Court Upholds Calif. Cap-and-Trade Emissions Scheme

SACRAMENTO, Calif. (CN) – In a major victory for California Gov. Jerry Brown’s crusade to reduce carbon emissions in the state, an appellate panel ruled Thursday the cap-and-trade auction scheme run by the state’s air-pollution regulator is legal.

In a 2-1 decision, a three-judge panel of the state’s Third Appellate District ruled the cap-and-trade program to regulate air pollution in the Golden State does not exceed the Legislature’s authority and is not a compulsory tax requiring a two-thirds vote by lawmakers.

“Contrary to plaintiffs’ view, the purchase of allowances is a voluntary decision driven by business judgments as to whether it is more beneficial to the company to make the purchase than to reduce emissions,” Third Appellate District Judge Elena Duarte in a 53-page decision that was joined by Judge Kathleen Butz concurred.

Judge Harry Hull dissented, saying the cap-and-trade system was in effect a compulsory tax on certain businesses.

The ruling represents a major victory for Brown and other lawmakers in support of reducing carbon emissions and for the California High-Speed Rail project, which is dependent upon proceeds of the auction to fund its construction.

The establishment of the cap-and-trade system dates back to Gov. Arnold Schwarzenegger, who signed Assembly Bill 32 into law. AB 32 mandates the reduction of emissions to 1990 levels by 2020.

In 2014, the Legislature passed a series of bills that authorized the State Air Resources Control Board to set up a system where companies that exceed a certain emissions allowance can pay for the right to emit more pollutants either by auction or on the secondary market, with the proceeds going to the state.

Two lawsuits, one filed by the California Chamber of Commerce and another by Morning Star Packing Company, quickly followed. They claimed the Legislature and the air resources board exceeded their respective authority and that because cap-and-trade essentially amounts to a tax, it needed two-thirds of lawmakers’ votes to pass.

Neither the first bill in 2006 nor any of the subsequent pieces of legislation passed relating to the cap-and-trade program earned a two-thirds majority.

The three-judge panel was unanimous in finding the plaintiffs’ first premise of legislative overreach failed.

“As for the first question, we hold that the Legislature gave broad discretion to the board to design a distribution system, and a system including the auction of some allowances did not exceed the scope of legislative delegation,” Duarte wrote. “Further, the Legislature later ratified the auction system by specifying how to use the proceeds derived therefrom.”

Hull agreed with that, but split from the panel on whether the scheme amounts to a tax. Duarte and Butz said cap-and-trade is a regulatory fee and not subject to the two-thirds rule.

“Reducing emissions reduces air pollution, and no entity has a vested right to pollute,” Duarte wrote. “Further, once purchased, either from the board or the secondary market, the allowances are valuable, tradable commodities, conferring on the holder the privilege to pollute.”

The judges considered the example of plaintiff Morning Star, a tomato-packing plant that accounts for 25 percent of California processed tomato production and 40 percent of the nationwide ingredients for tomato paste and diced tomatoes. The company uses natural gas to process the tomatoes.

Duarte said while complying with cap-and-trade may make doing business in California more expensive, the tomato packer “does not explain why Morning Star cannot absorb the increased cost of doing business or mitigate the increase in some other fashion.”

Hull said this reasoning was deeply flawed since purchasing auction credits isn’t voluntary.

“Taken to its logical extreme, even income, sales, and property taxes would not be “compulsory” because they must be paid only if one “voluntarily” earns income, purchases goods, or owns property,” Hull wrote in his 28-page dissent.

Many legal experts anticipate an appeal to the California Supreme Court is forthcoming.

An email seeking comment from the California Chamber of Commerce was not returned as of press time.

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