It’s cap and trade time again

On Friday, May 1, 2015, we filed our final brief in California’s appellate court in connection with our challenge to CARB’s scheme to sell carbon dioxide emissions allowances at auction to the highest bidders.  CARB intends to generate billions of dollars of revenue for the state from the auctions and use the funds for a variety of purposes that have little if anything to do with reducing carbon dioxide emissions.  Those unrelated purposes include diversion of funds to California’s general fund, high speed rail, and projects to benefit disadvantaged communities.

The California Constitution requires that such uses of the revenues be authorized by at least a two-thirds supermajority vote of both houses of the legislature.  CARB purported to create the auction under a 2006 statute known as A.B. 32, which was not enacted by a supermajority legislative vote.  Accordingly, the auction revenues are unconstitutional taxes.  Moreover, nothing in A.B. 32 actually authorizes CARB to sell emissions allowances at auction for billions of dollars.

CARB argues that the auction revenues are not illegal taxes because those who purchase emissions allowances at auction do so voluntarily.  But that ignores the realities facing California businesses that must comply with the cap and trade regulation, such as PLF’s client Morning Star Packing Company.  Morning Star makes tomato paste from tomatoes received from farms by heating the tomatoes in boilers fueled by natural gas, which causes carbon dioxide emissions in excess of CARB’s regulatory threshold.  As a result, Morning Star’s tomato processing facilities are required to obtain a sufficient number of emissions allowances in order to continue operating in California.  Because Morning Star does not receive all its required emissions allowances free of charge from CARB, it is forced to obtain them through other means, including purchasing them from CARB at the auctions.  Under the cap and trade regulation, this is a necessary cost of staying in business in California.

To characterize such payments as “voluntary” stretches the meaning of the term beyond recognition.  One could just as well argue that the payment of California income tax is “voluntary” because a California resident could choose to move out of the state and no longer be subject to the tax.  But, for those who choose to remain in California, the state income tax does not somehow become “voluntary” and not a tax.  Merely because a company like Morning Star chooses to continue to do business in the state by purchasing emissions allowances at auction does not make the auction payments any more “voluntary” or any less of a tax.

A PLF video provides additional insight into the case, and more information can be found at PLF’s website.