California’s Cap-and-Trade Auction Is Not a Tax: Court Decides “Close Question”

In a twin set of wins for the state, two lawsuits challenging California’s flagship cap-and-trade auction system first implemented in November 2012 were rejected by Sacramento Superior Court Judge Timothy Frawley this week.

California’s hallmark cap-and-trade program was developed pursuant to AB 32, the “California Global Warming Solutions Act of 2006,” which requires statewide reductions of greenhouse gas (GHG) emissions to 1990 levels by 2020. The cap-and-trade program, implemented by the California Air Resources Board (CARB), requires that certain covered entities acquire allowances for each metric ton of GHG they emit during specified compliance periods. CARB’s regulations provide that approximately half of the allowances, which are tradable, will be initially distributed to covered entities for free and that the other half will be distributed through a competitive auction process. The initial compliance period started nearly a year ago on January 1, 2013 and there have been four quarterly carbon allowance auctions to date, bringing in nearly $1.1 billion worth of carbon credits. The next carbon auction is scheduled for November 19.

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