SACRAMENTO – Six supplemental appellate briefs were filed on May 23 in the latest leg of a four-year lawsuit filed by manufacturers in connection with California’s carbon market auction system.

Briefs were filed in the Court of Appeal of the State of California, 3rd Appellate District by the California Air Resources Board, the Environmental Defense Fund and Natural Resources Defense Council, the International Emissions Trading Association and the California Chamber of Commerce, Morning Star Packing Co. and the National Association of Manufacturers (NAM), which filed the lawsuits in 2012 and 2013.

Dave Clegern, public information officer, climate change programs for the California Air Resources Board, said the board is “now awaiting further direction from the court,” but that the board does not know when the court will set a hearing date or issue a decision.

The initial brief filed in 2012 by the Chamber of Commerce against regulatory agency the Air Resources Board (ARB), argued that California’s carbon auctions establish an unconstitutional tax.

However, Sean Penrith, executive director of The Climate Trust, told the Northern California Record that “auctions have been shown to be a common approach to manage scarce resources.”

In its initial brief filed in November 2012, the chamber said: “This case is about one thing and one thing only - the lack of authority of an unelected, politically appointed regulatory board to engraft into a regulatory program a revenue-raising device that would impose what in effect is an invalid tax or an unconstitutional fee and would exact from taxpayers as much as $70 billion or more – a massive sum of tax/fee revenue that would be more than was sought by the Proposition 30 tax initiative approved by voters on Nov. 6, 2012.”

The chamber said the tax/fee device was added to the board’s regulatory program to reduce greenhouse gas (GHG) emissions through, among other things, a “cap-and-trade” program that sets a statewide cap on the amount of GHG emissions that entities covered by the program are allowed to emit, calculates individual emissions allowances that are applied to covered entities and allows an entity to trade, for compensation, any part of its GHG emissions that it will not use.

“If the legislature wants to authorize the ARB to impose fees or taxes on emitters of GHG, it has every power to do so through new legislation,” the chamber said. “But such authority must come from the elected branches of government through the democratic process, not slipped under the rug by an unelected board. Efforts to combat climate change can continue. So can ARB’s cap-and-trade program. The only thing that must cease is the unauthorized, unnecessary and illegal attempt by an unelected board to cloak a multi-billion dollar tax increase in an environmental regulation.”

In its May 23 supplemental appellate brief, the California Air Resources Board said the auction system is akin to a development fee in two ways. Specifically, the board said both the payment of development fees and the purchase of allowances through the auction system provide a governmental privilege to the payor. In addition, the board said both the payment of development fees and the purchase of allowances through the auction system are not compulsory.

“The continued viability of the cap and trade program is of critical importance to the state of California in meeting the 2020 statewide greenhouse gas emissions limit mandated by the Legislature in AB 32,” the board said in its supplemental brief.

Penrith echoed the board’s sentiments.

“We have just launched our pilot carbon investment fund with the support of a program-related investment from the Packard Foundation, so the outcome of the lawsuit is important to us,” he said.

If the court rules in favor of the plaintiffs, the board said it should preserve the status quo by ordering that all portions of the regulations implicated by its order remain in effect until the board has had a reasonable opportunity to amend the cap-and-trade regulations to come into compliance with the court’s decision.

Penrith also agreed that the board should be given a chance to “correct or replace the auction mechanism beginning in 2021” to give it time to make corrections without disrupting the market and California’s efforts to address climate change.

 “We believe that California is authorized to protect its natural resources and environment, and since entities that purchase allowances via the auction platform receive something of inherent value in return, the auction cannot and should not be construed as a tax,” Penrith said.

In 2013, the Superior Court of California, County of Sacramento found that the auctions were within Air Resources Board’s authority and that the board did not need to secure approval from a two-thirds majority of California’s legislature to hold the auctions. The plaintiffs subsequently appealed. The appeals court asked the parties to answer several questions to provide clarity on the issues at hand.

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