Latham's Clean Energy Law Report

US Climate Science Special Report Reveals Significant Findings

Posted in Energy regulatory

By JP Brisson, Michael Dreibelbis, and Chris Antonacci

The  US Global Change Research Program (USGCRP) has released the Climate Science Special Report (CSSR or the Report). Published on November 3, 2017, this US-focused authoritative climate change science assessment  serves as a foundation for assessing climate-related risks and informing decision-making.

As Volume I of the Fourth National Climate Assessment (NCA4), the CSSR provides:

  • Updated analyses of climate change findings
  • Executive summary and other materials providing the basis for discussion of climate science found in Volume II  (forthcoming in 2018)
  •  Foundational information and projections for climate change ranging from “likely” to “worst case” scenarios

A previous draft of the CSSR was leaked to the New York Times in August 2017, in what some commentators saw as a way to prevent the Trump Administration from drastically altering the final version’s findings . With the exception of wording changes intended to water down some of the report’s conclusions, the final CSSR’s substance and core discussion was not materially different  from the August version — and reports indicate that there was no political interference with its drafting. For more information, please see Lisa Friedman and Glenn Thrush’s New York Times commentary, U.S. Report Says Humans Cause Climate Change, Contradicting Top Trump Officials.  The CSSR comes on the heels of the Government Accountability Office’s  climate change report, released on October 23, 2017 [GAO Releases Climate Change Report] which provides economic valuations, and policy recommendations associated with US climate change risks.
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GAO Releases Climate Change Report

Posted in Energy regulatory

By J.P. Brisson, Michael Dreibelbis, and Chris Antonacci

On October 24, 2017, the Government Accountability Office (GAO), the auditing agency of the US Congress, released a report on climate change titled, “Information on Potential Economic Effects Could Help Guide Federal Efforts to Reduce Fiscal Exposure” (the Report). GAO prepared the Report at the request of the US Senate’s Committee on Energy and Natural Resources to review potential economic effects of climate change and risks to the federal government. The Report represents the latest installment of GAO’s attempt to monetize and frame climate change’s risk to the federal government, following the GAO’s inclusion of “Limiting the Federal Government’s Fiscal Exposure by Better Managing Climate Change Risks” on its “High-Risk List” in 2013 and its 2015 “High-Risk Update” on climate change adaptation.

The Report finds that climate change could result in significant impacts to the US economy that may be unevenly distributed across US sectors and regions, and recommends that the Executive Office of the President work with appropriate federal entities to identify significant climate risks and develop appropriate responses. The Report highlights that the federal government has already incurred direct costs of more than US$350 billion dollars due to extreme weather and fire events over the past decade.

Report

In preparing the Report, GAO reviewed two national-scale studies and 28 other available studies and interviewed 26 experts and knowledgeable stakeholders, and compared government-wide efforts to manage climate risks with leading practices for risk management. This performance audit was conducted from December 2015 to September 2017. The Report notes the inherent uncertainties of climate modeling and the difficulty of forecasting climate change’s effects due to the confluence of two erratic factors – weather and economics. It is somewhat surprising that GAO, in 2017, could not find more than two reliable and comprehensive national studies on climate change, given its primacy in national and world politics in the last decade or longer.

Economic Impacts

The Report concludes that economic impacts associated with climate change could be significant and could increase over time as the end of the century approaches. The Report cites a study finding that the estimated net economic costs increase over time and that the likely combined direct economic effects of climate change on six sectors analyzed (health, labor, coastal communities, energy, agriculture, and crime) could reach between 0.7 and 2.4 percent of the US gross domestic product per year by the end of the century. For example, the Report adds, estimated costs for coastal property losses from sea level rise and increases in frequency and intensity of storms would result in US$4-6 billion per year in the near term to as great as US$51-74 billion per year by end of the century. The Report also cites another study finding similar potential economic impacts across its broad spectrum of sectors analyzed, including health, infrastructure, electricity, water resources, agriculture, and forestry.

Uneven Impacts Across Sectors

The Report, relying on the same two studies, states that potential economic effects of climate change will be likely be unevenly distributed across sectors. The human health, labor, coastal infrastructure, and energy sectors would likely be more heavily impacted than others such as agriculture and crime. For example, the Report suggests that infrastructure in coastal areas faces higher financial risks than other sectors or geographic regions.

The disparity is attributable to a combination of factors, chief of which include: (i) an increase in premature mortality from higher temperatures; (ii) reduced number of hours worked because of high temperatures; (iii) infrastructure damage from increased flooding and storm surge; and (iv) increased energy demand. The CCIRA study similarly suggested that emissions reductions would generally generate larger effects on sectors related to human health, water resources, and electric power, with driving factors including: (i) lost labor hours and premature mortality from poor air quality and extreme health in the health sector; (ii) costs to water users when sufficient water is not available; (iii) and costs to expand power system capacity in the energy sector.

Climate Change: Information on Potential Economic Effects Could Help Guide Federal Efforts to Reduce Fiscal Exposure, GAO (Oct. 24, 2017), https://www.gao.gov/products/GAO-17-720.

The Report notes that each sector’s ability to adapt to its climate change risk will produce uneven impacts on sectors. For example, “protective adaptation measures – such as beach nourishment, property elevation, shoreline armoring, and property abandonment – can reduce projected coastal property damage.”

Uneven Regional Impacts

The Report suggests that potential economic effects of climate change will be likely be unevenly distributed across regions as well. To illustrate, ACP reported that individual states could experience uneven impacts. By the end of the century, Vermont could possibly see a 0.8 to 4.5 percent annual benefit to economic output compared to Florida’s 10.1 to 24% net annual economic costs.

The Report also identifies anticipated types of climate impacts specific to different regions of the US, ranging from increases in coastal infrastructure damage and heat-related mortality in the Southeast, to a decreased agricultural yield and decreased cold-related mortality in the Midwest. A key study cited by the report notes that the Southeast, Midwest, and Great Plains regions will likely experience the greatest economic impacts in coming years.

Report’s Recommendations

The Report finds that collecting and identifying information on potential economic impacts of climate change is the first step toward effective climate risk management at the federal level. The Report points out the absence of any government-wide strategic planning efforts to help set clear priorities for managing significant climate risks before they become federal fiscal exposures, suggesting that, “climate change risk management efforts need to be focused where immediate attention is needed and that, by prioritizing federal climate risk management activities well, the federal government can help to minimize negative impacts and maximize opportunities associated with climate change.” The Report calls for more comprehensive information on economic effects to better understand potential costs of climate change to society to better inform decision maker’s cost-benefit analysis of different adaptation options. GAO recommended that the appropriate entities within the Executive Office of the President, including the Council on Environmental Quality, Office of Management and Budget, and Office of Science and Technology, use the information presented in the Report to help identify significant risks and craft appropriate responses to climate change on the federal level.

New York Public Service Commission Adopts Compensation Values for Distributed Energy Resources in Reforming the Energy Vision Proceeding

Posted in Energy regulatory, Solar PV/Rooftop solar

By Michael Gergen, David E. Pettit and Christopher Randall

solar panelsOn September 14, 2017, the New York Public Service Commission (NYPSC or the Commission) issued its Order on Phase One Value of Distributed Energy Resources Implementation Proposals, Cost Mitigation Issues, and Related Matters (the Implementation Order). The Implementation Order sets the methodologies by which utilities throughout the state of New York will determine the Value of Distributed Energy Resources (VDER). It follows the Commission’s March 9, 2017 Order on Net Metering Transition, Phase One of Value of Distributed Energy Resources, and Related Matters (the VDER Phase One Order), which the Commission issued in furtherance of the State’s Reforming the Energy Vision (REV) initiative and is analyzed in a prior Latham & Watkins Client Alert.

In accordance with the VDER Phase One Order, each utility in the state submitted an Implementation Proposal addressing calculation and compensation methodologies for Distributed Energy Resources (“DERs”). The Implementation Order largely approves the utilities’ Implementation Proposals, with certain modifications relating to the recovery of VDER costs, the methodology behind the Installed Capacity credit, and the calculation of Market Transition Credits. The Order also addresses certain issues associated with the Value Stack for DERs and cost mitigation.

In general, solar energy advocates have reacted negatively to the Implementation Order. They assert that there is significant variation in how utilities calculate their respective Utility Marginal Cost of Service (MCOS), which is used to establish demand reduction value (DRV) and locational system relief value (LSRV) for DERs in their service territories. Because the DRV and LSRV inform the overall Value Stack associated with DERs, solar advocates claim that DER compensation will vary wildly from utility to utility. To illustrate this point, they note that proposed utility MCOS values range from $226/kW (Con Edison) to $15/kW (Central Hudson). While the Commission’s Order acknowledges the desire among some commentators for a more standardized valuation methodology, it concludes that Phase One is too early to implement such measures and instead will consider this issue as part of VDER Phase Two.

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California’s Supreme Court Denies ARB Petition To Review LCFS Case

Posted in Finance and project development, Permitting

By Joshua T. Bledsoe and Kimberly Farbota

In a previous post, we described how potential delays in the resolution of the case commonly known as POET I could create uncertainty regarding the future of the California Low Carbon Fuel Standard (LCFS). On August 23, 2017, the Supreme Court of California issued an order: (1) denying California Air Resources Board (ARB)’s petition for review of the appellate decision in POET I; (2) denying ARB’s request for an order directing depublication of the associated opinion; and (3) remitting the case to the Fresno County Superior Court.

As we have discussed in previous posts, the POET I case arises from petitioner POET, LLC’s challenges to the original LCFS regulation adopted by ARB in 2009. On April 10, 2017, the Court of Appeal ruled that ARB had failed to faithfully execute a writ of peremptory mandate requiring it to remedy violations of the California Environmental Quality Act (CEQA) that occurred during adoption of the original LCFS. In response to a petition for rehearing filed by ARB, the Court of Appeal reissued its opinion on May 30, 2017. The revised opinion narrows the holding to focus more squarely on the facts of the case, but does not substantively alter the April 10, 2017 opinion. On July 10, 2017, ARB filed a petition with the California Supreme Court seeking depublication of the May 30, 2017 opinion, or in the alternative, Supreme Court review. In the petition, ARB argued that the decision should be depublished because it creates unnecessary confusion about how agencies and courts should address uncertainty under CEQA. ARB also argued that Supreme Court review could provide clarification regarding the standards by which compliance with a CEQA-related writ should be measured. As is common practice, the Supreme Court’s August 23, 2017 order did not provide the Court’s reasons for denying ARB’s petition and request.

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Uncertainty Looms with Delays to Resolution of California’s Low Carbon Fuel Standard Program Challenges

Posted in Environmental and approvals, Finance and project development, Permitting

By Joshua Bledsoe and Kimberly Farbota

Two recent developments in the interrelated legal challenges commonly known as POET I and POET II may create additional uncertainty for the future of the Low Carbon Fuel Standard Program (LCFS).

Earlier this year, the California Court of Appeal for the Fifth Appellate District (Court of Appeal) issued two opinions in the POET I case, both of which were adverse to the California Air Resources Board (ARB). As we have discussed in previous posts, the POET I case arises from petitioner POET, LLC’s challenges to the original LCFS regulation adopted by ARB in 2009. On April 10, 2017, the Court of Appeal ruled that ARB had failed to faithfully execute a writ of peremptory mandate (the Writ) requiring it to remedy violations of the California Environmental Quality Act (CEQA) that occurred during adoption of the original LCFS. In the opinion, the Court of Appeal largely agreed with petitioner POET, LLC, finding that ARB failed to comply with CEQA’s requirement that it analyze the degree to which nitrogen oxide (NOx) emissions would be impacted by implementation of the LCFS.

In response to ARB’s petition for a rehearing, the Court of Appeal reissued its opinion on May 30, 2017. The revised opinion narrows the holding to focus more squarely on the facts of the case, but does not substantively alter the April 10, 2017 opinion. In the revised opinion, the Court of Appeal assigned continuing jurisdiction to the Fresno County Superior Court (Superior Court) over POET I pending ARB’s completion of the revised NOx analysis and discharge of a reissued writ. Continue Reading

Court Reissues LCFS Opinion Per ARB Petition For Reconsideration

Posted in Finance and project development, Permitting

By Joshua T. Bledsoe and Max Friedman

As discussed in a previous post, the California Court of Appeal for the Fifth Appellate District (Court of Appeal) ruled on April 10, 2017 that the California Air Resources Board (ARB) had failed to properly follow a writ of peremptory mandate (the Writ) requiring ARB to remedy violations of the California Environmental Quality Act (CEQA) that occurred during adoption of the original Low Carbon Fuel Standard (LCFS). The Court of Appeal largely agreed with the petitioner, POET, LLC (POET), a South Dakota-based ethanol producer, holding that ARB had failed to comply with CEQA’s requirement that it analyze the degree to which nitrogen oxide (NOx) emissions from biodiesel fuels had been and would be impacted by the implementation of the LCFS. Indeed, the Court of Appeal found that ARB had acted in bad faith in selecting a definition of the “CEQA project” that failed to account for NOx emissions attributable to the original LCFS.

As a result, the Court of Appeal directed the Fresno County Superior Court (Superior Court) to deny ARB’s request for dismissal of the Writ and to set aside its 2015 approval of the CEQA analysis regarding NOx emissions from biodiesel until ARB had conducted a revised analysis. The Court of Appeal also froze the carbon intensity (CI) targets for diesel fuel at 2017 levels until ARB had completed its revised NOx assessment. The Superior Court implemented the Court of Appeal’s ruling on April 20, 2017, vacating its prior discharge of the Writ and modifying the reissued Writ as required by the higher court. However, on April 28, 2017 the Superior Court vacated its April 20th order as premature due to subsequent filings by ARB.

On April 25, 2017, ARB and intervenor-respondent the Natural Resources Defense Council (NRDC, and together, Respondents) filed a petition with the Court of Appeal requesting rehearing and modification of its prior ruling. While asserting that ARB already had commenced its work on the revised NOx analysis, Respondents requested that the Court of Appeal make modifications to its prior ruling to clarify alleged ambiguities. Respondents requested that the Court of Appeal clarify which specific provisions of the LCFS regulations the Court of Appeal was targeting to effectuate freezing the diesel CI mandates at 2017 levels. ARB interpreted the freeze to apply to Table 2 of Section 95484(c) of the LCFS regulations, which sets the CI targets applicable to diesel fuel and its substitutes, but wished to confirm its interpretation so as to avoid future litigation over the Court of Appeal’s intent.

Second, Respondents sought clarification that the Court of Appeal did not intend to require an agency amending any regulation to define the “CEQA project” as including the original regulation, potentially even when the original regulation had gone unchallenged or been upheld. ARB understood the Court of Appeal to mean that the project included the original LCFS only for those portions of the CEQA analysis addressing NOx impacts. ARB sought to confirm that the Court of Appeal did not intend to interpret the term “project” so broadly, either for all portions of this case or for future agency actions. ARB argued that such a broad reading could significantly increase the time and expense necessary for agencies to revise even unchallenged regulations, with ambiguity increasing the likelihood of future CEQA litigation on this issue.

Finally, Respondents attempted to push back against the Court of Appeal’s finding that ARB had not acted in good faith when conducting its revised CEQA process with respect to NOx emissions. ARB argued that it had not previously been obvious that the instructions in the Writ contemplated an interpretation of the “project” as including the original regulation, and that ARB had acted reasonably, transparently, and thoroughly in accordance with its understanding of the Writ, without receiving any objections to its approach until after the fact.

On May 5, 2017, the Court of Appeal granted Respondents’ petition for rehearing and directed POET and other Petitioners to respond to Respondents’ brief on the proposed modifications. Petitioners filed their response on May 16, 2017, arguing that the Court of Appeal should deny the modifications sought by Respondents. POET disputed ARB’s reading that the Court intended the “project” to encompass the original LCFS regulation only for purposes of the NOx emissions section, rather than for the entire LCFS regulatory regime. POET suggested that the Court of Appeal’s intent was, in fact, to assert that the project included both the original and revised LCFS regulations (as well as the 2015 Alternative Diesel Fuels (ADF) regulations) for all purposes. Petitioners suggested that ARB’s interpretation was contrary to established CEQA precedent, constituted a major revision of the ruling, and should be rejected.

Similarly, Petitioners disputed ARB’s claims that it had acted in good faith and called upon the Court of Appeal to reject Respondents’ request that the bad faith portion of the opinion be struck. Petitioners challenged ARB’s argument that its interpretation of “project” was reasonable due to the novel nature of the Court of Appeal’s application of the term to a regulatory scheme; POET suggested that there was nothing novel or ambiguous about the situation. Petitioners also contested ARB’s contention that it had provided early notice of its narrow definition of the CEQA project and that it had disclosed the quantity of earlier NOx emissions in its Draft Environmental Assessment. POET did not oppose Respondents’ request for clarification regarding identification of the particular regulations to freeze, but suggested that clarification was unnecessary.

On May 24, 2017, the Court of Appeal filed an order stating that no further briefing or oral argument would be required, and that the matter was deemed submitted. A week later, on May 30, 2017, the Court released its revised opinion. The Court of Appeal only made a few minor modifications to its original decision. In short, the revised opinion changes little about the Court of Appeal’s original opinion, although it does provide ARB and other LCFS stakeholders with a greater degree of certainty regarding the precise meaning of certain sections of the opinion.

The Court of Appeal adopted ARB’s suggestions for clarifying that the freeze applies only to the CI standards applicable to diesel fuel and its substitutes, as set out in Table 2 of Section 95484(c) of LCFS regulations. The Court of Appeal also partially clarified its intent regarding the scope of the “CEQA project.” While the Court of Appeal did not adopt ARB’s suggested changes to the opinion, it did nod toward the agency’s concern that a broad definition of the “project” could have implications for future litigation. The Court modified one sentence, in an apparent effort to confine its definition of the project to the context of this case, stating: “Therefore, we conclude that for purposes of CEQA the activities associated with the original LCFS regulations, the 2015 LCFS regulations, and the ADF regulations constitute a single project under the circumstances of this case.”[1] This change was not nearly as expansive as what ARB had requested, but it appears to be an effort to limit the Court of Appeal’s interpretation to the facts of the case. Additionally, the Court of Appeal declined to amend its language regarding ARB’s lack of good faith in assessing NOx impacts. While the Court was willing to clarify certain ambiguities in its original opinion, it was unwilling to reconsider substantive issues, such as whether ARB had acted in deliberate bad faith.

This revised opinion pauses judicial proceedings in this particular case regarding the original LCFS (POET I), at least until ARB has completed its revised NOx analysis and seeks discharge of the reissued Writ. However, the parallel case between POET and ARB regarding the readopted LCFS (POET II) is slated for oral argument in the Superior Court on July 26, 2017. Many of the same issues litigated in POET I will be before the Superior Court in POET II court, which is why the Superior Court previously delayed oral argument until after POET I had been resolved by the Court of Appeal. While it is likely that the Superior Court in POET II will borrow from the Court of Appeal’s recent POET I ruling (indeed, some of the issues in POET II may be precluded by res judicata), there remains a real possibility that the Superior Court in POET II could upend certain other portions of the readopted LCFS regulations. This added uncertainty will not be resolved for months—or even longer if the POET II ruling is appealed.

[1] Emphasis added to indicate new text.

Proposed Amendments to Cap-and-Trade Extension Bill Could Undermine Program

Posted in Environmental and approvals, Permitting

By Bob Wyman, JP Brisson, Joshua Bledsoe, Andrew Westgate, and Brittany Dryer

On April 18, 2017, California Assembly Members Garcia, Holden, and Garcia proposed amendments to Assembly Bill No. 378 (AB 378) that are intended to extend but significantly reshape California’s Cap-and-Trade Program.[1] This post briefly summarizes the backdrop against which AB 378 has been proposed and discusses the key provisions of AB 378.

Summary

The Members initially introduced AB 378 on February 9, 2017 to “make sure social justice [and] environmental justice [are] addressed” as the California Legislature contemplates how to meet Governor Brown’s 2030 greenhouse gas (GHG) emission reduction goals, as codified in Senate Bill 32 (SB 32).[2] As discussed below, it would appear that the amendments to AB 378 would support the extension of the Cap-and-Trade Program through 2030. The amendments to AB 378, however, propose a number of fundamental changes to the Program. For example, the amendments would create individual facility GHG emissions caps and empower the California Air Resources Board (ARB) to establish “no-trade zones” and facility declining caps. These changes, taken together, would gut the flexibility that is otherwise inherent to a cap-and-trade program, convert the Program into an unwieldy command-and-control mechanism, and ultimately undermine the ability of the state to meet the SB 32 GHG emission targets in a cost-effective way. Finally, the amendments also would require ARB to adopt new criteria pollutants and air toxics emissions standards in response to ongoing concerns expressed by the Environmental Justice (EJ) Community. Continue Reading

California Court Rules Against Air Resources Board over LCFS but Preserves 2017 Status Quo

Posted in Environmental and approvals, Finance and project development

By Joshua T. Bledsoe and Max Friedman

In two recent posts, we discussed how California’s Low Carbon Fuel Standard (LCFS) had been thrown into a state of potential upheaval by two interrelated legal challenges commonly known as POET I and POET II, including a recent oral argument before the California Court of Appeal for the Fifth Appellate District (Court of Appeal) in POET I. That proceeding aimed to determine whether a lower court correctly dismissed a writ of peremptory mandate (the Writ) requiring the California Air Resources Board (ARB) to remedy violations of the California Environmental Quality Act (CEQA) that occurred during promulgation of the original LCFS regulation. ARB re-adopted the revised LCFS regulations in September 2015, but POET, LLC (POET), a South Dakota-based ethanol producer, contended that these revisions failed to properly discharge ARB’s responsibilities under the Writ.

Court Rules Against ARB over NOx Analysis

In its published April 10, 2017 opinion in POET I, the Court of Appeal largely agreed with POET, reversing the lower court’s dismissal of the Writ and holding that ARB had failed to comply with CEQA’s requirement that it analyze the degree to which nitrogen oxide (NOx) emissions from biodiesel fuels had been and would be impacted by the implementation of the LCFS rules. The Court found that ARB’s failure to properly define the scope of the project caused ARB to use an improper baseline against which NOx emissions could be measured. As a result, the Court concluded that ARB’s analysis of NOx emissions from biodiesel fuel was deficient under CEQA, and the environmental analysis was inadequate as an informational document disclosing the entirety of the project’s impacts. Continue Reading

U.S. Army Corps Reissues Fifty Existing and Two New Nationwide Permits

Posted in Energy regulatory, Environmental and approvals, Permitting

By Janice Schneider, Joel Beauvais, Stacey VanBelleghem, Jennifer Roy, and Francesca Bochner

On March 19, 2017, 52 new or reissued nationwide permits (NWPs) for discharges into “waters of the United States,” issued pursuant to Section 404(e) of the Clean Water Act (CWA) and Section 10 of the Rivers and Harbors Act went into effect. The U.S. Army Corps of Engineers (Corps) requires a Section 404 permit when development activities discharge dredged or fill materials into jurisdictional waters (i.e., “waters of the United States,” including wetlands). The NWPs – which are used to permit tens of thousands of new projects each year – cover a broad range of activities, including development of oil and gas pipelines, transmission and other utility lines, linear transportation projects, renewable energy, coal mining activities, and residential development. The Corps developed the NWPs as programmatic permits to expedite approval of specific types of activities deemed to have minimal environmental impacts. Seeking authorization under an NWP is less expensive and less time-consuming than obtaining an individual permit.

The prior NWPs were issued in March 2012 and expired on March 18, 2017. In the new NWPs, the Army Corps: (1) reissued all 50 of its existing NWPs, with revisions to twenty-seven; (2) issued two new permits; and (3) added one new general condition. The new NWPs include a grandfather provision that allows activities authorized under the 2012 NWPs that have commenced or are under contract to commence by March 18, 2017, to have until March 18, 2018, to complete the activity under the terms and conditions of the 2012 NWP. Activities that have not commenced by March 18, 2017, and/or will not be complete by March 18, 2018, must seek authorization under the new NWPs.

While the 2017 NWPs largely preserve the availability of these critical general permits without major changes, the revised permits incorporate a number of new features that may affect both new and existing projects in key industry sectors. Further, it is likely that environmental groups will challenge the NWPs in court on a number of grounds, including the National Environmental Policy Act, the Endangered Species Act, and consistency with the requirements of CWA Section 404(e). Effective implementation and successful defense of the new permits will be of critical importance for multiple sectors – including oil and gas, electric utilities, mining, and others. Latham & Watkins’ Environment, Land and Resources attorneys participated directly and intensively in the development of the new 2017 NWPs, and have substantial experience in securing and defending NWP authorizations for new projects. For further discussion of the new NWPs, including important changes to the permits and issues likely to be raised in future litigation, please see our Client Alert.

California Court of Appeals Upholds Cap-and-Trade Auctions

Posted in Energy regulatory

By Michael Romey, J.P. Brisson, Michael Dreibelbis and Andrew Westgate

Yesterday, the Court of Appeals for California’s Third Appellate District issued its decision in California Chamber of Commerce, et al., vs. State Air Resources Board, et al., upholding the district court’s decision and allowing the cap-and-trade system to remain in place. The suit was filed by business groups just prior to the state’s first auction of allowances in 2012, arguing that the sale of allowances exceeded the Air Resources Board’s authority under AB 32 and is an unconstitutional tax under Proposition 13, which requires a supermajority in the legislature to pass tax increases (AB 32 did not have such a supermajority).

In the 2-1 decision, the court held that the legislature gave broad discretion to the Air Resources Board to design a distribution system to distribute allowances, and the decision to implement auctions was a valid exercise of that discretion. Turning to the Proposition 13 question, the court held that the “tax or fee” analysis in Sinclair Paint is inapplicable to the cap-and-trade system, and that purchase of cap-and-trade allowances at auction is a “voluntary purchase of a valuable commodity and not a tax under any test.” The trial court had treated the auction program as a regulatory fee.

In a vigorous dissent, Justice Hull agreed with the majority that ARB did not exceed its authority in choosing an auction system, but argued that the auctions are an unconstitutional tax because they are not voluntary, because the allowances do not confer any property rights, and because the some of the proceeds have been used for non-regulatory purposes, which Justice Hull called “a hallmark, if not the gold standard,” for determining if a state exaction is a tax.  The California Chamber of Commerce and other business groups will likely pay close attention to Justice Hull’s dissent in weighing whether to appeal the decision to the California Supreme Court.

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