A Sacramento Superior Court judge issued a before hearing ruling supporting the State of California’s position that the California Air Resources Board (ARB) had the authority under AB 32, to establish an auction as a method of distributing greenhouse gas (GHG) allowances under the cap-and-trade program.  

AB 32, also known as the Global Warming Solutions Act of 2006, requires California to reduce GHG emissions to below 1990 levels by 2020.  Under the cap-and-trade, California industries are tasked with reducing emissions by 147 million tons of CO2, representing approximately 19 percent of the total emissions in the state.

The tentative ruling came the day before the hearing scheduled for Wednesday, August 28, 2013, on arguments from parties challenging ARB’s authority.  The ruling by Judge Timothy Frawley, supports the position advocated by ARB’s attorneys from the California Attorney General’s Office, that the legislature gave ARB the authority to choose a method for distributing carbon allowances when they passed AB 32. 

"At the time AB 32 was enacted, both auctioning and free distribution were widely recognized methods of distributing allowances," he said in a provisional ruling. "In delegating to ARB the authority to ‘design' the ‘distribution of emissions allowances,' the Legislature delegated to ARB the choice of distribution method." 

Plaintiffs’ attorneys, including The Morning Star Packing Co., acknowledged that the Legislature authorized the air board to adopt a cap-and-trade program, but argued that lawmakers never intended to allow the ARB to raise billions of dollars by auctioning off GHG allowances. 

In support of the reasoning behind establishing the auction, the AG attorney’s argued that the auction acts to equitably distribute allowances as well as minimizing costs while increasing benefits, and encouraging early action.  The auction forces companies to reduce emissions in a way distributing free allowances would not, according to the state.  The AG attorneys took the position that the auction isn't compulsory and doesn't call for mandatory participation.  Companies can avoid paying for allowances if they just reduce their emissions.

Pacific Legal Foundation (PLF) attorney Ted Hadzi-Antich, representing plaintiff Morning Star Packing Co., called the ARB’s reasons for the auction an "ivory tower" approach, citing the lack of available options to Morning Star to meet compliance obligations except through the purchase of allowances from the November 2012 auction.  

Most of the hearing was devoted to questions from the judge on the nature of the funds collected under the auction.  Judge Frawley took no position on whether the $500 million in auction revenue collected by the state through the auction constitutes an illegal tax.  

Of the six questions posed by the judge, five were questions related to possible tax characteristics of the money the ARB has collected from industry through the auction. 

Attorneys for the Morning Star Co. and the Cal Chamber spent much of the hearing responding to the judge’s questions on the tax aspects of the auction funds.  They also asserted that the current program is unconstitutional because it was not passed by at least two-thirds of the Legislature – as required by Proposition 13. The attorneys for the state and environmental groups contended the program doesn't amount to a tax and was not enacted for the purpose of raising money for the state.

Near the end of the hearing, the judge allowed the parties to address any issues that weren't raised in their briefs.  Cal Chamber took the opportunity to make arguments against the judge’s tentative ruling. 

Cal Chamber referred to a Bill Report on AB 32, authored by ARB and sent to then Governor Arnold Schwarzenegger, stating that any fees collected would be used only in support of program costs. The ARB also stated that the cost of the program to the industry would be limited to the cost of compliance.

In that same vein, Morning Star’s attorney, addressing the revenue raised by the ARB auction, referring to two exhibits it had provided to the judge: A 2006 letter signed by the author of AB 32, then Assembly Speaker Fabian Nunez, and delivered to the Chief Clerk’s Office for publication in the Legislative file the day after the vote on AB 32. The letter states, "It is my intent that any funds provided ... are to be used solely for the direct costs incurred in administering this division." 

The second exhibit was a video of Speaker Nunez’s floor speech just prior to the final vote on AB 32 wherein he verbally assured legislative members that AB 32 wasn’t intended to raise revenue and that the only revenue to be raised were the administrative fees that were to be used solely for implementation of the program.    

Morning Star then quoted a California Supreme Court case that found that statements made by a bill’s author in an attempt to elicit votes from other legislative members must be given great weight in determining the Legislative intent of a bill.

A final ruling is expected within the next few weeks. 

Click here to view Judge Frawley's tentative ruling.

Article written by John Larrea, CLFP Government Affairs Director