International Trade Impacts of California's Green Chemistry Regulation

Until recently, the field of environmental law, in both the United States and internationally, has consisted mostly of a series of statutes and regulations focused on controlling releases of hazardous substances into the environment, and cleaning up earlier disposals of hazardous wastes. Because activities causing pollution ­ i.e. discharges into air and water from a refinery, manufacturing plant or a backyard incinerator ­ were often local, systems of controls were adopted at multiple levels of government, including municipal, county and state, with little concern of one jurisdiction encroaching on the authority of another.

In the last several years, however, environmental law has shifted to a much different arena ­ the regulation of chemicals in consumer products through a proactive “cradle to cradle” approach which focuses on mandating greener design, and ultimately transforming the way manufacturers select raw materials and make consumer products. This paradigm shift, in turn, has highlighted an increasingly critical question: are the boundaries of a state’s authority to regulate the manner in which consumer products are designed and manufactured as elastic as has been historically presumed for other types of state and local environmental regulation, or, in our increasingly global economy, are new limits necessary for this new form of regulation?

Specifically, in the United States, if government is to get into the business of regulating the chemicals that may be used in consumer products, whose role is this? May it be exercised at the local and state level, on the grounds that local residents are put at risk by unsafe products? Or, so that markets not be balkanized with the erection of different "safety" barriers at the borders of each state, must this necessarily be a power reserved to the federal government? Similarly, on an international level, is state by state regulation of the safety of chemicals in consumer products consistent with the objectives of liberalized international trade fostered by the World Trade Organization, of which the United States is an active member, or would competing state safety requirements lead to the proliferation of trade barriers of the sort that the WTO exists to prevent?

California's Chemical Regulation Program

All of these issues have recently been drawn into focus by the adoption in California of the most ambitious chemical regulation program in the world -- the Safer Consumer Product regulations promulgated by California's Department of Toxic Substances Control (DTSC). In 2008, inspired by the European Union’s earlier adoption of “REACH,” a phased system for the registration and evaluation of chemical safety in the European Community, California enacted its “Green Chemistry Initiative,” incorporating many of REACH’s principles, and authorized the DTSC to establish a process by which chemicals of concern in consumer products, and their potential alternatives, were evaluated. The DTSC was directed to develop regulations that ensured “ease of use and transparency of application,” and that devised “simplified and accessible tools” for regulated parties to follow. After five years, two administrations and many proposed drafts, the DTSC published its final set of proposed regulations on April 10, 2013, and they are currently expected to become effective by the fall of this year.

What emerged from this lengthy process wasn’t exactly “simplified.” Rather, DTSC produced instead a highly complex regulatory structure, to be implemented by an agency with no prior experience in the field, which is breathtaking in scope. California identifies approximately 1,200 chemicals which the DTSC believes are potentially “chemicals of concern” (i.e. presenting health and environmental risks), establishes a process to identify which “products” present consumers the greatest risk of exposure to those “chemicals of concern” (called “priority products”), and declares steps which companies manufacturing and selling those products – regardless of where they are located -- must take to analyze whether “safer” alternatives exist. The DTSC assigns to itself the authority to then impose such requirements as it “deems necessary” on the manufacturer of a product – including telling the manufacturer the amount of a “chemical of concern” it may use in its product. The DTSC also reserves to itself the authority to ban a manufacturer’s product from California altogether if the DTSC determines that a “safer alternative” way of making the product exists which does not contain “chemicals of concern.”

California's program is not only sweeping, there can be little doubt that its impact will extend well beyond California's borders. California’s economy is not only the largest in the United States (representing roughly 12% of the entire U.S. economy), it is the twelfth largest in the world – behind Canada and ahead of Australia. Any consumer product manufacturer desiring to compete in this robust marketplace, regardless of location, effectively has no option but to adhere to California’s standards. This economic leverage gives California’s SCP regulations extraordinary influence, and yet other states -- with significant economies of their own -- will undoubtedly develop their own views of what constitutes a "safe" consumer product. Indeed, several already have.¹

EU Concerns with California Regulations

One of the first entities to recognize the profound impact which California's regulations would likely have on the orderly flow of international commerce was the European Union. The World Trade Organization, of which the EU and the United States are members, administers a number of agreements designed to facilitate and liberalize international trade, including the Agreement on Technical Barriers to Trade (TBT), the purpose of which is to assure that a member state’s regulations are based on sound science and do not create unnecessary non-tariff obstacles to trade with other member states. Focusing on this agreement, the European Union evaluated DTSC’s SCP regulations, and, by written comments submitted in 2012, found them inconsistent with the TBT in several critical respects.

The EU expressed a number of concerns with the DTSC’s proposed regulations, all of which it believed raised unjustified trade obstacles, including the potential for unequal treatment of different manufacturers, importers and retailers and the “extreme complexity” of the DTSC’s program for assessing potential chemical alternatives and the “high administrative burden” on companies to implement those requirements.

The TBT process includes a procedure which requires a member state which adopts a technical standard that could potentially present a barrier to international trade to provide formal notification to the WTO's office in Geneva. This, in turn, triggers a process designed to evaluate the adopted standard, assessing whether or not it violates the TBT agreement. While the EU plainly believed such a notification, triggering the TBT's evaluative process of the SCP regulations was required, the Office of the United States' Trade Representative – the federal agency responsible for providing that notification --- disagrees. Instead, the U.S. characterizes California's regulations as merely "conceptual," its rationale being that only when the first Priority Products are selected, months from now, will the regulations become "actual."  The SCP regulations do, however, impose immediate requirements, and while the EU could formally challenge the California regulations through the WTO’s formal dispute process, such a step seems unlikely. As a consequence, the international mechanism designed to evaluate and resolve barriers to trade will likely not be utilized.

Two of California’s other major international trading partners, Canada and Mexico, have also been evaluating the DTSC’s regulations. These two governments enjoy protections of the North American Free Trade Agreement (NAFTA), with similar provisions regarding trade barriers and well-established dispute resolution and investor-state arbitration measures. At present, neither country has sought to address California’s SCP regulations under NAFTA, but the sheer volume of trade involved make this one other possible venue for international disputes fueled by California’s regulation. Challenges under either the WTO or NAFTA, however, are not likely to occur until the policy causes injury to foreign actors trading with or investing in the state.

Does this then mean that whether or not DTSC's SCP regulations raise impermissible barriers to trade, they will go untested? That too is unlikely. Scores of consumer product manufacturers and trade associations have been actively involved in commenting on each iteration of the SCP regulations published by DTSC over the last several years. Concerns with the impact of California's SCP program on both interstate and international commerce have been raised by many of these commentators, concerns which are supported by a substantial body of law. Indeed, with respect to another leading California environmental initiative – the Global Warming Solutions Act – a U.S. District Court has ruled that California’s establishment of Low Carbon Fuel Standards amounted to extraterritorial regulation in violation of the U.S. Constitution’s Commerce Clause. Rocky Mountain Farmer’s Union v. Goldstene (Dist. Ct. E. D. Ca. 2011) 843 F. Supp. 2d 1071. That decision is currently on appeal, but it appears very possible that California’s Safer Consumer Product regulations may have the same flaw.

The 'Practical Effect' of California’s Regs

In terms of whether a state regulatory scheme transgresses the constitutional prohibition against interference with interstate and international commerce, the cases focus on the “practical effect” of the state regulation. Healy v. The Beer Institute (1989) 491 U.S. 324, 328. Given the enormous size of the California marketplace, and the immense purchasing power of its residents, it would seem that, as a “practical” matter, no manufacturer in the world would want to run the risk of being excluded from the world’s twelfth largest economy.

As a consequence, it seems the “practical effect” of the Safer Consumer Product regulations can be fairly characterized as “project[ing] [California’s] legislation into other States” by empowering the DTSC to enforce California’s perception of environmentally “safe” products on manufacturers world-wide. Brown-Forman Distillers Corp. v. New York State Liquor Authority, (1986) 476 U.S. 573, 584.  Yet, the Commerce Clause to the U.S> Constitution prevents states – including California – from enforcing any regulatory program where “the practical effect of the regulation is to control conduct beyond the boundaries of the State”. Healy, 491 U.S. at 336.

Indeed, the scope of the Safer Consumer Product regulations highlight what may have been a fundamental flaw in California’s Green Chemistry Initiative from the outset – a statute whose apparent “intention and effect… [was] to change conduct beyond… [California’s] borders” by exporting California’s green chemistry values worldwide. Nat’l Foreign Trade Council v. Natsios (1^stCir. 1999) 181 F.3d 38, 69. 

The proper role for individual states in regulating the chemical “safety” of consumer products in our global economy is a pressing issue not simply because of California’s program, but also because, as mentioned earlier, several other states have followed suit. Each state will very likely have its own view of what constitutes a “safe” consumer product. Therefore, in weighing the constitutionality of California’s program, a court must recognize that other states are acting too, and “tak[e] into account the possibility that other states may adopt similar extraterritorial schemes and thereby impose inconsistent obligations.” Pacific Merchant Shipping Ass’n v. Goldstene (9^thCir.2011) 639 F.3d 1154, 1178.  Finally, the fact that California’s program burdens international as well as interstate commerce raises the constitutional stakes even higher. “The foreign commerce context places further constraints on state because of ‘the special need for federal uniformity.’” Id.

Whether California’s SCP program will ultimately survive a legal challenge to its impacts on both interstate and international commerce and, if so, in what form, will likely not be known for some time. What is known now, however, is that California’s ambitious regulatory program raises profound issues as to the proper division of authority in our federal system of government, and specifically whether an individual state – under the banner of Green Chemistry – in fact has the authority California assumes it has: the power to transform global practices in the design and manufacturing of consumer products. Impacted parties in the United States and abroad will be following this issue closely as it eventually works its way through the U.S. judicial system.

¹SeeMaine’s Act to Protect Children’s Health and the Environment from Toxic Chemicals in Toys and Children’s Products, Maine Revised Statutes, Title 38, §§1691 et seq.; Minnesota’s Toxic Free Kids Act, Minn. Stat. 2010 §§116.9401 et seq.; and Washington’s Children’s Safe Products Act, Washington Revised Code, Title 70, Chapter 70.240 et seq.