California’s Cap-and-Trade Auctions Are Lawful: Appeals Court

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By Carolyn Whetzel

California’s auctions of carbon allowances are not an illegal tax, a state appellate court said April 6.

The 2-1 opinion resolves closely watched litigation that threatened a key feature of the greenhouse gas emissions cap-and-trade program.

Affirming a trial court, the Third Appellate District of the California Court of Appeal upheld the California Air Resources Board’s authority under the Global Warming Solutions Act of 2006, or A.B. 32, to establish the auctions to curb carbon emissions.

The court also said that because the purchase of the allowances is voluntary, the auctions are not an illegal tax.

“The system is the voluntary purchase of a valuable commodity and not a tax under any test,” the court said.

“The court’s decision affirms the basic purpose and structure of the program—to deliver carbon reductions in a cost-effective and flexible manner,” CARB Chairman Mary D. Nichols said in a statement. “The decision provides additional certainty for California to continue with this keystone program that puts a price on carbon and supports all other approaches California has underway to fight climate change.”

Governor Wants Extension

Gov. Jerry Brown (D) wants lawmakers to extend the cap-and-trade program to 2030, through budget legislation due June 1. A budget measure approved by a two-thirds vote would provide some added certainty to the future of the program.

Concern over the outcome of the years-long litigation has contributed to uncertainty as to the future of the program, and dampened interest in recent cap-and-trade auctions, according to market analysts.

The state’s multisector trading program is among a suite of programs implemented to help California meet its climate goals. It covers about 450 entities, the largest emitters of greenhouse gases: electricity generators, industrial facilities and distributors of transportation, and fuels.

Under the program, entities have the option of buying and selling allowances to meet declining annual caps. Some allowances, however, are distributed for free.

State law requires that auction proceeds go to programs that reduce greenhouse gas emissions. About 35 percent of revenue, by law, must be invested in disadvantaged communities.

Suit Filed on Eve of First Auction

The California Chamber of Commerce and other business groups filed the lawsuit on the eve of the state’s first auction of carbon allowances in 2014. Plaintiffs alleged CARB lacked legislative authority to create the auctions and that the emissions allowances amount to a tax that required a two-thirds vote of the Legislature.

Morning Star Packing Co. filed a similar claim, eventually consolidated with the chamber’s case.

“We are reviewing the decision and evaluating our options,” California Chamber spokeswoman Denise Davis told Bloomberg BNA in an April 6 email.

Attorneys at the Pacific Legal Foundation, representing Morning Star, had contended the ruling evades California’s tax rules under Proposition 13, a 1978 law requiring a super-majority vote for taxes.

Morning Star is considering an appeal to the California Supreme Court, its attorneys said.

Not Tax Under Proposition 13

The auction system “does not equate to a tax subject to Proposition 13,” the court said. The purchases of allowances is a business-driven decision, “not a governmentally compelled decision.”

Also, unlike a tax, “the purchase of an emissions allowances conveys a valuable property interest—the privilege to pollute California’s air—that may be freely sold or traded on the secondary market,” the court said.

In a statement, the Pacific Legal Foundation said: “Under the majority’s reasoning, California’s gasoline taxes are not really taxes, because the state does not compel you to buy gasoline and you get something of value for it paying the tax: a gallon of gas.”

Court ‘Got It Right’

“I think the court really got it right,” Cara Horowitz, a law professor at the University of California, Los Angeles, told Bloomberg BNA. “It took a creative analytical approach to recognize that the auction is neither a tax nor a traditional regulatory fee, but something else entirely.”

Horowitz wrote one of the amicus briefs filed supporting the state.

“The world is looking to California to lead on climate,” Natural Resources Defense Council attorney Alex Jackson said in a statement. “Making polluters pay for their harmful emissions and investing the proceeds in clean energy is critical to winning that fight and protecting the most vulnerable Californians.”

The case is California Chamber of Commerce v. California Air Resources Bd. , Cal. Ct. App., 3d Dist., No. C075930, 4/6/17

James R. Parrinello, Steven A. Merksamer, Kurt R. Oneto, Christopher E. Skinnell and Eric J. Miethke at Nielsen Merksamer Parrinello Gross & Leoni in Sacramento represented the California Chamber of Commerce.

Pacific Legal Foundation attorneys James S. Burling, Theodore Hadzi-Antich, Harold E. Johnson and Anthony L. François represented Morning Star and its co-plaintiffs.

California Attorney General Kamala D. Harris and Robert W. Byrne, Gavin G. McCabe, Molly K. Mosley, David A. Zonana, Robert E. Asperger, M. Elaine Meckenstock and Bryant B. Cannon represented the state.

—Laura Mahoney contributed to the story

To contact the reporter on this story: Carolyn Whetzel in Los Angeles at CWhetzel@bna.com

To contact the editor responsible for this story: Larry Pearl at lpearl@bna.com

For More Information

A copy of the California Chamber of Commerce v. CARB opinion is available at: http://src.bna.com/nJe

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