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California’s Cap-and-Trade Program Upheld by the California Court of Appeal

On April 6th, we issued an alert that discussed among other things the uncertainty surrounding California’s cap-and-trade program under Assembly Bill 32 (“AB 32”).  On April 7th, that uncertainty has been lessened considerably, thanks to a state Court of Appeal decision holding that the California Air Resources Board’s (“CARB”) auction program is not an unconstitutional tax on California businesses.

In 2012, the California Chamber of Commerce (“Cal. Chamber”) and others filed two lawsuits alleging that CARB’s cap-and-trade program was unconstitutional because the agency collected auction proceeds that far outweighed AB 32’s administrative costs and spent those monies on climate-friendly infrastructure projects.  Describing cap-and-trade as a “tax,” Cal. Chamber argued that such a tax was unconstitutional because it lacked approval by two-thirds majorities in both houses of the California State Legislature.  While cap-and-trade opponents lost at the superior court, they appealed to the court of appeal, which held oral arguments earlier this year.

That appeal has now been resolved in favor of cap-and-trade.  On the afternoon of April 6, the California Court of Appeal, Third Appellate District, upheld CARB’s cap-and-trade regulations in a 2-1 decision, ruling that the purchase of emissions allowances is a “business-driven decision” that “conveys a valuable property interest—the privilege to pollute California’s air—that may be freely sold or traded on the secondary market.”[1]  Unlike a tax, participation in CARB’s auction process is “voluntary,” and the allowances received are valuable.[2]

While there are still bills pending in the California legislature to explicitly extend cap-and-trade beyond 2020, the pressure to pass such an extension with a supermajority has likely been lessened.  We expect that cap-and-trade will continue to play a large role in CARB’s AB 32 Scoping Plan, and this recent decision may also spark renewed interest in CARB’s quarterly allowance auctions, the next of which is scheduled for May 16, 2017.  Environmental justice advocates who favor more stringent programs to reduce actual emissions may argue for stricter caps rather than opposing the entire auction process.

Cap-and-trade opponents had previously promised to press their fight to the California Supreme Court, if their bid at the court of appeal was unsuccessful.  But it is looking increasingly likely that cap-and-trade will continue to be California’s signature program to reduce greenhouse gas emissions at stationary sources, and CARB’s interim victory will likely embolden the agency’s broader efforts to fight climate change.


[1] Cal. Chamber of Commerce v. State Air Resources Bd., No. C075930, Slip. Op. at 29 (Cal. Ct. App. Apr. 6, 2017).

[2] Id.

Copyright 2017 K & L Gates

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About this Author

Ankur K. Tohan, KL Gates Law Firm, Environmental Law Attorney
Partner

Ankur Tohan works with the firm's Environmental, Land and Natural Resources practice. His practice focuses on energy infrastructure, natural resource development, compliance counseling, and defense of governmental and citizen enforcement actions.

Ankur helps clients navigate complex regulatory, permitting, and enforcement matters under a range of environmental statutes, including the Migratory Bird Treaty Act (MBTA), Bald and Golden Eagle Protection Act (BGEPA), Endangered Species Act (ESA), Clean Water Act (CWA), Safe Drinking Water Act (SDWA...

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Alyssa A. Moir, KL Gates Law Firm, Environmental Law Attorney
Associate

Alyssa Moir is an associate in the Environmental, Land Use and Natural Resources and Energy and Utilities groups in the Seattle office. Alyssa’s practice focuses on regulatory compliance and litigation related to air quality, water resources, land use, greenhouse gas regulation, and MTCA and CERCLA. She has represented individuals, municipalities, and corporations before state regulatory agencies, administrative hearings boards and in state courts.

Alyssa also advises clients in permitting strategies for large infrastructure projects in a range of industries, including renewable energy facilities, energy export facilities, data centers, and beverage producers.

206-370-7965
Buck B. Endemann, KL Gates, energy infrastructure lawyer, remediation projects attorney
Partner

Buck Endemann is a partner in the firm’s San Francisco office, where he is a member of the energy practice group. He provides comprehensive counseling on energy, infrastructure and remediation projects, including advice on air, water and waste compliance issues, and represents clients in related litigation. 

Mr. Endemann has extensive experience on the commercial, land use, and regulatory aspects of renewable energy and infrastructure projects throughout the Western United States, with an emphasis on California. He has a particular expertise...

415-882-8016
Christina A. Elles, Associate, KL Gates, Law Firm
Associate

Christina Elles is an associate in the firm’s Seattle office. Prior to joining K&L Gates, Ms. Elles was a Rule 9 licensed legal intern for University of Washington Student Legal Services and was also a summer legal extern at the California Governor’s Office of Planning and Research. She was a K&L Gates summer associate in 2015. Prior to law school, Ms. Elles worked for the Union of Concerned Scientists on climate change policy in Washington, D.C.

 

206-370-7849