Calif. appeals court upholds cap-and-trade program under state’s global warming law, says it’s not a tax

By Jessica Karmasek | May 5, 2017

SACRAMENTO, Calif. (Legal Newsline) - A California appeals court has upheld a cap-and-trade program, under the state’s global warming law, that includes the auction sale of some, but not all, greenhouse gas emissions allowances.

The majority of a three-judge panel of the state’s 3rd District Court of Appeal upheld the judgment of the Sacramento County Superior Court in a decision filed April 6, concluding the program is not a tax.

Justice Elena Duarte authored the panel’s 53-page majority opinion. Justice M. Kathleen Butz joined in the decision. Justice Harry E. Hull Jr. concurred in part one of the decision, but dissented in part two.

The two consolidated cases involve the California Global Warming Solutions Act of 2006, popularly known as AB 32.

In 2006, the state Legislature passed and then-Gov. Arnold Schwarzenegger signed the act, which requires that covered entities reduce greenhouse gas, or GHG, emissions to 1990 levels by the year 2020. The act did not pass by a two-thirds vote of each legislative house.

The law’s general purpose is to reduce GHG emissions to protect the environment.

The California Chamber of Commerce and Morning Star Packing Company were among those who sued the State Air Resources Board over the cap-and-trade aspect of the law.

The National Association of Manufacturers and Environmental Defense Fund intervened; NAM on behalf of the plaintiffs and EDF on behalf of the defendants.

“Plaintiffs and allied amici curiae do not quarrel with the Act or its goals, but attack one part of the implementing regulations adopted by the State Air Resources Board,” Duarte explained. “The Board created a ‘cap-and-trade’ program that includes the auction sale of some -- but not all -- GHG emissions allowances.

“Covered entities -- generally large emitters of GHGs -- must either surrender sufficient compliance instruments (emissions allowances or offset credits) to cover the amount of pollutants they discharge, or face monetary penalties or other negative consequences.”

As the appeals court explained, the board distributes some emissions allowances for free, but sells others at quarterly auctions.

A covered entity that cannot reduce its emissions below the amount authorized by its free allowances and any offset credits it has obtained must purchase more allowances at the board’s quarterly auctions, or on a secondary market where allowances are sold or traded without board control.

The plaintiffs assert the auction sales exceed the Legislature’s delegation of authority to the board to design a market-based emissions reduction system.

They also contend the revenue generated by the auction sales amounts to a tax that violates the two-thirds supermajority vote requirement of Proposition 13, a landmark decision by California’s voters in June 1978 to limit property taxes.

The trial court rejected both claims.

A majority of the appeals court agreed.

“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.”

And while the appeals court admits its reasoning differs from that of the trial court, it agrees with the lower court that the auction sales do not equate to a tax.

As it explains, the hallmarks of a tax are that it is compulsory and that the payor receives nothing of particular value for payment of the tax -- that is, the payor receives nothing of specific value for the tax itself.

“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. Reducing emissions reduces air pollution, and no entity has a vested right to pollute,” Duarte wrote for the majority. “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. Indeed, speculators have bought allowances seeking to profit from their sale, and as one party puts it, taxes do not attract volunteers.

“These twin aspects of the auction system, voluntary participation and purchase of a specific thing of value, preclude a finding that the auction system has the hallmarks of a tax.”

Hull, in his 25-page dissent, argues that the cap-and-trade auction program is, indeed, a tax.

“My colleagues and I have worked diligently on what is obviously a complex and difficult appeal. They, in good faith, have reached a conclusion different than mine. I simply cannot agree with their analysis or their result,” he wrote.

“Given that the auction program is, for Morning Star and businesses that are similarly situated, compulsory if they are to remain in business in California and that the auction program creates, in actual effect, general revenue, I can only conclude that the program is a tax in ‘something else’ clothing and that the auction program, not having been passed by a 2/3 vote in the Legislature, violates Proposition 13.”

From Legal Newsline: Reach Jessica Karmasek by email at jessica@legalnewsline.com.

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Organizations in this Story

California Chamber of Commerce California Third District Court of Appeal National Association of Manufacturers

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