Carbon Clashes
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Carbon Clashes

by Pamela MacLean

January 2013

California's grand experiment to cut greenhouse gas emissions through a cap-and-trade program began last fall with a surprise: Program opponents had filed only two lawsuits by the eve of the state's first auction of carbon allowances. Insiders say cap-and-trade critics had been scouting for at least $800,000 to fund five to seven lawsuits.

"It has long been expected that a raft of lawsuits were coming. The only thing that is surprising is that it has taken so long," says Michael B. Gerrard, director of the Center for Climate Change Law at Columbia Law School in New York.

Other challenges to California's Global Warming Solutions Act of 2006 (Cal. Health & Saf. Code ยงยง 38500-38599), commonly called AB 32, are in the works; the conservative Pacific Legal Foundation in Sacramento has acknowledged as much. Expect to see one based on the Constitution's dormant commerce clause, warns Timothy O'Connor, director of the Environmental Defense Fund's California Climate and Energy Initiative.

O'Connor's group plans to support the state's defense of the cap-and-trade program when a suit by the California Chamber of Commerce gets an airing in Sacramento County Superior Court, potentially as early as next month. (Cal. Chamber of Commerce v. Cal. Air Res. Bd., No. 2012-80001313 (Sacramento Super. Ct. filed Nov. 12, 2012.) If successful the chamber's lawsuit - couched as a narrow attack on the state's power to retain some auction proceeds for itself - could be enough to derail the fledgling cap-and-trade efforts.

In 2006 California adopted AB 32 to cut the state's greenhouse gas emissions to 1990 levels by 2020. A portion of the reductions are to be achieved by the California Air Resources Board's (ARB) complex new cap-and-trade regulations, which create a market for carbon. The regulations apply to companies emitting more than 25,000 metric tons of greenhouse gases annually, which includes large industry and electricity generators; together those businesses are responsible for 80 percent of the state's emissions. Polluters must either buy allowances for each ton of emissions they release, or reduce emissions to meet the cap. Companies performing below the cap may sell their allowances to others. As the cap ratchets down each year, the price of allowances should rise; the idea is to make it cheaper to reduce emissions than buy the carbon allowances needed to continue polluting.

More than 70 bidders participated in the first California carbon auction November 14, when all of the 23 million allowances available for use in 2013 were sold to the tune of roughly $233 million. Holders of the initial allowances, utilities, get the auction proceeds to offset the cost of shifting to clean energy without passing the expense through to ratepayers. The chamber's lawsuit challenges ARB regulations that allow the state to keep a portion of future proceeds for itself. California has put $56 million from allowances sold for future use into the Air Pollution Control Fund to pay for pollution-reduction programs.

As the chamber sees it, this amounts to a "money grab" by the state. An "unelected, politically appointed" regulatory board is set to unconstitutionally impose as much as $70 billion in fees or taxes on Californians without debate or approval by the Legislature, according to Steven A. Merksamer of Nielsen Merksamer Parrinello Gross & Leoni in Sacramento, who represents the plaintiffs. He says AB 32 did not authorize the state to keep auction proceeds. The ARB's claim of regulatory authority to allocate carbon allowances "to itself, and then to sell them for profit, turns the doctrine of administrative authorization on its head," the suit states.

"They say it is a very narrow claim so the state can't line its pockets," says Kevin Poloncarz, who represents energy companies for Paul Hastings in San Francisco. "But if you look at the challenge, it goes to the heart of the regulations

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