Legal Winds from New Directions Buffet California’s GHG Cap-and-Trade Program

Posted on June 28, 2012 by Michael R. Barr

Late in the fall of 2011, the California Air Resources Board adopted its groundbreaking cap-and-trade rules (CTR) for greenhouse gasses. ARB faced stiff headwinds at every step.  This month, one lingering legal tempest subsided while a new legal gale appeared on the horizon.  Each involves novel environmental justice claims and could snuff out CTR and similar programs in other states.

First, balmier breezes for CTR:  in a decision filed June 19, 2012, the California Court of Appeals rejected a 2009 mandamus petition filed by the Association of Irritated Residents (AIR) and other groups and upheld ARB’s climate plan under the “California Global Warming Solutions Act of 2006” (Cal. Health & Safety Code §38500 et seq., also known as “AB 32”).   The court recognized the magnitude of ARB’s challenge under AB 32 and held: “After reviewing the record before us, we are satisfied that the [ARB] has approached its difficult task in conformity with [AB 32], and that the [GHG] measures that it has recommended reflect the exercise of sound judgment based upon substantial evidence.  Further research and experience likely will suggest modifications to the blueprint drawn in the [ARB] scoping plan, but the plan‘s adoption in 2009 was in no respect arbitrary or capricious.” (p. 22).

In its 2009 mandamus petition, AIR et al. had challenged ARB’s overall plan to implement AB32, partly on the grounds that the plan’s CTR element did not adequately protect already overburdened local communities. The petitioners preferred “direct regulation” of GHGs at sources, another major element of ARB’s plan.  They asserted that the full benefits of AB 32 to communities surrounding major sources could only be obtained by controlling GHG emissions at each GHG source, rather than by adopting the CTR.  CTR would allow GHG sources to acquire and trade GHG allowances and/or GHG offsets resulting from GHG reductions in other communities, states, provinces or countries. 

Now, a new tempest:  earlier this month, AIR et al. filed a new complaint with EPA under title VI of the federal Civil Rights Act alleging that ARB had discriminated against African/American, Latino and Asian/Pacific Islander residents throughout California by adopting and implementing CTR. The title 6 complainants ask EPA to require, as a condition of continuing to provide federal financial assistance to ARB, that ARB reverse its decision to approve the CTR and adopt less discriminatory alternatives.  It is impossible to say how or when EPA will respond. 

Forecast:  ARB will continue to try to implement CTR on schedule in spite of all legal flurries. 

A lot is at stake now.  Under the CTR, ARB plans to conduct its first auction of GHG allowances in November of this year, which could raise tens of millions of dollars. Starting January 1, 2013, refineries, power plants and other major GHG sources throughout California must properly account for all of their GHG emissions and later surrender qualifying GHG allowances and/or GHG offsets to ARB for every ton of GHGs emitted during the first compliance period (2013-14).  Later this month, ARB plans to link its CTR to a similar program in the Canadian Province of Québec.  Please see the June 11, 2012 ARB Notice.

But all regulated and other interested parties are left with new questions about how these legal winds may affect:

•    The willingness of regulated companies and GHG traders to bid tens of millions or more for GHG  allowances at ARB auctions.
•    The willingness of other states to adopt cap-and-trade programs and link them to the ARB CTR.  U.S. states are now vulnerable to federal title VI complaints as soon as they adopt their own cap-and-trade programs.
•    The ability of ARB to contain the costs of AB 32 and minimize leakage by adopting the CTR and linking it to other cap-and-trade programs, as provided by AB 32.
•    The continued ability of California to maintain its own climate program and achieve its climate goals.

It surely looks like more westerlies are approaching the CTR on the legal radar.