Capping Cap and Trade
California Lawyer

Capping Cap and Trade

January 2012

illustration by Phil Foster

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California puts cap-and-trade regulations into effect this month, making it the first state in the nation to use such a scheme to reduce greenhouse gas emissions. The regulations are a central part of the state's much-debated 2006 Global Warming Solutions Act (AB 32). Already they face a legal threat based on a little-known constitutional amendment passed by voters in 2010.

That amendment - which appeared as Proposition 26 on the ballot - requires a two-thirds supermajority vote by the Legislature for any new fees, levies, or taxes enacted in California. Opponents of cap and trade argue that putting a price on carbon dioxide amounts to a new fee and should be subject to supermajority approval.

Last October the Southern California branch of the Committee for a Constructive Tomorrow, a nonprofit libertarian lobbying group, called for plaintiffs in a potential lawsuit against cap and trade. CFACT's branch leaders, Warren and Pam Duffy of Orange County, are seeking small-business owners in industries that will be affected by the new regulations in 2012. They reportedly have retained counsel; Pam Duffy declined to comment.

The call for plaintiffs has been circulated by Eric Eisenhammer, the founder of the Roseville-based Coalition of Energy Users, which advocates for "affordable energy." He stressed that the lawsuit was still under development, but he acknowledged that Prop. 26 is a point of contention.

"They're imposing costs, and there's no legislative approval for the costs," says Eisenhammer, who also directs marketing at the Howard Jarvis Taxpayers Association. The association was a significant supporter of efforts to promote Prop. 26's passage.

AB 32's cap-and-trade scheme establishes financial markets to try to drive down the state's greenhouse gas emissions to 1990 levels by 2020. Carbon dioxideintensive industries are given an emissions allowance; if they stay below it they can sell the difference to other entities in a market set up by the California Air Resources Board (CARB). Those that go over will have to buy "allowances" in the market or directly from the state, and the number of allowances decreases each year. Businesses can also buy offsets by investing in projects that reduce emissions.

The key question in any challenge to AB 32 based on Prop. 26 would be whether the 2010 ballot measure applies retroactively to a law that was passed four years earlier, according to Cara Horowitz, executive director of the Emmett Center on Climate Change and the Environment at UCLA School of Law. Typically, California courts rule that it wouldn't. "There's no evidence that voters intended to change that default rule that propositions don't have retroactive reach," she says.

Environmental lawyer Kevin T. Haroff, a partner at Shook, Hardy & Bacon, agrees, noting that AB 32 opponents may attempt to show that fees set by CARB after the constitutional amendment passed are statutory rather than regulatory.

But Robert Lawrence, a partner in the San Francisco office of Marten Law, which represents various industries that will be affected by the regulations, questioned the significance of retroactivity. He says that the CARB is imposing a fee on emissions that is not expressly authorized by AB 32. "[It] is exactly the kind of regulatory fee that Prop. 26 is aimed at," he says. "It's imposed by the state, and the revenues collected by the state would be applied for energy investments or other government purposes. So it is an effective tax."

At least three other suits have been filed citing Prop. 26's supermajority requirement. In November the Shasta Superior Court heard arguments on Citizens for Fair REU Rates v. City of Redding (Shasta Cnty. Super. Ct. No. SC RD CV 11-0171377) challenging energy rate increases. Pending is Schmeer v. County of Los Angeles (Los Angeles Cnty. Super. Ct. No. BC 470705), which seeks to invalidate a law that bans plastic shopping bags and requires retailers to charge customers a fee for paper bags. A third case filed in August, City of San Buenaventura v. United Water Conservation Dist. (Ventura Cnty. Super. Ct. No. 56-2011-004017-CU-WM-VTA), alleges that disproportionate water rate hikes violate Prop. 26.

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