Friday, November 15, 2013

California court upholds cap-and-trade program against industry attack

California's pioneering cap-and-trade greenhouse gas reduction program got a long-awaited and vital legal thumbs-up from a state judge this week.

Judge Timothy M. Frawley of the state's superior court in Sacramento County rejected arguments that the state legislature did not authorize the sale of emission allowances in California's 2006 comprehensive climate change legislation, AB 32.

Frawley also held that the revenues raised by the California Air Resources Board as a result of the allowance sales are not taxes subject to the super-majority requirement of the state constitution.

"The court sent a strong signal today, thoroughly affirming California’s innovative climate protection program—including the vital safeguards to ensure that polluters are held accountable for their harmful emissions” Erica Morehouse, an attorney with the Environmental Defense Fund, said in a statement.

Frawley's opinion explained that the language of AB 32 gave CARB the authority to develop and implement a system for distributing emission allowances:
Although AB 32 does not explicitly authorize the sale of allowances, it specifically delegates to [the California Air Resources Board] the discretion to adopt a cap-and-trade program and to 'design' a system of distribution of emissions allowances. The breadth of the delegation of authority to ARB supports, rather than undermines, ARB's construction of AB 32.
The court noted that a statutory phrase referring to "distribution of emissions allowances" was likely understood by legislators to include an auction system because a state research panel had provided the legislature with a report that recommended it.

On the tax issue, the plaintiffs - the California Chamber of Commerce, Morning Star Packing Company, and the National Association of Manufacturers - strenuously argued that the sale of emissions allowances is covered by California's 35-year old tax limitation law, Proposition 13.

Frawley decided the revenues amount to a fee, not a tax, and are therefore not required to have been adopted by a two-thirds majority of each legislative chamber.

"[T]he charges have some traditional attributes of a tax and some traditional attributes of a regulatory fee, but, on balance, the court finds the charges to be more like a regulatory fee/charge than a traditional tax," Frawley wrote.

Based on that holding, Frawley analyzed whether the revenues collected by CARB fit within the state's framework for "police power" fees and held that Proposition 13 is not "subverted" when the fees assessed for the privilege of polluting the atmosphere are imposed as a means of lessening that environmental damage. 

He also rejected an argument that a fee should be treated as a tax if it aims to change the fee payer's behavior.

"[A] fee is not any less a fee because it raises revenue, and a tax is not any less a tax because it has a regulatory effect," Frawley wrote. 

He went on to rule that the revenues paid to CARB are regulatory fees related to the program's goal of cutting greenhouse gas emissions and that a requisite reasonable relationship exists between the "covered entities' (collective) responsibility for the harmful effects of [greenhouse gas] emissions" and the charge for emissions allowances.

Pacific Legal Foundation, the property-rights advocacy law firm that represented the plaintiffs, said Thursday that it will appeal Frawley's decision.

Image courtesy Wikimedia.