By Michael Feeley and Aron Potash

A lawsuit which delayed and once threatened to dismantle California’s greenhouse gas (GHG) cap and trade scheme was largely resolved last week, removing one roadblock to California’s plan to be the first state to impose an economy-wide GHG trading program.  Under modified regulations adopted by the California Air Resources Board (CARB) on October 20, 2011, California will require certain emitters of GHGs to obtain allowances or offsets in amounts commensurate to their respective emissions beginning in 2013.  CARB may be forced to navigate other legal challenges, however, prior to the start of the cap and trade program. 

The roadblock CARB cleared last week arose out of a suit in which environmental groups, including the Association of Irritated Residents (AIR), alleged that CARB failed to comply with the California Environmental Quality Act (CEQA) in approving the Scoping Plan, CARB’s detailed roadmap for reducing GHG emissions pursuant to the Global Warming Solutions Act of 2006 (AB 32).  CARB is the agency primarily responsible for implementing AB 32, which requires California to reduce GHG emissions to 1990 levels by 2020.  CARB has promulgated regulations covering many of the initiatives detailed in the Scoping Plan, including the centerpiece cap and trade regulations in December 2010.  Although it may at first blush seem counterintuitive that environmental groups would file a lawsuit challenging a GHG reduction plan, the plaintiffs expressed environmental justice concerns with the cap and trade program and argued that a carbon tax would be a preferable approach for achieving the AB 32 emission reductions. 

A May 20, 2011, San Francisco Superior Court ruling agreed with the plaintiffs’ assertion that CARB’s CEQA analysis of cap and trade alternatives was inadequate.  The court ordered CARB to redo the CEQA analysis and enjoined any further cap and trade rulemaking until CARB did so.  CARB approved an updated CEQA analysis in August.  In a December 5, 2011, order the court found the updated analysis to be adequate and discharged the writ of mandate it had previously entered.    

Although the now-discharged writ of mandate was stayed by an appellate court, the legal maneuvering may have played a role in delaying the start of the cap and trade program.  When CARB approved the original cap and trade regulations in December 2010, it directed its staff to issue proposed modifications to the regulations in 2011 to address a large number of comments and unresolved issues.  The injunction prevented CARB from issuing these proposed changes to the cap and trade regulations as quickly as it had initially planned.  CARB was not able to release proposed changes to the cap and trade regulations until July and September 2011.  Among many other changes, these regulations pushed the start date for cap and trade compliance obligations back from 2012 to 2013 (although CARB claimed that it was not the lawsuit that forced the change in the start date).  On October 20, CARB adopted the September version of the proposed regulations (which are discussed in detail here).

Expect to see additional modifications to the cap and trade regulations in 2012—when approving the modified cap and trade regulations in October, CARB requested that staff go back and make more changes prior to the 2013 start of compliance obligations.  In addition, various entities have discussed filing lawsuits challenging the validity of the cap and trade regulations on other grounds.  The arguments which could form the basis for these lawsuits include: the imposition of cap and trade compliance obligations upon electricity imports is proscribed by the Dormant Commerce Clause of the U.S. Constitution; cap and trade allowance purchase requirements constitute taxes under Proposition 26 and require approval by two-thirds of the legislature to be valid; and, the Federal Energy Regulatory Commission has exclusive jurisdiction over interstate electricity sales under the Federal Power Act, so CARB authority is preempted.  Challenges based on these arguments, or others, could yet delay or derail the cap and trade scheme.