Calif. regulators scramble in wake of court ruling on emissions law

California's climate change law is not in danger of outright reversal following a court decision this week that suspended it, but the deadline for approving a cap-and-trade carbon market later this year is in doubt, according to state government and legal experts following the process.

If that deadline, which requires the state's Air Resources Board to vote on cap and trade in October, slips even one day into November, a ripple effect could delay greenhouse gas regulations set to go live on Jan. 1, 2012.

That is because the air board adopted a draft version of its cap-and-trade regulation last October that gives the agency a year to finalize the rule. If the agency fails to meet the deadline, board members must go back to square one and likely endure another lengthy public comment process, a former senior ARB official said.

Meeting the deadline "can still happen, but there are still a lot of unknowns," said Jon Costantino, an architect of the air board's climate plan who has since become a senior adviser at a Sacramento law firm, Manatt, Phelps & Phillips LLP.

The suspension of all work related to the law stems from a ruling by San Francisco County Superior Court Judge Ernest Goldsmith this week that sent the proposed implementation plan for the law, known as A.B. 32, back to the air board. In a 36-page ruling, Goldsmith said ARB had abused its authority by not doing enough work on alternatives to cap and trade and had failed to comply with the California Environmental Quality Act (ClimateWire, March 22).


The cap-and-trade system, which would apply to 85 percent of emitters by 2020 and enact the largest U.S. carbon market to date, has been challenged by a small but vocal band of environmental justice groups that insist it would disproportionately hurt low-income communities. The Goldsmith ruling effectively freezes action on the state's low-carbon fuel standard, the cap-and-trade market and a 33 percent renewable portfolio standard for electricity by 2020.

Though ARB plans to appeal, in the short term the ruling means the agency will have to submit a more thorough analysis of alternatives to cap and trade, including a carbon tax, direct regulation of emitters, or both. It is anybody's guess whether Goldsmith will accept those analyses as adequate under the law.

Moreover, Costantino said the ruling could mean reopening a public comment process that could drag through the summer -- all while the air board is supposed to be working to finalize key aspects of cap and trade it left hanging last year. These include how to deal with revenue from carbon credit auctions, how many allowances to give electric utilities and what percentage of the greenhouse gas cap could be met with offsets.

"If they can quickly get this analysis out in front of the public and back to the judge, they can get back online," he said.

What the agency has going for it is that ARB officials say they conducted a more extensive study of alternatives but then failed to include that analysis in the rulemaking last year. So according to the air board, much of the work required by the judge has already been completed.

But those behind the lawsuit question the validity of that study, arguing that the board -- under political pressure -- never seriously considered alternatives to cap and trade and therefore never studied the public health effects of a carbon market on communities in Southern California with some of the worst air pollution in the state.

"They are not complying with the law," said Jesse Marquez, executive director of Coalition for a Safe Environment, which is one of the plaintiffs in the case. "That study was never proposed during the public process. They had an obligation to put it forward to the public."

Local regulation vs. broader market

Marquez went on to say the litigants in the case will not be satisfied until cap and trade is completely eliminated from the air board's plan for achieving the cuts outlined in A.B. 32 to 1990 levels by 2020. The groups are holding out for one policy: direct regulation.

When asked if there were any concession his group would make on a carbon market, Marquez replied, "Absolutely no."

"Even if you put in a tax, a tax still allows refiners to continue polluting," he added. "They'll just spend millions to offset their pollution. The only way to offset refiner pollution is to eliminate refiner pollution."

Marquez explained that his group is based in Wilmington, Calif., a city bordering the Port of Los Angeles that is 87 percent Latino and close to three refiners. He insists neither cap and trade nor a carbon tax would do a thing to stem pollution from the refiners, as it would give refining companies and others the right to lower carbon output indirectly by purchasing offsets or paying a carbon fee to comply.

"Every oil refinery in Wilmington puts out hundreds of tons of pollution every single year because there is no direct regulation that makes them reduce it to 'less than significant,'" he said. "The reason that has not happened is because [the ARB] is staffed by political appointments. What they do is they negotiate with the polluting industry in terms of what they are willing to do."

ARB, for its part, has pledged to take the communities into account, promising that revenues from credit sales would be used, in part, to lower pollution or help lower-income residents. The air board is discussing possible remedies directly with plaintiffs in the suit, to include community benefits funds that might soften the blow, but if Marquez's strong words are an indication of the groups' negotiating stance, the agency has its work cut out for it.

Earlier this week, an agency spokesman said attorneys will request clarification from the judge on the scope of the order so the A.B. 32 process might continue on schedule. The spokesman did not respond to further inquiries seeking comment for this story.

To Costantino, the only way the environmental justice groups "will come off their stance" is to devise additional regulations locally that might at least resemble direct regulation locally.

Rethinking cap and trade?

Alice Kaswan, an environmental law professor at the University of San Francisco, does not believe the ruling will "ultimately derail" the climate law. But she does think some unanticipated policy shifts may be in order to satisfy the low-income communities.

"Given the many ancillary environmental consequences of a cap-and-trade program, particularly for co-pollutants, it is conceivable that, as a consequence of more detailed CEQA analysis, CARB would modify its cap-and-trade design to better maximize co-pollutant reduction benefits," she wrote in an email.

What does that mean? Kaswan said the agency might -- following the new CEQA analysis -- decide to impose a stricter limit on the number of allowable offsets to get more reductions directly from regulated sources.

Or, in the industrial sector, the agency might decide to emphasize efficiency improvements, to achieve greenhouse gas reductions with "more certain" benefits.

"CARB might then enact a combination of regulatory and trading mechanisms, rather than relying exclusively on a cap-and-trade program," she said.

Kaswan went on to say that straying a bit from strict cap and trade might be pragmatic for political reasons, but she also noted that the agency under ARB chief Mary Nichols -- an appointee of former Gov. Arnold Schwarzenegger (R) -- has always been deeply committed to its market-based approach.

"Realistically, I think it fairly unlikely that additional CEQA analysis will change CARB's regulatory agenda," she said. "On the other hand, that commitment to pure cap and trade might have been influenced by Governor Schwarzenegger's focus on market mechanisms. Governor [Jerry] Brown [D] could be more open to alternative designs, and renewed CEQA analysis might provide an opening for alternative cap-and-trade design."

Sullivan reported from San Francisco.

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