The People’s Republic of California

At the annual U.N. climate talks in Doha, Qatar, delegates are undoubtedly applauding the new Australian cap-and-trade scheme, bemoaning Canada’s withdrawal from the Kyoto Protocol, and wondering what to do about emissions from emerging India. They will spend far less time thinking about an economy bigger than any of those: California.

California’s new cap-and-trade system is perhaps the biggest good news climate story this year, and delegates in Doha should be celebrating it. Just last month, environmentalists celebrated California’s first successful auction of carbon emissions allowances. Yet the rise of Sacramento and other state capitals as leading forces in U.S. climate policy raises thorny foreign-policy dilemmas, too. These are easy to miss because U.S. states have no seats at the global climate talks, but are nevertheless critical for negotiators around the world to address.

Taking credit for progress in California and elsewhere will be tricky for the United States: International diplomacy tends to focus on what is happening in national capitals, slighting state efforts in the process. This problem will be resolved over the long run by what happens on the ground, since climate policy success in places like California should reduce total national emissions — the ultimate proof of their success. But U.S. diplomats can reap dividends today by doing a better job of systematically showing other countries what ongoing state-level efforts will deliver. Putting those efforts in the context of what is happening in similarly sized economies — like Australia, Russia, and the United Kingdom — could help.

Some of what happens as a result of state policy, though, presents tougher challenges for Washington. California’s cap-and-trade program, in particular, promises to launch the United States into uncharted territory on climate change — and could even cause Sacramento to develop its own foreign policy at odds with the agenda formulated at Foggy Bottom.

California is already becoming entangled in the international system: Its program will eventually allow companies to comply with its climate laws in part by buying international "offsets" instead of reducing their own emissions. (Offsets are payments to entities overseas that cut their emissions below what regulators judge that they otherwise would have been, had the offset system not been in place.) Offsets are being used by Europe and Japan to help meet their obligations under the Kyoto Protocol; implemented properly, they can be an important part of California’s approach too.

Yet they pose significant dilemmas for Washington. The first has to do with accounting. When the Japanese or European governments report their total emissions to the United Nations, they take credit for offset projects that they or their companies have supported abroad. If an oil company operating in the Netherlands, for example, buys offsets that finance a big reduction in Indian power plant emissions, the Netherlands gets to report that emissions cut as its own. As California allows international offsets into its system, then, Washington will be faced with a decision: Should it follow the European precedent and count the foreign emissions cuts supported by California-purchased offsets as its own?

There will be a real temptation to do so. Anything that makes U.S. emissions look smaller is helpful to U.S. diplomatic efforts. Encouraging a robust offset system can also help push developing countries toward bigger emissions cuts than they would otherwise make, a goal shared by the U.S. government.

But there are also real risks. International offsets are essentially created by regulators who decide that the projects that those offsets support are legitimate  — in particular, that they would not have occurred without offset support. But the legitimacy of particular offset schemes is often controversial. For example, scholars and policymakers have fought over whether wind turbine projects in China would have occurred even without offset support. Others have pointed out that some industrialists appear to have built chemicals plants primarily so that they could collect offset payments in exchange for destroying those plants’ climate-warming byproducts — which wouldn’t have existed in the first place if the plants hadn’t been built. By choosing to take credit for Californian offsets, Washington would be vouching for a system regulated by a state entity over which it has limited control.

And that is only the beginning of what could become a considerably more complex problem. As California’s use of international offsets develops, the state will essentially enter into a system of contracts with foreign entities. The integrity of that system will rest on the continuation of the rules governing the state’s cap-and-trade system. Yet somewhere down the road, if the United States gets more serious about climate change, it may decide to revisit cap-and-trade (or a related system) at the national level. A national cap-and-trade law would probably seek to preempt state level efforts — much like national fuel economy regulations for cars and trucks have preempted Californian regulations in the past. Washington would then face the prospect of potentially invalidating (or materially interfering with) many of the Californian offset contracts, possibly with severe consequences for U.S. relations with the various foreign countries involved.

Of course, no national cap-and-trade scheme is in the immediate offing. But even if a U.S. cap-and-trade system isn’t in the cards for a decade or more, steps taken soon in California will lock the United States in to a future of long-term headaches. In the event of a national effort to combat climate change, Congress could also try to find ways to grandfather in the policies of the Californian scheme — but even that would mean accommodating the foreign-policy decisions Sacramento is making today.

Avoiding this sort of debacle is precisely the reason that the U.S. Constitution made the conduct of foreign policy an exclusive province of the federal government. The line between what states can and cannot do internationally has always been fuzzy, and legal precedent is thin. But as California’s cap-and-trade program becomes increasingly linked up with foreign countries — and as similar efforts rise elsewhere in the United States — the case for caution will become stronger, lest the system be set up for a mess down the road. Achieving the right balance will require much more coordination between California and the federal government.

None of this should take away from the positive example that California’s program has set for the rest of the United States, and the rest of the world. But the task of fully exploiting that success, and avoiding important dangers ahead, has just begun.