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Calif. Chamber sues to stop cap and trade, calling it an illegal 'tax'

The California Chamber of Commerce filed a lawsuit yesterday seeking to halt the Golden State's cap-and-trade auctions, which are set to start today as the landmark program kicks off.

In a state Superior Court complaint, the business group charged that California lacks the authority to sell carbon allowance permits because that isn't explicitly sanctioned by the state's climate law, A.B. 32. The suit, filed in Sacramento, also claims that the system is a tax requiring approval from two-thirds of the state Legislature.

CalChamber, as it's known in the state, called the California Air Resources Board's sale of allowances a "money grab" that over the life of cap and trade will cost taxpayers $70 billion.

"This action by an unelected state board to use regulatory statutes to raise tens of billions of dollars from taxpayers is unprecedented in our state's history," CalChamber said in court papers. "Even the elected and democratically accountable Legislature and governors of California have never imposed such a massive tax/fee."

The lawsuit arrived on the eve of the state's inaugural allowance auction, seen as the unofficial start to cap and trade. The economywide program starts in earnest next year, when businesses will be required to submit permits for a portion of their emissions. By 2015, they will need to produce enough to cover all their carbon pollution for the two-year period.

Whether cap and trade survives will have national repercussions, observers said.

"It's the most comprehensive program to reduce greenhouse gas emissions that the United States has seen," said Tim Profeta, director of the Nicholas Institute for Environmental Policy Solutions at Duke University, which worked with California on its system. "Whether it succeeds or fails will talk to the larger political debate about whether it's feasible across the country."

The new lawsuit will not affect the auction, Stanley Young, communications director for the Air Resources Board (ARB), said yesterday. The agency today plans to sell 62.6 million allowances, about one-third for use covering companies' emissions through 2013. Businesses can submit the remainder -- called "vintage" -- starting in 2015.

"We are reviewing the lawsuit but are confident that the cap-and-trade program will withstand any court challenge," Young said. "This market-based approach to cutting greenhouse emissions gives businesses the flexibility to best decide how to reduce their emissions."

The suit does not challenge ARB's right to run a cap-and-trade program, but rather whether it has the power to issue allowances to itself, auction those and keep the proceeds for the state. CalChamber, along with business group California Manufacturers and Technology Association (CMTA), has argued that the state should give away all permits and let the cap as it tightens push carbon emissions down.

"The business community has repeatedly underscored the fact that the auction will raise energy costs significantly in the state, harm the economy and impact California's competitiveness, without providing any additional environmental benefits," CalChamber said in a statement.

An '11th hour' strategy of attack

CalChamber in its suit did not ask for a temporary restraining order, the mechanism that normally would be requested in a bid to block the auction, legal experts said. Some cap-and-trade supporters questioned why the suit was filed so close to the auction and without that provision.

"It seems like with the timing of this, the plaintiffs are not trying to delay this auction, but they could be trying to affect the markets or introduce some doubt," said Erica Morehouse, staff attorney with the Environmental Defense Fund (EDF). "It's far too late for the courts to invalidate the [initial] auction.

"There's something a little suspicious about the timing of the lawsuit," Morehouse added.

CalChamber did not respond to numerous requests about the timing or other aspects of the case.

Filing the suit yesterday could have been calculated to generate publicity while also allowing for the sale of permits, needed to show that the state is raising revenue, said Jon Costantino, senior adviser with law firm Manatt, Phelps & Phillips in Sacramento and former climate change planning manager at ARB.

"If you don't want to actually stop the first [auction], then it's fine," he said. "If you want the first one to take place and money to change hands, then you don't want to file it too early, because that's a theoretical debate you're having, as opposed to if money was transferred and revenues actually collected."

There will be eight auctions before the first allowances have to be turned in, he said, with the next one coming in February 2013.

The market is unlikely to be adversely affected by the suit, even with it arriving the day before, several people said.

After news of the claim broke, advance trading in allowances was roughly consistent with levels of the past few days, said Samantha Katz, managing director of BGC Brokerage. Vintage-year 2013 allowances due in December 2013 were fetching $12.30 per ton, she said.

Prices had already reflected the assumption that a lawsuit was imminent, she said. "People are under the assumption that we will see lawsuits," Katz said. "The question of whether we'd see them before or after the auction was up in the air."

"There was always an expectation the chamber might try to do something like this at the eleventh hour," said Nancy Pfund, managing partner at DBL Investors, a venture capital firm that has helped finance clean technology companies. "I don't think the investment community is going to take it as any kind of a blow."

People and businesses have repeatedly challenged cap and trade and "still it moves forward," Pfund said.

Suit claims damage to economy, consumers and jobs

A group representing green businesses that want cap and trade to start said CalChamber should accept the will of the people.

Californians in 2010 overwhelmingly rejected Proposition 23, which would have shelved cap and trade. In addition, state voters have just passed Proposition 39, which will change how some businesses are taxed and provide up to $2.75 billion for clean energy efforts, noted Susan Frank, director of the California Business Alliance for a Green Economy, a network of businesses that support green power policies (ClimateWire, Nov. 7).

"The chamber along with the CMTA have been long been opposed to A.B. 32 and have tried every which way to stop the program, delay the program," Frank said. "They've met defeat at every turn, so they're trying again."

CalChamber President and CEO Allan Zaremberg said that cap and trade won't succeed if it hurts businesses.

"Unless we adopt the most cost effective way of reducing carbon emissions, other states will not follow us," he said in a statement. "The current CARB proposal is the most costly way to implement A.B. 32 and it will hurt consumers, the job climate, and the ability of businesses to expand here."

Many observers said that the suit was not a surprise. Observers were anticipating claims around a number of state and federal laws.

The CalChamber claim states that A.B. 32 gives ARB only limited authority in running cap and trade but doesn't allow it to "raise billions of dollars of revenue for the state by withholding and auctioning off or selling of a percentage of the statewide GHG emissions allowances."

"The only fee authorized by A.B. 32 is a regulatory fee limited to covering ordinary administrative costs of implementing the GHG emissions regulatory program," the suit adds. "Likewise absent from A.B. 32 is any implied authority for the Air Resources Board to keep for itself a percentage of the statewide GHG emissions allowances and then sell them to raise billions of dollars of revenue for the state."

If those claims were upheld by the court, it would effectively hobble cap and trade, said Costantino, the former climate change planning manager at ARB. "ARB would have to go back to the drawing board," Costantino said.

Defenders say Legislature gave regulators 'significant discretion'

Two legal experts, however, said they believe ARB has the authority to auction allowances.

A.B. 32 grants the agency "significant discretion in designing policies to cut the state's greenhouse gas emissions," said Ann Carlson, director of the Emmett Center on Climate Change and the Environment at the University of California, Los Angeles. She briefly reviewed the claim along with Cara Horowitz, executive director at the center.

"The Legislature clearly contemplated cap and trade as one of those measures and indeed included language in A.B. 32 authorizing 'market mechanisms' to cut emissions," Carlson said. When the climate law passed, she said, it was clear that ARB would need to make numerous design choices, including whether allowances would be given away or auctioned.

"There is no indication that the Legislature meant to cabin CARB's discretion in any of these areas," Carlson said. "We think a court is likely to defer to CARB about the design choices it has made, including the choice to auction a portion of the allowances."

The lawsuit's claim that the cap-and-trade auctions constitute a tax could also be flawed, Carlson asserted.

"Regulated parties with compliance obligations, many of whom are allocated allowances for free, need not buy the allowances," Carlson said, adding that "an emitter subject to a compliance obligation under the cap-and-trade program could cut its emissions rather than purchase allowances at auction to cover emissions. Thus the auction could be viewed as akin the selling off of state property, not the levying of a tax."

If the auction is not a tax, she said, the lawsuit should be dismissed.

The suit charges that "courts must presume that the Legislature did not intend to give the [ARB] authority to take unlawful action or action that raises serious doubts as to A.B. 32's constitutionality. Bills that impose or increase taxes must be adopted by a two-thirds vote in each house of the Legislature. Because A.B. 32 did not receive such a super-majority vote, it cannot be interpreted as delegating to [ARB] the power to impose a tax."

The suit repeatedly refers to the allowance auction as a tax/fee. Under Proposition 13, passed by California voters in 1978, any new tax must be passed by a two-thirds vote of the Legislature. Proposition 26, passed in 2010, said that fees must be approved by two-thirds of voters. Some legal experts, however, have said that the ballot measure doesn't apply because it came after the 2006 passage of the state's climate law.

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