Defining Additionality: Why the Challenge to California’s Cap-and-Trade Program Fails

Posted on August 20, 2012 by Patrick Dennis

Co-Authored by: Beth A. Coombs, Gibson Dunn & Crutcher LLP

California’s recently approved regulations establishing a Cap-and-Trade Program for the reduction of greenhouse gas (“GHG”) emissions are already under attack in California court.  In March 2012, two citizen groups filed a petition challenging the California Air Resources Board’s (“CARB’s”) regulations that allow entities to quantify GHG emission reductions and take credit for those reductions while, at the same time, making such reductions available to other GHG emitters to purchase as an “offset” to their own greenhouse gas emissions.  The case, Citizens Climate Lobby and Our Children’s Earth Foundation v. California Air Resources Board, Case No. CGC-12-519554, filed in San Francisco County Superior Court, represents the first major legal challenge to California’s landmark Cap-and-Trade Program.

The Cap-and-Trade program is part of the Global Warming Solutions Act of 2006, which the California legislature adopted in 2006 under Assembly Bill 32.  The bill required statewide GHG emissions to be reduced to their prior 1990 levels by 2020.  Cal. Health & Saf. Code § 38550.  As part of its overall statutory scheme, AB 32 vested the CARB with the discretion to decide whether to adopt regulations employing “market based compliance mechanisms.”  Health & Safety Code §38570.  Exercising that discretion,  CARB, through a multi-year process involving extensive public comment, promulgated regulations establishing offset credits through protocols specific to certain industries or business operations.  It is these offset protocols that are now under attack.

Petitioners claim that the protocols adopted by the CARB allow GHG emission reductions that are not “additional.” This, they say, violates AB 32’s mandate that offsets must be “in addition to any greenhouse gas emission reduction otherwise required by law or regulation, and any other greenhouse gas emission reduction that otherwise would occur.”  Cal. Health & Saf. Code § 38562(d)(emphasis supplied).  However, Petitioners’ interpretation of “additionality” is inappropriately and prohibitively narrow.  For example, under Petitioners’ view of AB 32’s requirements, the offset protocol for the use of anaerobic digesters that reduce GHG emissions (primarily methane) by treating manure at dairies and hog farms allows in “non-additional” projects because some farms within the United States already use digesters—despite the fact that (1) farms currently using digesters would not be credited under the program, (2) the use of digesters on farms is still rare, and (3) most digesters currently in use were installed under grants for increasing energy efficiency.  As another example, Petitioners argue that the offset protocol for the destruction of ozone depleting substances (“ODS”) allows crediting for projects that otherwise would occur because while less than 1.5% of recoverable U.S. sourced ODS is currently being destroyed, there are still ‘business reasons” aside from offset incentives for destroying ODS.  And they point to the General Electric Company as an example of a company that gains “goodwill” with the consumer public by voluntarily destroying ODS.

This prohibitively narrow view of AB 32’s offset requirements for “additionality” effectively nullifies the California legislature’s grant of regulatory authority to CARB to create an offset program, because no such program could comply with the strictures laid out by Petitioners.  Indeed, it is Petitioners’ philosophical disagreement with the legislature’s decision to allow an offset program that underlies this litigation.  Two members of one of the groups challenging the offsets long ago advised CARB that, “[i]t is critically important for ARB to resist the temptation to make offsets part of California’s cap-and-trade program.”  Laurie Williams & Allan Zabel, Comment on Proposed GHG Offset Protocols, 9, Dec. 13, 2010, Comment 521 for California Cap-and-Trade Program.  But this fundamental disagreement about whether offsets should be part of a government greenhouse gas reduction program is necessarily a policy decision – not one that should be decided by the courts – and the legislature clearly gave CARB the discretion to adopt the protocols.  

The legal problem with Petitioners’ attack is that they sidestep the critical definition of “additional” that CARB adopted as part of the same regulatory package that contains the offset protocols.  That definition provides that:

"in the context of offset credits, [GHG] emission reductions or removals that exceed any [GHG] reduction or removals otherwise required by law, regulation or legally binding mandate, and that exceed any [GHG] reductions or removals that would otherwise occur in a conservative business-as-usual scenario.”  Cal. Code of Regs. tit. 17, Section 95802(a)(3). 

The four protocols challenged by the litigation – livestock (digestors), ozone depleting substances, forests and urban forests – were all developed through a lengthy and thorough public process involving stakeholders from all perspectives on the political spectrum.  In each case, data and research were devoted to determining what “business as usual” meant with respect to GHG emissions reductions.  And where there were clear additional steps that very few, or almost none, of the industry was taking regarding GHG emissions reductions, then protocols were developed to recognize such steps as potentially qualifying for offsets.  There seems little doubt that the protocols easily meet the CARB definition of “additional” and that may be why Petitioners chose to avoid a challenge of the regulatory definition, and instead simply to claim that the protocols violate the statute.  But their failure to challenge the definition in the same regulatory package seems like a transparent attempt to avoid the more lenient “arbitrary and capricious” standard of review for the adoption of most regulatory programs in California, and to try for the more rigorous “de novo” standard of review.

All of these issues are laid out in the briefs that have been filed by Petitioners, CARB, and the interveners which include the Climate Action Registry (the original developer of the protocols), a business interveners group which includes many of the large utilities (Southern California Edison, for example, is a member), and the Environmental Defense Fund.  The Nature Conservancy has also submitted an amicus brief. It is certainly telling that a coalition of major utilities, the Environmental Defense Fund, and The Nature Conservancy have all lined up to take the same position of defending CARB’s adoption of the four offset protocols. 

The Court has scheduled November 6, 2012 as the date to hear the matter.

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