In a split decision, a California appellate panel recently affirmed a lower court’s decision upholding the state’s greenhouse gas cap-and-trade program.  Challengers, including the California Chamber of Commerce, the National Association of Manufacturers, and the Pacific Legal Foundation, argued that: (1) the California Air Resources Board (CARB) acted outside of its authority when it created a cap-and-trade program that included an auction of emission allowances, and (2) the revenue generated from the auction sales constitutes an impermissible tax.  California’s Proposition 13 requires taxes to be approved by a two-thirds vote of each house of the legislature.

The majority opinion, authored by Judge Elena Duarte and joined by Judge M. Kathleen Butz, concluded that the legislature gave broad discretion to CARB to craft an allowance distribution system, and creation of an auction system did not exceed the scope of that legislative delegation.  Although there was no specific mention of an auction system in the legislative record, the majority held that this did not preclude CARB from designing such a system.  Further, in an effort to effectuate “massive, historic, and immediate change,” the legislature intended to allow CARB flexibility to design a program to best address air quality issues, relying on CARB’s technical expertise.  Cal. Chamber of Commerce v. State Air Res. Bd., Nos. C075930, C075954, 2017 Cal. App. LEXIS 318, at *27 (Ct. App. Apr. 6, 2017).

Judges Duarte and Butz also ruled that revenue generated from the auction is not a tax.  A tax must: (1) be compulsory in nature, and (2) not give the payor anything of particular value for paying the tax.  The majority concluded that the purchase of allowances is a voluntary decision driven by business judgments as to whether it is better for the regulated community to purchase allowances or reduce emissions.  Further, once purchased, the emission allowances are valuable, tradable commodities that confer on the holder the right to pollute (a property right), and are thus not a tax.

In a partially dissenting opinion, Judge Harry Hull concluded that the auction program is a tax, and thus violates Proposition 13 since it was not approved by a two-thirds vote in the legislature.  With respect to voluntariness, he asserted that while some entities participate in the auctions voluntarily, others’ participation is not voluntary, pointing to the example of a company that could not continue to do business in the state without participating in the auctions and purchasing the necessary credits.  Judge Hull also disagreed with the majority’s conclusion that the emission allowances convey property rights in the form of a commodity.  Rather, he characterized the emission allowances as providing a limited authorization to emit that is subject to the state’s discretionary termination, but not a property right.

The Pacific Legal Foundation has already announced its intent to appeal this decision to the California Supreme Court.  Although it has discretion in determining which petitions to hear, the statewide importance of this challenge and the split opinion may increase the likelihood that the Supreme Court will hear the appeal.