Six years after then - Gov. Arnold Schwarzenegger signed the California Global Warming Solutions Act, also known as AB 32, the California Air Resources Board (CARB) holds its first auction of emissions allowances on November 14. The California Chamber of Commerce, however, has weighed in with a lawsuit seeking to invalidate CARB’s authority to sell the allowances.

Background

AB 32 is a broad program intended to reduce the state’s emissions to 1990 levels by 2020 and an 80 percent reduction from 1990 levels by 2050. The cap and trade program being implemented by CARB is one piece of that regulatory puzzle. It covers facilities that emit more than 25,000 metric tons of carbon dioxide annually, roughly 600 California cement, cogeneration, glass, hydrogen, iron and steel, petroleum refining, electric generation, and pulp and paper manufacturing plants. Each ton of carbon dioxide emissions is equal to one allowance. CARB has given away most of allowances for free, but has reserved ten percent for the first auction November 14th at a floor price of $10 per allowance. The sale is expected to generate between $660 million and $3 billion. In subsequent years, the portion of allowances sold at auction will increase, while the cap on emissions will gradually decline.

Lawsuit

The California Chamber’s lawsuit alleges that the sale of the allowances is contrary to AB 32 and the California state constitution. The Petitioners claim that AB 32 did not explicitly or impliedly authorize CARB to reserve any portion of the allowances for sale and, they further claim, that the sale of the allowances constitutes a tax that was not adopted by a two-thirds vote in each house of the Legislature as required by the state constitution. The lawsuit asserts that it is not challenging the merits of climate science, the Legislature’s authority to regulate greenhouse gas emissions in California, or even the use of cap and trade as a tool for reducing those emissions. In essence, the lawsuit seeks to require CARB to allocate all of the allowances free of charge.

UCLA Prof. Ann Carlson, a contributor to the UCLA/Cal-Berkley Legal Planet Law and Environmental Policy blog, writes that the basis for the Chamber’s lawsuit seems “weak” because it’s unclear whether the auction really is a tax and because CARB was granted substantial discretion in designing the program. Prof. Carlson says regulated entities do not have to purchase allowances if their emissions are under the cap and non-regulated entities can purchase the allowances and retire them. Furthermore, she says the Legislature recently directed “the state’s Department of Finance and CARB to develop a plan to invest auction proceeds and to set up an account for the deposit of auction funds. If the Legislature did not intend to provide CARB with discretion to auction allowances it seems hard to imagine it would have passed legislation to assist in the processing of auction revenues.”

Carbon Tax?

While many eyes will be on California’s auction, the confluence of Hurricane Sandy, President Obama’s reelection and the pending fiscal “cliff” have renewed attention in D.C. on a carbon tax, the unpalatably of which was the original motivation for the much more market-oriented, yet complex, cap and trade system. Discussions on the once-taboo carbon tax may be only that, but the fact that they are taking place at all even as California launches its ambitious cap and trade auctions, could move a tax, in the words of former Rep. Bob Inglis (R-S.C.), from the “impossible . . . to the inevitable without ever passing through the probable.”