California holds fifth cap-and-trade auction

California continued its pioneering program of auctioning allowances that authorize polluters to emit greenhouse gases to the atmosphere this week, holding the fifth auction in the past year on Tuesday.

Results of the auction will not be available until Friday. However, given that all the allowances for both the current year and for 2016 were sold at the last auction in August, there is reason to surmise a that Tuesday's event showcased a similar level of interest from the regulated community.

"We’re expecting participation to have been strong and that the futures are going to sell," Emily Reyna, a manager with the U.S. climate and energy program operated by Environmental Defense Fund, said. "I think that, like a lot of other folks have been saying, the price might come down a bit. That’s probably because it’s the end of the year and companies at this point know their emissions levels for 2013 and have a better sense of what their compliance obligations are going to be."

The latest auction comes on the heels of a California superior court decision that rejected a two-pronged legal attack on the state's cap-and-trade program. The plaintiffs in that case argued that it is not authorized by A.B. 32, the state's landmark 2006 climate change law, and that the auction proceeds are a tax that was not approved by a constitutionally required super-majority of state legislators.

Judge Timothy Frawley ruled on Nov. 14 that the state legislature authorized the California Air Resources Board to conduct the cap-and-trade auctions and collect money from regulated entities for emission allowances and did not violate the state constitution's taxation procedures.

"I think this case further injects confidence for participants that the market and the program is here to stay," Reyna said.

The nascent market will soon grow larger, as California regulators recently announced that the state's cap-and-trade program will be integrated with one run by Quebec authorities.

Implementation of that expansion will occur on Jan. 1, 2014.

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.

California holds first U.S. auction of carbon dioxide emission rights

California took another step forward in its innovative program to mitigate emission of heat-trapping gases to the atmosphere earlier this month as it held the first-ever sale of carbon dioxide pollution permits in the nation.

The auction, which occurred Nov. 14 in Sacramento, resulted in a modest price for the right to pollute the air.

According to data released by the state's Air Resources Board, bidders will pay $10.09 for each metric ton of the greenhouse gas they emit. The minimum bid was $10.

California's leading air pollution regulator said she is pleased with the results, notwithstanding the relatively low price paid by the 71 participants.

"The auction was a success and an important milestone for California as a leader in the global clean tech market," Mary D. Nichols, chairwoman of the agency, said in a statement. "By putting a price on carbon, we can break our unhealthy dependence on fossil fuels and move at full speed toward a clean energy future. That means new jobs, cleaner water and air - and a working model for other states, and the nation, to use as we gear up to fight climate change and make our economy more competitive and resilient."

The sale of the carbon allowances for 2013 generated only a little more than $233 million and not much of that money will be kept by the state.

"Some of the allowances are consigned with us from the utilities," Dave Clegern, a spokesperson for the agency, said. "The money that comes from that goes back to the utilities, in a form worked out by the [Public Utilities Commission], as a buffer for ratepayers. The rest goes into the California Air Pollution Reduction Fund."

The California Legislative Analyst's Office has said that it expects state coffers to swell by an average of billions of dollars per year as the auction program reaches more and more of the polluters in the nation's most populous state.

Whether or not that estimate is accurate, it is likely that the price of the required pollution permit will rise as the state's groundbreaking AB 32, a wide-ranging 2006 law to reduce greenhouse gas emissions in the nation's most populous state, ratchets down the ceiling on facility emissions.

The likely downward impact on California's future accumulation of greenhouse gases excites the environmental advocacy community, notwithstanding the financial return the first effort generated.

"We had the benefit of learning from others like the European Union and have been able to put together a really great program that creates a market incentive for innovation and reducing carbon," Emily Rayna, a spokesperson for Environmental Defense Fund, said. "This is an exciting time in California."

The state's business community does not seem to be so thrilled. The California Chamber of Commerce sued the state on the day before the auction in an effort to prevent repetitions of the event. The litigation did not seek to enjoin the Nov. 14 auction but does argue that requiring companies who must comply with air pollution limits to pay for permission to pollute is an unauthorized tax or an illegal fee.

Rayna said that environmental advocacy organizations are not worried about the Chamber of Commerce's move.

"We don't anticipate that further auctions will be stopped because of this lawsuit," she said.

Those future auctions will occur on a regular basis during the next eight years. The next one is scheduled for Feb. 2013.