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«The New Insider Trading: Environmental Markets within the Firm Sarah E. Light* Environmental law scholarship has failed to appreciate fully the ...»

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The New Insider Trading: Environmental

Markets within the Firm

Sarah E. Light*

Environmental law scholarship has failed to appreciate fully the

significant parallels between public law rules and private environmental

governance—the traditionally “governmental” standard-setting functions

that private parties, including business firms, non-governmental

organizations, and individuals, have adopted to govern behavior respecting

the environment. Recognizing these parallels should affect how we think both about what methods are best for setting environmental standards— prescription, markets, property rights, informational governance, or hybrid approaches—and who should be setting those standards—government regulators, private actors, or some combination of the two.

This Article examines the use of market approaches (carbon taxes) and hybrid market instruments (emissions trading) in the climate change context. A great deal of legal scholarship has examined both how to design carbon taxes and cap-and-trade systems and the merits of these approaches relative to other methods of public regulation, such as prescriptive rules.

There has been virtually no legal scholarship, however, analyzing the adoption by business firms of private market and hybrid instruments to address climate change. By closely examining British Petroleum’s use of a private emissions trading scheme and Microsoft’s use of a private carbon fee, this Article illuminates some of the common challenges that decision makers face in designing public and private forms of environmental governance, while acknowledging some of the key distinctions. The Article * Assistant Professor of Legal Studies and Business Ethics, The Wharton School, University of Pennsylvania. Thanks to the participants in the Sabin Colloquium for Innovative Environmental Law Scholarship at Columbia Law School, Reuven Avi-Yonah, Vincent Buccola, Eric Orts, Richard Shell, David Uhlmann, Michael Vandenbergh, and David Zaring for their insights on this project. Thanks to David Britto, Michael Steele, and Kristin Teager for excellent research assistance.

3 4 STANFORD ENVIRONMENTAL LAW JOURNAL [Vol. 34:1 concludes by arguing that this new “insider trading” has the potential to reap significant benefits in combating climate change. It is important, however, to remain cautious about its limitations.


II. PUBLIC MARKETS AND HYBRIDS IN THEORY AND PRACTICE........ 12 A. Relative Merits of Market and Hybrid Approaches.......... 14 B. Cap-and-Trade Systems in Theory and Practice............... 18

1. Design Issues

2. Public Cap-and-Trade Systems in Operation and Their Limits

C. Carbon Taxes in Theory and Practice

1. Design Issues

2. Public Carbon Taxes in Operation and Their Limits

D. Carbon Taxes Versus Cap-and-Trade


A. BP’s Internal Emissions Trading Scheme

1. Setting the Cap, Selecting the Baseline Year, and Scope of the Program

2. Distributing Emissions Allowances

3. Administration and Enforcement

4. Collateral Issues

5. Lessons From BP’s Experience

B. Microsoft’s Internal Carbon Fee

1. Setting the Price

2. Scope of the Program

3. Administration and Enforcement

4. Lessons from Microsoft’s Carbon Fee



–  –  –

adopting to govern behavior respecting the environment. 1 Recognizing these parallels has implications for how policymakers and private actors, including business firms, non-governmental organizations (NGOs), and individuals, should think about what methods to use to set environmental standards. Such methods include prescriptive rules, the creation of property rights or entitlements, the creation or enabling of markets, the use of informational governance, or hybrid approaches. 2 Recognizing these parallels also broadens the scope of who should be setting standards in a comprehensive regime of global environmental governance—government regulators, private actors, or some combination of the two. 3 Finally, the different options must ultimately be weighed against normative criteria, including effectiveness, economic efficiency, environmental (distributive) justice, potential to stimulate innovation, accountability/transparency, potential for transnational impacts, risk of greenwashing, durability/adaptability, and expressive content. 4 This Article examines in-depth the parallel adoption by public and private actors of a market approach (a carbon tax or fee) and a hybrid market approach (carbon emissions trading) to address climate change. 5 While there is a great deal of legal scholarship

1. Sarah E. Light & Eric Orts, Parallels in Public and Private Environmental Governance, (forthcoming 2015) (manuscript at 3) (on file with authors) (offering a new analytical approach to issues of “instrument choice” in environmental law). In Parallels, we argue that each of what we deem the primary categories of public environmental law, namely prescriptive rules, the creation of property rights, the use or creation of markets, and informational governance, as well as hybrid approaches, are methods that both public and private actors employ to set and enforce environmental standards. Id. at 3, 19-43. See also Michael P. Vandenbergh, Private Environmental Governance, 99 CORNELL L. REV. 129, 133 (2013) (arguing that private environmental governance should be recognized as a form of law).

2. Light & Orts, supra note 1, at 19-43.

3. Id.

4. Id. at 45-55 (discussing these normative criteria in-depth).

5. A “market approach,” either (i) intends to affect market behavior by using prices, incentives, and other market signals or (ii) creates new markets. Id. at 33. Market approaches include, for example, public and private (1) taxes, charges, and fees; and (2) subsidies and payments. Id. A great deal of legal scholarship considers emissions trading schemes a “market approach,” alongside carbon taxes. However, Eric Orts and I argue that emissions trading is better understood as a hybrid form of governance that incorporates the creation of property rights in the new allowance, a prescriptive cap, and the creation of a new market for trading. Id. at 31-32; cf. James Salzman, Teaching Policy Instrument Choice in Environmental Law: The Five P’s, 23 DUKE ENVTL. L. & POL’Y F. 363, 369arguing that public tradable permit schemes are a hybrid form of property and 6 STANFORD ENVIRONMENTAL LAW JOURNAL [Vol. 34:1 debating the relative merits of market approaches, such as carbon taxes and cap-and-trade systems over other instruments, such as prescriptive regulation, there has been no discussion in the legal literature about the use of private market and hybrid approaches by firms to combat climate change. This Article therefore focuses attention on this underexplored parallel use of private environmental market and hybrid instruments. After addressing the theoretical literature on carbon taxes and emissions trading, I analyze British Petroleum’s (BP’s) use of a private carbon emissions trading scheme and Microsoft’s use of a private carbon fee to illuminate some of the common challenges that public and private decision makers face in designing these systems. This new “insider trading” has the potential to reap significant benefits to combat climate change. At the same time, it is essential to be thoughtful about both the normative implications of private environmental governance, and how to integrate private environmental governance and traditional public law. 6 prescriptive rules); JAMES SALZMAN & BARTON THOMPSON, ENVIRONMENTAL LAW & POLICY 47-53 (4th ed. 2013) (arguing the same). For ease of reference, here I refer to carbon taxes and cap-and-trade schemes as market approaches, or as market and hybrid approaches, respectively.

6. Although the BP and Microsoft programs are conducted within each firm (rather than imposed by another party in the firm’s value chain through contract, or enforced by a third-party certifier), I consider them as a form of private environmental governance rather than simply internal corporate management for several reasons. First, a complete account of private environmental governance must acknowledge that the phenomenon exists in many different forms, each with particular strengths and weaknesses. The intrafirm nature of the programs I discuss here may affect how to evaluate them along certain normative dimensions as compared to other forms of private environmental governance (such as accountability, transparency, durability, or potential for greenwashing). Other forms of private governance—such as those involving third-party certification and auditing, or environmental standards imposed through supply chain contracts—may be more durable, involve a greater degree of accountability and less risk of greenwashing, though they may be less transparent if embodied in a private contract. This descriptive account is not the same as advocating the option in all circumstances. Second, the source of the environmental standards is purely private. See Light & Orts, supra note 1, at 3. Third, each actor was, at least to some degree, influenced to adopt these measures by private stakeholder pressure, including from the public or investors. Microsoft, for example, reported its significant emissions reductions to the CDP, a third-party NGO that provides a forum for investors to press firms to report (and ultimately reduce) their greenhouse gas emissions. BP’s reputation was significantly enhanced when it adopted its emissions trading system. See infra, Part III.A-B. Thus, even for those who define “governance” to require a coercive element should find at least some coercive pressure here. Fourth, while a full discussion of this point is outside the scope of this paper, each firm is a large, multinational corporation with multiple business units in different countries. The particular corporate form of these interconnected enterprises should not affect whether these methods fall on one side or the other of the line of what constitutes private 2015] THE NEW INSIDER TRADING 7 There is a rich scholarly literature debating how best to combat climate change. Many legal scholars have examined the relative merits of different public regulatory options, including prescription, market approaches such as carbon taxes, hybrid market approaches such as cap-and-trade systems, and the use of information disclosure. 7 Some advocate government subsidies for green technology development, the creation of a governmental “green bank” to support emerging renewable energy technologies, 8 or government-funded technology-inducement prizes. 9 Elsewhere, I have argued that the United States military’s “green” procurement and investment in research and development can stimulate technological innovation to promote the development of renewable energy sources, and should be included in this matrix of options for global environmental environmental “governance” as opposed to mere corporate environmental social responsibility. Finally, here I focus on issues relating to the design of private (and public) systems that account for carbon; such design issues are likely to be present in other private environmental governance schemes that involve third-party certification or contracts within the value chain.

7. See, e.g., Bruce A. Ackerman & Richard B. Stewart, Reforming Environmental Law, 37 STAN. L. REV. 1333, 1347-51 (1985) (advocating market solutions to address air and water

pollution); Reuven S. Avi-Yonah & David M. Uhlmann, Combating Global Climate Change:

Why a Carbon Tax is a Better Response to Global Warming Than Cap and Trade, 28 STAN. ENVTL.

L.J. 3, 6-9 (2009) (advocating a carbon tax); Sarah E. Light, NEPA’s Footprint: Information Disclosure as a Quasi-Carbon Tax on Agencies, 87 TUL. L. REV. 511, 513 (2013) (advocating information disclosure with quasi-tax effects to address climate change and summarizing literature); Gilbert E. Metcalf & David Weisbach, The Design of a Carbon Tax, 33 HARV.

ENVTL. L. REV. 499, 502 & n.11 (2009) (advocating a carbon tax); Robert N. Stavins, A Meaningful Cap-and-Trade System to Address Climate Change, 32 HARV. ENVTL. L. REV. 293, 344-53 (2008) (advocating an upstream carbon cap-and-trade system). But see Nathaniel O.

Keohane, Richard L. Revesz & Robert N. Stavins, The Choice of Regulatory Instruments in Environmental Policy, 22 HARV. ENVTL. L. REV. 313, 313-14 (1998) (explaining through a public choice model why prescriptive environmental regulation has generally been preferred both by firms and government actors over market solutions); Thomas Merrill, Explaining Market Mechanisms, 2000 U. ILL. L. REV. 275, 290-96 (2000) (discussing why, if market mechanisms are more “efficient” than prescriptive regulation, they have not been widely adopted); cf. David Weisbach, Instrument Choice is Instrument Design, in U.S. ENERGY TAX POLICY 113 (Gilbert E. Metcalf ed., 2011) (arguing that distinctions between a carbon tax and cap-and-trade system can be eliminated through careful design).

8. Allison S. Clements & Douglass D. Sims, A Clean Energy Deployment Administration:

The Right Policy for Emerging Renewable Technologies, 31 ENERGY L.J. 397, 398 (2010) (arguing that government intervention is necessary to “create a level playing field” for emerging clean technologies in light of subsidies for fossil fuel extraction, processing, and infrastructure).

9. Jonathan H. Adler, Eyes on a Climate Prize: Rewarding Energy Innovation to Achieve Climate Stabilization, 35 HARV. ENVTL. L. REV. 1, 1 (2011) (favoring technology inducement prizes to “accelerate the rate of technological innovation in the energy sector”).

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