Environmental -- 2017

California Chamber of Commerce v. California Air Resources Board   (Cal. Ct. App.)

Challenging CARB cap-and-trade auction allowance revenues

In November, 2013, a California judge ruled that the California Air Resources Board (CARB) has the discretion to raise revenues by auctioning and selling allowances under the state's greenhouse gas cap-and-trade program. The NAM had intervened in this suit to bring to the court's attention the extraordinary revenues generated by the auction and reserve sale provisions adopted by the CARB, which we said were far beyond what the law required for administering the program. We also argued that the fees constituted a new tax that must be approved by the legislature, an issue that the judge considered a close call.

On March 7, 2014, the NAM appealed the case to an intermediate California appeals court. Our opening brief was filed Oct. 20, 2014, and our reply brief on May 4, 2015, making these same arguments.

We argued that AB 32 does not authorize the Board to generate billions of dollars in revenues over and above the regulatory fees separately authorized to implement and enforce the law. These revenues are the largest of any environmental program in the United States. Moreover, the revenues vastly exceed the amount necessary to implement AB 32, which is already full funded through a separate statutory provision expressly authorizing the collection of regulatory fees. There has been no showing that those revenues have a reasonable relationship to the regulatory burden imposed on manufacturers, and the funds have been set aside to fund programs that have not yet been identified.

Moreover, if raising such large sums through auctions and reserve sales is authorized, then that revenue-raising authority is a tax that violates the California Constitution because the law was not adopted by a two-thirds majority of the legislature.

On its own initiative, the appellate court issued a set of questions to the parties in preparation for upcoming oral arguments. The NAM filed a supplemental brief in May arguing that (1) allowances are taxes, not property rights, (2) there is no relationship between environmental impacts and the billions of dollars in excess revenue generated by the auctions and reserve sales, (3)allowance charges are not development fees, (4) they cannot be upheld on the ground that they confer the "privilege to pollute," (5) fees generated in excess of the amount needed to run the program are taxes, (6) the purchase of allowances is not in any practical sense voluntary, and (7) the relief that should be granted is elimination of the tax. Oral arguments in the case were held on Jan. 24, 2017.

On April 6, 2017, the Court decided 2 to 1 to uphold the allowance auction system. The majority felt that AB32 authorized the State Air Resources Board to adopt the cap-and-trade system, and left the development of the details to the Board. It also found that the money paid by companies that buy allowances in the auction do not constitute a tax because, unlike a tax, (1) they are not compulsory, and (2) purchasers receive something of value in return. Click here for a summary of the trial court proceedings.

Related Documents:
NAM supplemental brief  (May 23, 2016)
NAM reply brief  (May 4, 2015)
NAM's opening brief  (October 20, 2014)


California Chamber of Commerce v. California Air Resources Board   (California Supreme Court)

Challenging CARB cap-and-trade auction allowance revenues

In 2013, the NAM intervened in a case challenging a greenhouse gas cap-and-trade auction system created by California's Air Resources Board (ARB). The system generates extraordinary revenues, far beyond what is needed for administering the program. In the lower courts, we argued that the fees constitute a tax that must be approved by a two-thirds majority of the legislature.

The trial judge upheld the auction system, but said it was a close call. His ruling was affirmed 2-1 on appeal, and, on May 16, 2017, the NAM appealed to the California Supreme Court.

We argued that the lower court should have used the controlling legal precedent to assess whether a charge imposed for regulatory purposes is a tax. By rejecting that precedent, the court provided "a roadmap for the evasion of Proposition 13," which requires a two-thirds vote of the legislature to increase taxes.

"ARB purposely designed the allowance auctions to raise billions in excess revenue that could be used for general public benefit purposes," we argued. The Board endorsed the view that the auction revenue could "reduce the extent of the government's reliance on ordinary taxes for financing expenditures." We urged the court to review the ruling, which "concerns the constitutionality of a multi-billion dollar transfer of wealth from California businesses to the State." The ruling "effectively grants ARB a blank check to raise unlimited revenue, free and clear of any meaningful restraint."

We also challenged the appellate court's view that auction allowances are voluntary because a company is free to "choose to leave the state." We argued that that "holding defies precedent, the record evidence, and common sense, and taken to its logical conclusion, would mean that virtually all taxes are 'voluntary.'" The idea that business in California are simply "volunteering" to pay billions of dollars to the State out of the goodness of their hearts is nonsensical. Every tax can be avoided by leaving the state, but that does not make the tax voluntary. Moreover, while the auction allowances may be a valuable asset, that is true for other taxes that are paid to acquire valuable assets (sales taxes) or to engage in a valuable activity (income taxes).

On June 28, the Court declined to hear this appeal.

Related Documents:
NAM reply brief  (June 26, 2017)
NAM petition for review  (May 16, 2017)


Environmental -- 2013

California Chamber of Commerce v. California Air Resources Board   (Superior Court of Sacramento County)

Challenging CARB cap-and-trade auction allowance revenues

In November, 2012, the California Chamber of Commerce filed a lawsuit challenging the legality of the fees charged by the California Air Resources Board (CARB) for the state’s cap-and-trade greenhouse gas program. The NAM moved to intervene in the litigation, focusing not on the legality of the cap-and-trade program itself or the merits of climate change science, but on the extraordinary revenues generated by the auction and reserve sale provisions adopted by CARB.

The effectiveness of the cap-and-trade program comes from the state’s ability to ratchet down greenhouse gas emissions from year to year. CARB may not go beyond this authority to generate a huge income stream for the state. The first quarterly auction of greenhouse gas allowances in November, 2012, raised nearly $289 million for California, substantially more than the $62 million required to implement the law. Moreover, that revenue is projected to increase to as much as $70 billion over the life of the program. In 2015, more than $2 billion is expected to be generated by the program, and most of the funds already collected have been earmarked for housing and transportation projects.

We argued that that income goes far beyond simply paying for the costs of administering the program, and thus exceeded the legal authority of CARB. Alternatively, even if the fees were authorized, they constitute a massive new tax that must have been approved by a 2/3 majority of the California legislature under the state constitution.

On Nov. 12, 2013, the judge ruled that the Air Resources Board was given the discretion to raise revenues by auctioning and selling allowances. The fact that the Board may charge an administrative fee does not prevent it from also auctioning the allowances. The judge also ruled that the revenues were not an unconstitutional tax, although he called that a close question. He analyzed the difference between taxes and government regulatory fees, and found the charges more like traditional regulatory fees. The primary purpose is for regulation, not revenue, the total fees don't exceed the costs of the regulatory activities, and the fees collected are reasonably related to the burden imposed by the greenhouse gas emissions. The court was at a loss to know what the fees will actually be used for, but the law requires that they be used to further the emissions reduction goals of AB 32. It admitted that "since nearly every aspect of life has some impact on GHG emissions, it is difficult to conceive of a regulatory activity that will not have an least some impact on GHG emissions." Thus, the decision gives extremely broad power to the state government to use the funds collected and not have them be considered a tax.

This income scheme will significantly raise energy costs in the state and further harm its competitiveness, without providing any additional environmental benefits, since it will still be affected by GHG emissions from elsewhere around the world.

Related Documents:
NAM Reply brief  (August 7, 2013)
Motion to Intervene  (February 15, 2013)
Points and Authorities in Support of Complaint  (February 15, 2013)


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