California regulators still might be able to start their greenhouse gas trading program in January 2012, despite a court decision last week to stay the first trading system in the United States for greenhouse gas emissions from power plants, oil and gas refineries, transportation fuels and other heavy industries.
Environmental justice advocates had sued over a provision in the California Environmental Quality Act requiring state agencies to analyze the environmental consequences of their policies. The state Air Resources Board (ARB) did not properly consider alternatives to cap and trade when it picked the market-based mechanism to achieve about 20 percent of overall emissions reductions by 2020, the groups alleged.
On Friday, San Francisco County Superior Court Judge Ernest Goldsmith agreed, ruling that the agency's "functionally equivalent document" that it released in December 2008 to explain its selection of cap and trade was insufficient. ARB must set aside its December 2010 decision approving the trading system for emitters over 25,000 metric tons per year and must cease all rulemaking activities related to cap and trade until it complies with the law, Goldsmith ruled (E&ENews PM, May 20).
"This is what we were hoping the judge would do," said Brent Newell, an attorney for the plaintiff Center on Race, Poverty and the Environment. "We wanted the good parts of A.B. 32 to proceed and the court to only enjoin the cap-and-trade component, and that's exactly what the court did."
Most observers took the view that ARB dodged a potentially fatal bullet in its implementation of cap and trade. Goldsmith could have ruled that a trading scheme was an unacceptable method of reducing emissions. He could also have stayed the entire suite of regulations that the state is pursuing, 69 in all, including a low-carbon fuel standard, local development and smart growth guidelines, and emissions reductions from ships and trucks.
ARB spokesman Stanley Young said the agency would file an appeal today but is also preparing to file a revised alternatives analysis "as soon as possible."
"All interested stakeholders will have an opportunity to participate in the conversation about California's clean energy future," he said in a statement.
State Sen. Fran Pavley (D), who co-authored the 2006 law setting up emissions reduction targets of 1990 levels by 2020, is planning to hold an informational hearing on the decision June 15. "I am pleased that the judge's ruling will not interfere with the core of A.B. 32 implementation involving clean cars, renewables and energy efficiency among other positive measures and that they can proceed as planned," she said.
Trader: 'The sun will come up tomorrow'
The question now is whether ARB can get back on track by Oct. 28, the date that it has to finalize the program according to internal regulations. If it misses the deadline, agency employees will have to begin the process over again, starting with submitting the original cap-and-trade regulation back to the board for approval.
Newell predicted a delay. "I seriously doubt ARB will be ready unless they try and cut corners, but we are standing by to prevent bad-faith conduct by ARB," he said. "A direct challenge to the cap-and-trade regulation itself may come at some point in the future, if ARB elects to retain cap-and-trade as the key component of the scoping plan."
Newell said he was hoping that Gov. Jerry Brown (D) would weigh in against cap and trade. "Governor Brown has not shown his hand yet, so it is unclear whether this administration wants to depart from [ARB Chairman Mary] Nichols' ill-conceived agenda or not,” he said.
Jon Costantino, a former climate change manager at ARB and now a senior adviser with the law firm Manatt, Phelps & Phillips in Sacramento, said the decision would slow the pace of rulemaking unless ARB can get the stay lifted. Agency officials had been conducting private meetings with stakeholders to tie up the plan's numerous loose ends, including how many free allowances each industry would get, whether to allow emitters to invest in certain uncapped sectors to reduce overall emissions, and how to compensate investors in those projects in the event of fraud.
The decision might also delay rulemakings going on at other agencies, including a proceeding in the California Public Utilities Commission on how to spend proceeds from the auction of allowances.
"Previously, ARB viewed the judge's ruling as only telling them you cannot finalize cap-and-trade regulations," Costantino said. "This says stop working on the program, so this is a little more specific."
David Pettit, director of the Natural Resources Defense Council's Southern California air program, said a delay might influence policymakers in other jurisdictions contemplating cap and trade. "I think if the deadline slips, people are going to get nervous about if this is a system that's reasonably easy to implement or if there's going to be a large number of roadblocks in the future," he said.
Carbon traders, like Josh Margolis, CEO of CantorCO2e, were unconcerned. "He didn't say CARB's answer was wrong," he said of Goldsmith's ruling. "Like a math teacher, he sent the [functionally equivalent document] back with a note to Mary [Nichols], 'Show your work.'"
"The sun will come up tomorrow. There will be a cap-and-trade program. We will be trading in 2012."