Energy Law Alert: California Cap and Trade Auctions Upheld as Constitutional

by Stoel Rives LLP

The Sacramento Superior Court has upheld the constitutionality of California Air Resources Board's ("ARB") cap and trade auctions in the related cases California Chamber of Commerce v. ARB and Morning Star Packing Company v. ARB. The petitioners in these cases challenged the cap and trade auctions on two fronts. First, petitioners argued that ARB's regulation providing for the auction of cap and trade allowances exceeds the scope of authority granted to ARB in the California Global Warming Solutions Act of 2006, or AB 32. Second, petitioners claimed that the sale of allowances at auction constitutes an illegal tax adopted without the requisite supermajority vote of the California State Legislature. The court rejected both arguments, finding the cap and trade auctions constitutional and within the scope of AB 32.

AB 32 requires the reduction of California's greenhouse gas ("GHG") emissions to 1990 levels by 2020. To achieve this task, AB 32 gave ARB authority to design and implement emissions reduction measures, including the use of a market-based compliance mechanism. Pursuant to this authority, ARB developed a cap and trade program, which establishes a firm cap on GHG emissions state-wide. As the cap on emissions declines year over year, a regulated source that exceeds its share of free allowances must either reduce its GHG emissions or purchase emission allowances in state-run auctions. Starting November 2012, ARB began holding quarterly auctions to sell emission allowances to regulated sources.

Since its inception, AB 32 and its programs have been beset by legal challenges. In the California Chamber of Commerce and Morning Star Packing cases, two groups of petitioners separately filed actions challenging the cap and trade auctions on similar grounds. The National Association of Manufacturers intervened in the California Chamber of Commerce case on behalf of petitioners. The Environmental Defense Fund and the Natural Resources Defense Council intervened in both cases on behalf of ARB. The Sacramento Superior Court ordered the cases related for briefing and argument. Petitioners contended that the cap and trade regulations providing for the sale of allowances are void because they exceed the scope of authority conferred to ARB under AB 32, and that the allowances constitute an illegal tax adopted in violation of California Constitution, Article XIIIA, established by Proposition 13, requiring a supermajority vote of the legislature for any new tax.

Sacramento Superior Court issued a joint ruling on the cases on November 12, 2013, denying the petitions. The court found petitioners' first argument unpersuasive, holding that the sale of allowances is within the broad scope of authority delegated to ARB in AB 32. The court found that it was "reasonable to assume that the legislature understood the phrase 'distribution of emissions allowances' to potentially encompass both giving away allowances and selling them via an auction or direct sale."

The court also rejected petitioners' second argument, that the auction provisions constituted an illegal tax because AB 32 was not passed by a two-thirds vote of the legislature, as required by Proposition 13. The court viewed the argument that the cap and trade auctions provided for under AB 32 constitute a revenue-generating tax as a closer question than the delegation issue. It was undisputed that the cap and trade auctions will result in a cumulative net increase in state revenues. To resolve the question of whether the sale of allowances constitutes a tax, the court focused on the distinction between taxes and fees. The court distinguished "taxes" from "fees" and reviewed the various categories of fees not subject to Proposition 13's supermajority requirement, including special assessments and related business charges, development fees, user fees, and regulatory fees. While the specific facts of this case did not fit squarely within any recognized fee classification, the court agreed with ARB and found on balance "the charges to be more like a regulatory fee/charge than a traditional tax." As a result, the court found that the provisions of AB 32 creating the market-based compliance mechanism did not need to be approved by a supermajority of both houses of the California legislature.

Petitioners in each case have 60 days from entry of judgment to appeal the decision to the Third District Court of Appeal. ARB still faces a challenge to another aspect of the cap and trade program, in Citizens Climate Lobby v. ARB, currently before the First District Court of Appeal. Petitioners in Citizens Climate Lobby attack the offset credit provisions of the cap and trade regulation.

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.

© Stoel Rives LLP | Attorney Advertising

Written by:

Stoel Rives LLP

Stoel Rives LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.