Appeals Court Upholds California's Cap and Trade Plan

A state appeals court panel has upheld California’s fee for carbon pollution — a central piece of the state’s landmark efforts to fight climate change that requires companies to buy credits if they exceed pollution limits.  The cap-and-trade law limits carbon emissions and auctions off permits that allow companies to release excess greenhouse gases into the atmosphere.

The California Court of Appeal sided Thursday with Gov. Jerry Brown’s administration and environmental groups in a 2-1 decision.

Businesses and the California Chamber of Commerce had separately sued to invalidate the auction sales, arguing that a 2006 law underlying the cap-and-trade program never authorized California to conduct an auction for carbon credits. Even if the legislation allowed an auction, they argued, it amounts to a tax increase that would require approval of two-thirds of the Legislature under the state constitution.

Third District Associate Justice Elena Duarte said in the ruling that the cap-and-trade regulations don’t force anybody to buy carbon permits and give the buyers a valuable commodity — namely, the “privilege to pollute,” so they don’t constitute a tax.

California Air Resources Board Chairwoman Mary Nichols said the ruling “provides additional certainty for California to continue with this keystone program that puts a price on carbon and supports all the other approaches California has underway to fight climate change.”

Cap-and-trade auctions are a key component of how California expects to meet its targets of reducing carbon emissions to 1990 levels by 2020, and 40 percent below 1990 levels by 2030.

Uncertainty surrounding the case has been a major factor in upending the market for pollution permits, which consistently raised hundreds of millions of dollars a year until demand plummeted in 2016. Besides the case, demand for pollution permits has been affected by questions about whether the law authorized cap-and-trade beyond 2020. Governor Brown, who has urged leaders around the world to adopt carbon regulations, has called for the Legislature to muster a two-thirds vote to explicitly authorize carbon auctions after 2020.

The California Chamber of Commerce and the businesses who sued both said they were evaluating their next steps. Lawyers for both sides in the suit have previously said they would appeal if they lost.