California Cap-and-Trade Lawsuits Dismissed

A Sacramento, Calif., superior court last week dismissed two lawsuits filed by the California Chamber of Commerce (Chamber) and the Pacific Legal Foundation (PLF) against the state’s cap-and-trade emissions program created under AB 32, the “California Global Warming Solutions Act of 2006.”

The cap-and-trade rules have been in effect since Jan. 1, 2013, but the California Air Resources Board (CARB) is still facing numerous court challenges related to various aspects of AB 32.

Refinery stack emissions are already covered by cap-and-trade, and fuel storage and transport facilities are due to be covered beginning on Jan. 1, 2015. Reflecting the future impact, jobber Merit Oil Company and Robinson Enterprises Inc., which owns fuel terminals, are among the plaintiffs represented by PLF.

The PLF case is Morning Star Packing Co. v. California Air Resources Board, and the Chamber’s case is California Chamber of Commerce v. California Air Resources Board.

The goal of cap-and-trade is to reduce statewide emissions of greenhouse gases (GHG) cost effectively. Emitters must acquire emissions allowances for each metric ton of GHG they emit during specified compliance periods. Over time, the allowances will be reduced, thus reducing emissions, but giving covered entities the flexibility to find their own ways of meeting their share of the emissions goals.

To date, there have been five quarterly carbon allowance auctions, the latest being on Nov. 19. These have raised more than $1.1 billion.

The money raised by the auctions is at the heart of the lawsuits filed by the Chamber and PLF. “They asserted that AB 32 does not permit CARB to hold a revenue-raising auction because AB 32 provides only for the collection of regulatory fees sufficient to cover the program’s administrative costs,” said Michael Steel, partner with law firm Morrison & Foerster LLP. “Second, the lawsuits asserted that the revenue-raising auction process, even if authorized by AB 32, is void as an unconstitutional ‘tax’ that was not passed by two-thirds of the state legislature, as required by Propositions 13 and 26.”

However, Superior Court Judge Timothy Frawley rejected those arguments last week. In his opinion, he described the auction as more similar to permits than to taxes, and he wrote that AB 32 gives CARB “wide discretion … to design” a system of emissions allowances.

“This issue is significant because, had the auction been treated as a tax, a key provision of the law would have been void,” said Steel. “It is also important, given that there are many unanswered questions about how the proceeds of the auctions will be used. There is no assurance that the funds will be used for anything even remotely related to climate change.”

The superior court ruling follows the pattern set by other challenges to AB32, said Steel. “So far, every lawsuit filed to date challenging CARB’s authority under AB 32 has been denied, and the longer the cap-and-trade program is in place, the more difficult it may be for future challenges to prevail,” he said.

However, both Chamber and PLF stated that they will file appeals within the 60- day statutory window. “We strongly disagree with the ruling and will appeal to the California Court of Appeal, where the appellate court will decide all issues de novo, meaning, from scratch,” said PLF Senior Staff Attorney Ted Hadzi-Antich in a prepared statement.

Meanwhile, a lawsuit filed against CARB by environmental groups also is on appeal. In that lawsuit, Citizens Climate Lobby and Our Children’s Earth Foundation v. California Air Resources Board, environmental groups are challenging CARB’s plan to allow regulated entities to use offsets to comply with up to 8% of its allowed emissions. CARB won that lawsuit, too, but the 1st District Court of Appeal in San Francisco will hear arguments in the appeal next year.

 

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