Market Segmentation vs. Subsidization: Clean Energy Credits and the Commerce Clause's Economic Wisdom

49 Pages Posted: 3 Apr 2018 Last revised: 9 Jan 2019

See all articles by Felix Mormann

Felix Mormann

Texas A&M University School of Law; Stanford Law School

Date Written: March 28, 2018

Abstract

The dormant Commerce Clause has long been a thorn in the side of state policymakers. The latest battleground for the clash between federal courts and state legislatures is energy policy. In the absence of a decisive federal policy response to climate change, nearly thirty states have created a new type of securities—clean energy credits—to promote low-carbon renewable and nuclear power. As more and more of these programs come under attack for alleged violations of the dormant Commerce Clause, this Article explores the constitutional constraints on clean energy credit policies.

Many observers view the dormant Commerce Clause doctrine as a major threat to state-led efforts to combat climate change. Pushing back against widespread scholarly skepticism and calls for reform, this Article makes the case that state policymakers can use clean energy credits to simultaneously promote global environmental and local economic causes without running afoul of the dormant Commerce Clause. The latest wave of judicial decisions and scholarly criticism fail to recognize that not all energy credit programs are created equal.

When states use energy credits as compliance instruments for their renewable portfolio standard—requirements that electric utilities source a percentage of their electricity sales from solar, wind, and other renewables—they partition power markets into renewable and non-renewable segments. Such segmentation policies cannot follow state or other geographically defined lines without violating the dormant Commerce Clause. A few pioneering states have begun to use energy credits as a vehicle for subsidies that operate independently of sourcing requirements. Unlike their market segmentation counterparts, these subsidization policies raise no concerns under the dormant Commerce Clause even when subsidies are available only to in-state firms.

The Commerce Clause’s “preference” for subsidization over segmentation policies may seem counterintuitive. Both have, after all, the potential to disrupt interstate commerce and competition. Yet, two centuries of dormant Commerce Clause jurisprudence reflect a simple economic truth: segmentation prevents competition altogether, while subsidization can have a pro-competitive effect, such as when used to correct for carbon externalities and other market failures.

Keywords: commerce clause, renewable energy, REC, ZEC, RPS, renewable portfolio standard, nuclear power, solar, wind, federalism, policy innovation, climate change, renewables

JEL Classification: H10, H70, K32, L10, O30, O10, O38, Q20, Q28, Q40, Q42, Q48

Suggested Citation

Mormann, Felix, Market Segmentation vs. Subsidization: Clean Energy Credits and the Commerce Clause's Economic Wisdom (March 28, 2018). 93 Washington Law Review 1853 (2018); Texas A&M University School of Law Legal Studies Research Paper No. 18-38. Available at SSRN: https://ssrn.com/abstract=3152123

Felix Mormann (Contact Author)

Texas A&M University School of Law ( email )

1515 Commerce St.
Fort Worth, TX 76102
United States

Stanford Law School ( email )

Steyer-Taylor Center for Energy Policy and Finance
559 Nathan Abbott Way
Stanford, CA 94305-8610
United States

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