California Court of Appeals Upholds Cap-and-Trade Auction Emission Regulations

Date: April 07, 2017

Related Content: Legal - Blog Energy

Late last spring the NFIB Small Business Legal Center filed a brief urging a California Court of Appeal to reverse a lower court decision upholding regulations promulgated by the Air Resources Board on the view that the Agency had exceeded its statutory authority. At issue were regulations requiring small business manufacturers and energy companies to purchase “credits” to continue with long established business practices that result in green-house gas (GHG) emissions. Under this cap-and-trade regime these businesses must bid at auction for the emission allowance credits that they need in order to stay in business—which puts smaller firms at a severe disadvantage to larger corporations with deeper pockets. Given that the enabling statute said nothing whatsoever about the auctioning of emission allowances—or the millions of dollars the State might bring in through such auctions—we argued that the Legislature did not intend to authorize ARB to auction-off emission allowances.

Our view was that it is only proper to interpret statutory silence as an implied limitation on the agency’s powers. Moreover, even if we were to assume some ambiguity in the statutory text, it’s inconceivable to think that the Legislature would intend for ambiguous language to be interpreted in a manner that would impose radically greater financial burdens. To be sure, in this case, ARB could have chosen to establish a cap-and-trade program that would accomplish the same end goal (i.e., reduction in GHG emissions), but while distributing auction emission allowances at no cost—which would also be more fair to small business.

But in a decision earlier this week, in Morning Star / Cal. Chamber v. Air Resources Board, the Court of Appeals ruled that the Legislature had conferred authority on ARB to craft its cap-and-trade program however it might like—and had subsequently ratified ARB’s actions to the extent the agency may have exceeded it authority in the first place. And while this, in itself, raises serious concerns under the non-delegation doctrine—which holds that the Legislature cannot confer unfettered lawmaking powers on a state agency—this is not the end of this legal battle. One dissenting judge argued that the auctioning of emission allowances amounted to an illegal tax. To be sure, we had raised that argument previously and will continue to press that point. We expect a petition to the California Supreme Court in the coming weeks.

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