Cap-And-Trade Program:
Suit Filed Challenging Cap-and-Trade as Illegal Tax

As California launched a historic cap-and-trade emissions reduction program Thursday, CalChamber filed suit November 13 challenging provisions where regulators may have exceeded their authority and potentially imposed an illegal tax in violation of Proposition 13.

Stanley Young, spokesman for the California Air Resources Board (CARB), said: "For the first time, business will begin to understand what it means to put a price on carbon. The program rewards efficiency. It will help move California away from its dependence on fossil fuels and toward a clean-energy economy."

Cap-and-trade is one of several programs adopted by CARB to meet emission-reduction requirements under AB 32 (Chapter 488, Statutes of 2006). The program requires carbon-intensive businesses and government facilities to purchase pollution permits (called "allowances") in an auction marketplace. The auction could generate revenue in the range of $12 billion to $72 billion over the span of the program through 2020.

Because the CalChamber suit does not seek an injunction, the November 15 auction continued as scheduled. The Internet-based auction allowed bidders to submit bids in a single-round, sealed-bid format. The auction included 21.3 million allowances available in 1,000-unit lots, with a minimum bid of $10 per allowance. Nearly 40 million allowances for use in 2015 also were available. Results, including the number of participants and the revenue generated from the auction, will not be made available until November 19, CARB indicated.

CARB Chair Mary Nichols told The Washington Post: "It is entirely in line with the notion … that competitive economics in the 21st century is built upon clean and more efficient ways of generating energy, making products and doing business." Ms. Nichols said she hopes other states will review climate policies and adopt similar programs.

CalChamber's suit challenges the auction component of the cap-and-trade program, arguing that the auction violates Article XIIIA of the California Constitution, which requires at least a two-thirds vote for taxes approved by the Legislature. (The text of the suit, California Chamber of Commerce vs. California Air Resources Board, can be found here.)

"At this point, it is important to reiterate that this lawsuit is about one thing and one thing only – the lack of authority of the unelected, politically-appointed Air Resources Board to engraft into a regulatory program a $70 billion or more revenue-raising device that would impose what in effect is an invalid tax or an unconstitutional fee," the suit states.

The action notes that the only fee specifically authorized in AB 32 is one designed to cover CARB's administrative costs for implementing emission-reduction efforts. Citing Sinclair Paint Co. v. Bd. Of Equalization (1997) 15 Cal.4th 866, the suit says CARB cannot raise revenue from the auction, because doing so violates three tests established by the Sinclair case: that there must be a reasonable relationship between the amount of the fee and the social or economic burdens caused by the fee-payer; that the fee cannot be primarily for the purpose of raising revenue; and that remedial measures funded by the fee must have nexus to the fee-payer's operations.

In his November 14 column, Dan Walters of The Sacramento Bee wrote: "This is a huge experiment in altering Californians' economy and lifestyles. Whether it pans out or not, the short-term cost will be immense."

Jack Stewart, president of the California Manufacturers & Technology Association, said his group supports the suit. "Assembly Bill 32 explicitly prohibited CARB from raising revenue beyond the administrative costs of the program," he said. "There is a distinct difference between a good cap-and-trade program that helps reduce greenhouse gases with minimal costs, and an auction that is designed to extract billions from industry. … We have always worked with CARB toward effective implementation, but they have clearly decided to turn the auction into a money raiser."

The plaintiffs in the legal action are represented by the law firm of Nielsen, Merksamer, Parrinello, Gross & Leoni, LLP. (Sources: The Washington Post, November 14; The Sacramento Bee, November 14.)

November 16, 2012
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