California’s Climate Leadership Gets a Boost as Court Upholds Cap and Trade

The court's ruling that California's carbon permit auctions are not an illegal tax provides certainty for its landmark program for tackling climate change.

An appeals court ruling to uphold a key part of California's landmark cap-and-trade legislation could help cement the state's role as national leader on climate change action, environmental groups said. Credit: David McNew/Getty Images

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In an important sign that state climate actions may thrive even if federal efforts wither, an appeals court in California upheld the state’s ability to auction off carbon pollution permits, the cornerstone of its landmark cap-and-trade program.

Environmental groups who had joined the California Air Resources Board (CARB) to defend its auctions said the decision would help cement California’s role as a national and global leader in tackling climate change.

California’s cap-and-trade system, including its permit auctions, are central to the state’s promise to cut its emissions sharply in the coming decades. Because the state’s economy is so large and its program so sophisticated, it presents an opportunity to link to other trading programs, in other U.S. states, in Canadian, Mexican and Brazilian provinces, or elsewhere in the world.

The appeals court rejected challenges by the state Chamber of Commerce and other business groups that the permit auctions were an illegal tax prohibited by Proposition 13, a 1978 amendment to the state constitution that restricts tax increases.

The industry said its legal challenge was not intended to entirely overturn cap and trade or the rest of California’s ambitious climate change law, the Global Warming Solutions Act of 2006, also known as AB 32.

Rather, challengers focused on the part of the program that auctions off some permits. The auctions raise substantial revenue to help finance other parts of the state’s climate agenda, like spending on energy efficiency.

The permits make it easier for polluting companies to comply with the program’s caps on emissions, and under a trading system, they are a valuable commodity. The companies wanted the permits to be handed out for free, as is sometimes done in cap-and-trade systems.

The question of whether permits in a cap-and-trade system should be given away or sold by the government has long been debated by scholars trying to design an efficient system that encourages pollution control at the lowest possible cost.

In the California case, it was more than an academic issue.

But despite the costs to industry, the court ruled that California’s solution was not a tax.

A tax, it said, is a compulsory payment for which the taxpayer receives nothing of specific value in return.

“The system is the voluntary purchase of a valuable commodity and not a tax under any test,” the judges ruled in a 2-1 decision.

The court also affirmed the powerful role of CARB as an expert agency to carry out the legislature’s “desire for a massive, historic, and immediate change in behavior” involving greenhouse gas emissions.

“The legislature could have spent many years considering, analyzing, and dictating the best way to achieve its ambitious goals,” the court ruled. “But that delay itself would have impeded the goals.”

For now, the ruling eliminates what the Los Angeles Times called “a cloud over the cap-and-trade program ever since it began.” The Chamber of Commerce is considering an appeal to the state Supreme Court, the paper quoted a spokesman as saying. Meanwhile the legislature continues to consider whether to extend the cap and trade system beyond the year 2020.