Anticlimactic End to Cap-and-Trade Battle

Date: July 15, 2017

In a disappointing decision, the California Supreme Court recently declined to hear arguments in a case challenging controversial regulations under California’s cap-and-trade regime. Specifically, the California Chamber of Commerce and Morning Star Company, a small business manufacturer, contested CA Air Resources Board (ARB) regulations that were designed to increase compliance costs while bringing-in tremendous revenue to the state. In support of their arguments, NFIB Small Business Legal Center argued that these imposed costs amounted to an illegal tax.

Simply put, California (like a handful of other states) requires a two-thirds supermajority for the enactment of any new tax. That’s a crucial safeguard against government actors who are always hungry for new sources of revenue. But, unfortunately, government bureaucrats often seek to bypass such procedural requirements by labeling true revenue raising measures as “fees.”

That’s essentially what happened with California’s cap-and-trade program, under which ARB regulations prohibit “covered entities” from emitting greenhouse gases without state authorized credits of allowances. ARB’s goal was to reduce greenhouse gas emissions by authorizing only a limited set of credit allowances each year. But whereas ARB could have allocated limited emission allowances without charge in an equitable distribution among covered entities, it chose instead to award credits to the highest bidder at auction. And while styled as a sort of voluntary fee, we argued that the State had quite simply imposed a tax on greenhouse gas emissions.

In the past the California Supreme Court had said that regulatory fees could be upheld only under limited circumstances where the amount charged is carefully calibrated to cover actual costs that regulated conduct may impose on the public, and where the funds generated are actually devoted to mitigating the affects of regulated conduct. But of course there was no way to say that the price a manufacturer pays for an emission allowance at auction is at all calibrated to mitigate the impacts of its green house gas emissions. In any event, the California Court of Appeals saw things differently and the Supreme Court was uninterested in weighing-in.

So, for the time-being, cap-and-trade remains in place in the Golden State—with ARB continuing to auction-off an increasingly limited supply of emission allowance credits. That said, California’s Legislature is currently contemplating changes that may be implemented after 2020. But given the exorbitant costs of cap-and-trade, and the impacts on energy costs in particular, it may come as no surprise that NFIB has come out strong in opposition to any extension of ABR’s cap-and-trade program after 2020. In any event, the small business community will continue to keep its eyes on this issue—as we anticipate other states may well view California’s cap-and-trade regime as a model to emulate. For the Legal Center, this means we’ll have further battles to fight in the near future.

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