[authors:  Jon Costantino and Marc D. Luesebrink]

It has been rumored for weeks that a Cap and Trade lawsuit was imminent. The questions were: who would file the lawsuit, when, and on what grounds?  Those questions were answered, at least in part, today.  The case is California Chamber of Commerce v. California Air Resources Board (Sacramento County Superior Court).

As a result of the lawsuit, California's effort to regulate greenhouse gases (GHGs) through a market-based approach--ie., the Cap and Trade Program--is facing its first legal challenge from California business and industry, just one day prior to the first scheduled auction.  (Two prior lawsuits have been filed challenging aspects of the Cap and Trade Program: the first challenged the scoping plan and the second challenged CARB's offset protocols.) 

The Chamber's lawsuit seeks to invalidate CARB's Cap and Trade regulation that allows CARB to allocate to itself a certain number of allowances (i.e., permits to emit GHGs) and to auction off those allowances to generate revenue.  While the lawsuit is narrowly targeted at a specific aspect of the Cap and Trade Program, if the Chamber were to prevail, it would have a significant impact on the operation of the Cap and Trade Program (likely requiring a delay to allow CARB to decide whether and how to revise the Cap and Trade Program).  Of course, CARB would also be prevented from obtaining the revenues that would otherwise be generated from the sale of allowances it allocated to itself.

From a process standpoint, the Chamber lawsuit threatens to side-track the Cap and Trade Program and result in another delay.  The Cap and Trade Program had originally scheduled the first auction for August, but CARB later decided to hold a "practice auction" instead to test its computer system and other auction logistics.  Also, the initial timeframe for starting the emissions obligations clock was earlier delayed from 2012 to 2013.

The Chamber's lawsuit includes both a petition for writ of mandate and a request for declaratory relief.  In plain English, the petition for writ of mandate asks the court to prohibit CARB from allocating allowances to itself and selling those allowances at auction, while the request for declaratory relief asks the court to issue a binding decision on the legality of CARB's regulation (as a practical matter, if the court were to rule against CARB on either cause of action, it would invalidate the regulation).  In both the writ of mandate and declaratory relief actions, the Chamber is asserting alternative grounds: the regulation either exceeds CARB's authority under AB 32 or, if authorized, the regulation results in an unconstitutional tax.  Based on the documents filed today, the Chamber does not appear to be asking the court for a stay of the auction planned for tomorrow.

Early comment from CARB indicates that CARB will move forward with the auction planned for November 14th:  "We are reviewing the lawsuit, but are confident that the cap-and-trade program will withstand any court challenge.  This market-based approach to cutting greenhouse emissions gives businesses the flexibility to best decide how to reduce their emissions," CARB spokesman Stanley Young said.

This lawsuit will hang over the California carbon market until it is resolved.  After tomorrow's auction, the next major steps for the program are on January 1 and February 14. This is the actual start of the compliance period and next auction respectively.

The professionals at Manatt are fully engaged in this issue and those issues surrounding California's efforts to reduce greenhouse gases.  For additional information on how this lawsuit or the pending Cap and Trade regulatory requirements will affect you, or for assistance participating in CARB's continued rulemaking process, contact Jon Costantino at 916-552-2365 in the Energy, Environment & Natural Resources practice group at Manatt, Phelps & Phillips, LLP.