California's Greenhouse Gas Cap-and-Trade Regs-- Who's Suing, Who Isn't

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by Peter M. Morrisette and Robert D. Infelise, Cox, Castle & Nicholson LLP

By 2013, California electrical power generators and utilities, as well as other greenhouse gas emitters, must comply with an emissions cap mandated by the California Air Resources Board’s (CARB’s) adoption of new regulations.

The regulations might be the most ambitious effort by any government to regulate greenhouse gas emissions.

Conventional wisdom suggests that such an effort would be met with multiple legal challenges.

So far, however, conventional wisdom has been wrong. More curiously, most of the legal challenges have been brought by environmental justice groups.

With the exception of a recently filed case, the regulated business community has been surprisingly quiet.

CARB’s Cap-and-Trade Regulations

California’s Global Warming Solutions Act of 2006 requires a reduction of greenhouse emissions to 1990 levels by 2020.

The law vests considerable power in CARB to adopt policies and regulations.

The act does not mandate a cap-and-trade program, but it requires CARB to consider market-based mechanisms when drafting regulations.

After considering the options, including a carbon tax, CARB opted for a cap-and-trade approach that includes a gradually declining emissions cap.

The new regulations cover major emission sources, including power plants, refineries and major factories.

These sources will be given emission allowances, which must be surrendered in amounts equal to emissions at the end of specified compliance periods.

Businesses can buy and trade allowances. The first allowances auction was Nov. 14. The first compliance period begins in 2013.

Challenges From the Environmental Justice Community

Most legal challenges to CARB’s cap-and-trade regulations have come from environmental justice organizations that support the act’s mandate to cut emissions but favor a carbon tax or command-and-control style regulation of emissions over a cap-and-trade regime.

The consensus within the environmental justice community is that cap and trade favors industry, is subject to gaming, cannot be adequately monitored, and increases the already disproportionate burden on poor communities and communities of color from industrial pollution.

The larger environmental community, however, is by no means united in opposition to cap and trade.

Several national groups, including the Environmental Defense Fund, the Natural Resources Defense Council and The Nature Conservancy, support CARB’s cap-and-trade approach.

In June, a state appellate court upheld CARB’s overall blueprint for implementing the Global Warming Solutions Act, known as the 2009 Climate Change Scoping Plan.

The purpose of the scoping plan was to outline strategies for reducing emissions.

Among the recommendations in the plan was the development of a cap-and-trade program.

An environmental justice group known as the Association of Irritated Residents (AIR) challenged the scoping plan on grounds including non-compliance with the act.

Most of the arguments AIR raised were technical: CARB did not consider the maximum technologically feasible reductions, as required by the act; CARB failed to apply a cost-effectiveness standard, as required by the act; and CARB failed to include direct regulation of agriculture and industry in the scoping plan.

The court, however, found that the California legislature had granted CARB broad discretion in implementing the act.

The court further found that CARB’s scoping plan was based on extensive technical expertise and review, as to which the court afforded deference.

Courts most likely will find that CARB was given broad discretion in writing the cap-and-trade regulations and, thus, will defer to the agency.

A state court recently had that opportunity because two environmental justice groups brought a legal challenge to the cap-and-trade regulations, heard in November.

The case, brought by Citizens Climate Lobby and Our Children’s Earth Foundation, challenges the offset protocols adopted by CARB as part of the cap-and-trade regulations.

Offsets are voluntary greenhouse gas emission reductions made by entities not otherwise required to participate in the cap-and-trade program, such as a farmer who plants trees that he would not have planted otherwise.

Offsets are permitted under the act, but they must result in reductions that are in addition to emission reductions already required by law or that otherwise would occur under normal conditions. This is referred to as the additionality principle.

The suit challenges whether the offset protocols adopted by CARB meet the additionality requirement.

Offsets are a significant issue because electrical generators and utilities in particular expect offsets to be a key tool in meeting compliance requirements.

Several California investor-owned utilities—Southern California Edison, Pacific Gas & Electric Co., San Diego Gas & Electric and Southern California Gas Co.—have intervened in support of CARB.

The Environmental Defense Fund, an advocate of cap and trade and offsets, also intervened in support of CARB, as have entities who hope to profit in the offsets market.

If CARB is prevented from using offsets, compliance with the emissions cap will become more difficult.

A decision either way by the court almost certainly will be appealed, so it might be a long time before this issue is resolved.

The other pending challenge is an administrative proceeding before the Environmental Protection Agency brought by, among others, the Center on Race, Poverty & the Environment.

People living within six miles of facilities regulated under cap and trade are disproportionately poor and people of color.

The plaintiffs contend that if greenhouse gas emissions from these facilities were directly regulated, there would be a reduction in co-pollutant emissions (particulate matter, nitrogen oxides and volatile organic compounds), which threaten public health.

The complaint argues that co-pollutant emissions could increase as a result of the use of offsets and, thus, cap and trade disparately and adversely affects communities of color.

Potential Challenges From Regulated Industries

Other than to intervene in one action to support CARB, the regulated community mostly has taken a wait-and-see approach.

If greenhouse gas emissions must be regulated, industry apparently prefers cap and trade to a carbon tax or a command-and-control brand of regulation.

The California Chamber of Commerce, however, recently filed a suit challenging CARB’s ability to reserve to itself some carbon allowances that it then will sell at auction.

The lawsuit claims the statute does not authorize CARB to sell allowances and the revenues raised by the auction amount to an unconstitutional tax because the act was not passed by the required two-thirds vote of the legislature needed for tax increases.

The Chamber of Commerce lawsuit only challenges the revenue-raising component of the regulations and not the use of cap and trade as a regulatory approach.

If industry were to mount a challenge, it likely would be premised on the so-called dormant Commerce Clause or preemption.

A dormant Commerce Clause challenge to the cap-and-trade regulations would argue that CARB is improperly attempting to regulate electrical power generation outside California.

A similar argument was successfully employed in a federal district court to challenge California’s Low Carbon Fuel Standards, which CARB also enacted to reduce greenhouse emissions.

This district court ruling is on appeal to the 9th Circuit Court of Appeals.

Another issue is whether CARB’s efforts to regulate greenhouse gas emissions from electrical power providers is preempted under the Federal Power Act.

There are potential state law challenges as well, such as whether CARB complied with California law in drafting the new regulations.

But with the first compliance period beginning in January, few challenges have surfaced.

What Will Happen?

A successful assault on CARB’s cap-and-trade regime simply would send CARB back to the drawing table either to modify the existing regulations or to formulate a new approach.

The mandate to reduce greenhouse gas emissions significantly will not change.

The environmental justice community wants to force CARB to consider taking a more draconian approach to reducing emissions.

The regulated community, on the other hand, appears to prefer cap and trade to any alternative.

The next few months should be interesting.

Authors

Robert D. Infelise is a senior trial attorney and partner with Cox, Castle & Nicholson LLP in San Francisco. His clients include institutions and entrepreneurs in the real estate industry, public utilities, financial institutions, investment banks and high net-worth individuals.

Peter M. Morrisette is a senior counsel in the San Francisco office of Cox, Castle & Nicholson LLP. He focuses on environmental law with an emphasis on litigation, cleanup of contaminated properties, climate change, air pollution regulation, California’s Proposition 65, and hazardous waste regulation.

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