Today, the Third Appellate District affirmed the Sacramento Superior Court judgment from 2013 that dismissed two consolidated lawsuits filed by the California Chamber of Commerce and Morning Star Packing Co against the California Air Resources Board (CARB).  These cases attacked the sales of allowances under CARB’s Cap-and-Trade program. The California Chamber of Commerce suit alleged that the AB 32 (California Global Warming Solutions Act of 2006) did not authorize CARB to impose fees in the form of a cap-and-trade auction beyond those required to recover the costs of administering such a program.  The Morning Star Packing suit alleged that even if CARB’s cap-and-trade auction was authorized, the sale of allowances constitute an illegal tax adopted in violation of Proposition 13’s 2/3 approval requirement for taxes. The parties appealed the superior court judgment.

The appellate court ruling affirmed the lower court judgment.  All three Justices concurred that the sales of allowances are within the scope of authority delegated to CARB under AB 32 and, on a slightly different basis than the superior court, two of the three Justices held that the sale of allowances do not constitute an illegal tax.  First, the Third Appellate District Court held 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. Further, the Legislature later ratified the auction system by specifying how to use the proceeds derived therefrom.” Second, the court held that the “..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 hallmark of a tax…the Sinclair Paint test is not applicable herein, because the auction system is unlike other governmental charges that may raise the ‘tax or fee’ question resolved thereby. The system is the voluntary purchase of a valuable commodity and not a tax under any test.” This decision removes a pending challenge that questioned whether the cap-and-trade program and the revenue from the auction mechanism are grounded on a firm legal basis.

Justice Hull dissented on the tax issue writing that “(1) the purchase of auction credits by Morning Star or other businesses similarly situated is not voluntary, (2) the action credits do not confer property rights in the nature of a commodity or otherwise to Morning Star or businesses who are similarly situated, and (3) the use of the auction proceeds, a hallmark, if not the gold standard, for determining if a state exaction is a tax must be considered.” Justice Hull concluded that the cap-and-trade auction program is a tax that “[r]espondents cannot possibly fit the auction program within Sinclair Paint’s formulation of a regulatory fee. Thus, the issue before the court is whether this ‘something else’ is in fact a tax.”

As with all decisions, it is possible that this ruling will be appealed to the California Supreme Court. We will continue to follow this case if it is appealed and review granted.

Cap-and-Trade still has other issues including whether it is authorized beyond 2020.  We previously posted about this issue and the Legislative Counsels nonbinding opinion.  There is a proposed bill, AB 378, that would authorize cap-and-trade from 2021-2030.  Currently, AB 378 has been referred to the Committee on Natural Resources in the Assembly but has not been heard or voted on.  This bill may begin to move after the Legislature returns from recess on April 18^th.  Cap-and-Trade remains a fundamental tenant of climate change policy and assumed to be one of the mechanism available to reduce emissions across the economy required by SB 32 out to 2030 and reflected in CARB’s draft 2017 Climate Change Scoping Plan Update.

Court Information can be found below on these cases:

Consolidated: California Chamber of Commerce, et al. v. California Air Resources Board, et al. (Sacramento Superior Court, Case No. 34-2012-80001313; petitioners’ appeal, California Court of Appeal, Third District, Case No. C075930); and Morning Star Packing Company, et al. v. California Air Resources Board, et al. (Sacramento Superior Court, Case No. 34-2013-800001464; petitioners’ appeal, California Court of Appeal, Third District, Case No. C075954).