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The U.S. Court of Appeals for the Second Circuit (the “Court") recently upheld a lower court decision to permanently enjoin enforcement of New York’s Air Pollution Mitigation Law, N.Y. Pub. Serv. L. § 66-k (Section 66-k"). Clean Air Markets Group v. Pataki, 338 F.3d 82 (2d Cir. 2003) (the "Opinion"). The Court determined that enforcement of Section 66-k would interfere with the emissions trading system established under Title IV of the Clean Air Act Amendments of 1990 ("Title IV"), 42 U.S.C. §§ 7651-7651o, and that Section 66-k was therefore preempted by federal law. As explained in the Opinion, Congress enacted Title IV to reduce acid rain caused by emissions of sulfur dioxide. To that end, Title IV created a "cap-and-trade" system under which electric-generating utilities each receive a certain number of sulfur dioxide emissions "allowances" annually. Each allowance represents one ton of sulfur dioxide. The aggregate of all allowances issued per year is reduced in each successive year, and the allowances are transferable. The intent is for polluters for whom emissions reductions are relatively expensive to buy allowances from polluters for whom emissions reductions are relatively cheap, thereby achieving the greatest overall reduction of emissions at the least overall cost. The cap-and-trade system does not take into account the geographic location of the buyers and sellers of emissions allowances. According to the Opinion, acid rain has been especially problematic in the Adirondack region of New York. Much of the acid rain that falls in the Adirondacks is caused, not by sulfur dioxide emissions from New York utilities, but rather by emissions from fourteen so-called "upwind" states (New Jersey, Pennsylvania, Maryland, Delaware, Virginia, North Carolina, Tennessee, West Virginia, Ohio, Michigan, Illinois, Kentucky, Indiana and Wisconsin). From New York’s point of view, the benefit of emissions reductions achieved in New York may be offset or negated by any increase in emissions in the upwind states. The New York legislature enacted Section 66-k with this issue in mind. Section 66-k provides that any New York utility that sells sulfur dioxide emission allowances to a utility in any of the fourteen upwind states must pay an assessment equal to 100% of the amount received for the allowance. The assessment also applies when a New York utility’s emissions allowances are subsequently transferred to an upwind state. As the Court explained, the effect of this restriction is to prevent the transfer of allowances of New York utilities to utilities in the upwind states. New York argued that Section 66-k would not conflict with Title IV because it advances Title IV’s ultimate purpose of protecting natural resources. The Court disagreed on the ground that, even if the ultimate goal of both the state and federal legislation is the same, Section 66-k is still preempted because it interferes with the method by which the federal statute sought to achieve the goal, that is, through a national allowance trading system. In support of its conclusion, the Court pointed to specific language in the statute, which permits the transfer of allowances to "any other person who holds such allowances." The Court also pointed to the legislative history of Title IV, which indicates that Congress specifically considered and rejected proposed geographic restrictions.
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