Forbes: State Appeals Court Affirms California’s Cap-And-Trade Program To Cut Carbon

A California appeals court upheld on Thursday the state’s free market plan to cut carbon — one that facilitates companies buying and selling credits amongst each other to try and limit greenhouse gases.

The California Chamber of Commerce has alleged that the so-called cap-and-trade program is merely an illegal tax on businesses that has forced some companies to move across state lines. But the target of the suit, the California Air Resources Board that voted unanimously in October 2011 to enact the program, has said that it is carrying out the will of state legislators and that it is healthier for both the economy and the environment.

“The world is looking to California to lead on climate,” Alex Jackson, legal director for the Natural Resources Defense Council’s California Climate Project said in a statement.

Cap-and-trade works like this: Governments set pollution limits and then credits are either auctioned or allocated to industry. Those companies that are able to exceed the expectations can either bank their allowances for future use or sell them to other businesses that are unable to meet their obligations. As the ceilings come down, overall emissions then fall.

In 2013, the Air Resources Board won in district court. But the chamber and its allies appealed the case, maintaining that regulators had no legal right to restrict carbon emissions and that the monies used to buy credits are an illegal tax on commerce under state law.

“The challenged action by an unelected, politically appointed state board to engraft into a regulatory program a massive revenue raising device is unlawful because it … imposes what is an invalid tax,” the chamber wrote in its appellate brief, as reported by the Sacramento Bee. 

However, California’s Third Appellate District Court ruled that the state legislature intended the Air Resources Board to oversee the cap-and-trade program. In a two-to-one ruling, the judges noted that the legislature followed up a year later with information on how to run the program, reports Reuters.

Two of the three judges, furthermore, said that buying credits is not the same as taxing businesses; companies can choose to reduce their emissions in a number of ways that include purchasing offsets or buying permits from other companies.

While the chamber said it would evaluate its options, the case is expected to head to the California Supreme Court.

To be sure, the lawsuits have weakened California’s trading program, although activity on the exchanges did pick up in late 2016 as companies sought to purchase carbon credits before the price of an allowance rose. The question now is whether California will extend the cap-and-trade scheme past the original 2020 timeline — something Governor Jerry Brown favors.

The lawsuits have been just one of the system’s problems. The other is an oversupply of credits that have kept them inexpensive at roughly $12.50 or $13.50 a metric ton. That means it is probably cheaper to buy credits and to exceed emissions limits than it is to purchase pollution controls.

Experts say that the price per ton needs to reach $30 to $40 to properly incentivize new investments, although $4.4 billion has been raised from 2012 to 2016, says the Air Resources Board. The revenue from selling credits to companies is allocated toward clean energy technologies.

California’s original goal had been to bring down carbon emissions to 1990 levels by 2020. Now the aim is to reduce those releases by 40% by 2030 from 1990 levels.

And by 2050, California hopes to have cut its greenhouse gas emissions by 80%, which would not just make it an example for other states but also for other countries. In the end, it will be a job creator, say advocates. To get there, the state will also employ other strategies such as vehicle emissions limits, energy efficiency standards for buildings and renewable portfolio standards for utilities.

“The plan will help us meet both our climate and our clean air goals in the coming decades and provide billions of dollars in investments to cut greenhouse gases …,” California Air Resources Board Chair Mary Nichols said in a statement. “It is also designed … (to generate) good new jobs in the growing clean technology sector.”

At present, only California and the Northeastern states have cap-and-trade programs in place in the United States. Quebec in Canada also has one while Europe does as well. In all cases, there are mandatory carbon cuts in place set up in part to stimulate investment in new technologies.