California's Cap and Trade Program Goes to Court Again

by Manatt, Phelps & Phillips, LLP

The other shoe finally dropped. The much-speculated and much-anticipated “tax vs. fee” AB 32 Cap and Trade lawsuit has finally been filed. A diverse coalition of businesses and trade groups filed a lawsuit in a state superior court challenging the programs’ Greenhouse Gas (GHG) auctions, calling them a state tax, and therefore unconstitutional.

The Pacific Legal Foundation (PLF) filed the suit on behalf of a group of food processing, trucking, oil, and construction companies and several individuals who claim the state’s fledgling carbon market threatens their businesses and increases their fuel costs. The plaintiffs in the case include:

  • The Morning Star Packing Company, headquartered in Woodland, California.
  • Merit Oil Company, whose operations include storing, transporting, and selling a variety of petroleum products, including gasoline, diesel fuels, solvents, kerosene, and lubricants.
  • California Construction Trucking Association (CCTA), a nonprofit California trade association representing owner-operators of on-road and non-road vehicles, engines, and equipment, primarily in connection with construction projects.
  • Dalton Trucking, Inc., a California corporation that operates and leases loaders, dozers, blades, and water trucks.
  • Loggers Association of Northern California (LANC), a California nonprofit trade association.
  • Ron Cinquini Farming, out of Chico, California.
  • Construction Industry Air Quality Coalition (CIAQC), a California trade association founded in 1989 by four Southern California trade associations.
  • The National Tax Limitation Committee (NTLC), headquartered in Roseville, California.

According to the PLF, the act of auctioning allowances and subsequently generating auction proceeds violates California law requiring all new proposed taxes to be approved by two-thirds of the state legislature.

This is the second lawsuit originating from the business community. In November the state’s largest business group, the California Chamber of Commerce, filed a similar lawsuit challenging the Air Resources Board’s authority to withhold allowances for auction. Though distinct, the two lawsuits target a very narrow, yet critical, aspect of an otherwise broad AB 32 GHG reduction program—the auction mechanism.

So far California has held two quarterly auctions, with the next one set for May. Revenue from the auctions is directed into special funds whose appropriation methodology is the subject of intense debate in the Legislature and at the California Public Utilities Commission.

Earlier this year California successfully defended another lawsuit filed by non-business groups over the programs’ offset provisions. California’s AB 32 program has been the subject of additional lawsuits aimed at the Scoping Plan and the Low Carbon Fuel Standard.

This new lawsuit begins what is likely another lengthy legal process. Each time a lawsuit is filed, there is a level of uncertainty about a program that is still in its first year of required reductions. Just how much the market sees this as a risk will be determined at the next auction. If daily carbon trading numbers are an indication of the market’s view of this lawsuit, not much risk is seen at this time as the price of traded allowances is relatively steady.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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