions.7 They often championed preemption of state climate roles. Final (but unsuccessful) bills, however, rejected such calls.8 And a recent 2017 proposal by leading Republican conservatives advocated enactment of a carbon tax regime, but coupled that proposal with a call for the elimination of other similarly targeted federal or state laws.9 In the absence of a tailored federal climate law, states nonetheless have made climate and clean energy regulatory progress and, as litigants, prompted a series of federal regulatory actions to address climate risks under the Clean Air Act and federal energy laws. And those federal regulatory interventions, especially the Clean Power Plan (CPP) targeting existing power plants’ greenhouse gas (GHG) emissions, were shaped by state experiences, sought to harness state regulatory capacity and creativity, and preserved state authority to do more.10 The role of federalism overlap and interaction as a hedge, especially in the climate regulation arena, is a subject of more than just theoretical interest. As this Article goes to press, the new administration of President Donald Trump has overtly declared plans to revisit and roll back climate progress.11 The extent to which this new administration can do so is substantially shaped by federal, state and business climate and clean energy progress, and past statutory federalism choices. This Article agrees that the ideal answer to a global challenge like climate change would be regulation at the largest scale possible, with minimized regulatory overlap. Nonetheless, mandating such authority allocations would be the wrong answer. The effects and political economic dynamics of federalism hedging analyzed in this Article reveal why. The value of federalism hedging links to likely regulatory implementation failures, regulatory reversal risks, and risks of unsettling linked markets. Responses to regulation will inevitably be ongoing and dynamic; whatever regulatory instruments and design are chosen will shape and change the political and market terrain, and vice versa.12 All policy reforms are “at risk,” facing post-enactment threats and a dynamic environment.13 The challenges of climate change make such regulatory derailment risks especially likely to be persistent threats. Federal harnessing of state roles, or at least preservation of the possibility of state regulation alongside federal regulation,14 can be part of an effective and durable regulatory design due to three effects linked to federalism hedging: heightened stakeholder incentives to commit to the federal regime; policy diffusion dynamics; and gradual entrenchment of supportive coalitions through a process of path dependence dynamics that result in “increasing returns” and “costs of exit.”15 Relatedly, tested regulatory and market accomplishments create a body of experience and record that can provide a bulwark against ungrounded claims of regulatory hardship, change coalitional political dynamics, and provide a fact-based foundation for future regulation.16 For market actors supplying goods and services to meet a regulatory goal, a web of regulation resulting from multiple regulators, or at least potential regulators, is far more resilient and resistant to wholesale derailment than would be complete dependence on a single federal regulatory scheme. Retaining that state authority, even if just a regulatory hedging strategy, fosters overall stability, creates room for regulatory innovation, and thereby creates conditions conducive to private investment to meet regulatory goals. Legal durability is always important, especially where the regulatory infrastructure is a critical underpinning of linked investments and markets. This is especially true in the setting of climate regulation.17 Always underlying climate politics and linked markets is fear of all governments, citizens, and market actors that their jurisdiction will act, but others will not. Such inaction or regulatory reversals of others can disadvantage the climate-regulating jurisdiction, lay waste to investors in related businesses and markets, and leave GHG levels still on the rise.18 The climate and clean energy regulatory infrastructure is already built on laws and regulations benefitted by federalism hedging.19 Concerted federal efforts to reverse course on climate change—a constant in all climate regulation battles and an even more certain scenario under the Trump administration—will surely slow and might even halt federally led climate progress. The existence of federalism hedging strategies, however, will likely reduce the scale of such reversals and also set the stage for future progress.