Reed Smith Client Alerts

Authors: Courtney T. Potts Jennifer A. Smokelin Michele D. Yuen Phillip H. Babich Todd O. Maiden

Type: Client Alerts

A California Court of Appeal signaled it is moving closer to making what could be a far-reaching decision in the consolidated cases of California Chamber of Commerce v. California Air Resources Board (Case No. C075930) and Morning Star Packing Co. v. California Air Resources Board (Case No. C075954). Plaintiffs-appellants challenge California’s cap-and-trade auctions of carbon allowances on grounds that the California Air Resources Board exceeded its statutory authority by selling the allowances, and that the allowances are invalid regulatory fees and an unconstitutional tax. Earlier this month, the court ordered the parties and interveners to submit supplemental briefing on seven narrowly tailored questions. Briefing is due May 23, 2016.

A California Court of Appeal signaled it is moving closer to making what could be a far-reaching decision in the consolidated cases of California Chamber of Commerce v. California Air Resources Board (Case No. C075930) and Morning Star Packing Co. v. California Air Resources Board (Case No. C075954).

Plaintiffs-appellants challenge California’s cap-and-trade auctions of carbon allowances on three grounds: (1) that the auction exceeds the authority granted to California Air Resources Board (CARB) by the state’s climate change initiative (AB 32); (2) that the auction constitutes an invalid regulatory fee under Sinclair Paint Co. v. State Board of Equalization, 15 Cal.4th 866 (1997); and (3) that revenue from the auction sales results in an unconstitutional tax.

Earlier this month, the court issued two orders that indicated it was in a position to move the case forward.

First, the court granted appellants’ motion for calendar preference to expedite scheduling for evaluating the appellate briefs and setting the date for oral argument.

Second, in a rare occurrence, the court directed the parties to file simultaneous supplemental briefing on seven exceptionally detailed and narrow questions in an April 8, 2016, order, a copy of which can be found here. A few of the questions raised by the court relate to issues or arguments that the parties did not directly raise in their briefs.

  • The court first asks the parties what the rationale and purpose is for the regulations stating that the auction credits confer no property rights.
  • The court next asks the parties to “[d]escribe the relationship, if any, between the probable environmental impacts caused by covered entities and the revenue generated from the auctions, and whether the record shows [CARB] established a reasonable relationship between the two.”
  • The court then poses two questions regarding possible defenses to the Proposition 13 challenge to the cap-and-trade auction system:
    • The court inquires whether the auction system could be defended against the Proposition 13 challenge on the grounds that it is akin to a development fee.
    • The court also questions whether the auction system could defeat the Proposition 13 challenge on the grounds that the auction system sells to covered entities the “privilege to pollute.”
  • As a fifth area of inquiry, the court poses a three-pronged question demonstrating it is turning a careful eye toward the expenditures of auction revenues for purposes unrelated to the goals of AB 32.
  • The court’s sixth question goes to the issue of whether the auction payments are voluntary or compulsory.
  • The court’s final question raises a practical consideration and the million (or multi-million) dollar question: If the auction is an invalid regulatory fee or an unconstitutional tax, what is the remedy regarding the regulations?

Details regarding the seven questions can be found here.

If you have any questions or would like additional information on the material covered in this Alert, please contact one of the authors or the Reed Smith lawyer with whom you regularly work.

 

Client Alert 2016-103