California Court Rules Cap-And-Trade Is Not A Tax

Michael Bastasch | Energy Editor

A state appeals court ruled California’s cap-and-trade program is not an illegal tax.

A panel of three judges upheld the carbon trading system that began in 2012, ruling it does not amount to an illegal tax and that state regulators have the legal authority to operate the system until 2020.

“The system is the voluntary purchase of a valuable commodity and not a tax under any test,” the court ruled.

A coalition of business groups challenged California’s system to reduce emissions blamed for global warming in 2013. Plaintiffs said the state’s 2006 global warming law did not allow the auctioning of emissions permits and constituted an illegal tax.

“I think the judge majority is completely wrong on both issues.” Ted Hadzi-Antich, the senior attorney at the conservative Texas Public Policy Foundation, told The Daily Caller News Foundation.

“I read through the opinion and the majority bends over backwards to achieve what appears to be a preordained result on their part. They are trying to say these payments, to the tune of hundreds of thousands or millions of dollars, are voluntary,” said Hadzi-Antich, who represented plaintiffs at his former employer, the Pacific Legal Foundation.

California Proposition 13 requires new taxes to be approved by a two-thirds vote in both chambers of the state legislature. The global warming law was only passed by a majority vote, thus violating the state’s Constitution, opponents argued.

The court disagreed and ruled forcing some companies to buy cap-and-trade permits did not constitute a tax.

“First, the purchase of emissions allowances, whether directly from the Board at auction or on the secondary market, is a business-driven decision, not a governmentally compelled decision,” the court ruled.

“[S]econd, unlike any other tax to which we have been referred by the parties, the purchase of an emissions allowance conveys a valuable property interest–the privilege to pollute California’s air–that may be freely sold or traded on the secondary market,” the court ruled.

“It’s kind of like saying state income taxes are voluntary because you can always move out of the state,” Hadzi-Antich countered, citing the dissenting opinion by Judge Harry Hull.

California passed its cap-and-trade law in 2006 under former Republican Gov. Arnold Schwarzenegger. The point of the law is to reduce carbon dioxide emissions to 1990 levels by 2030. The cap-and-trade system went into effect in 2012.

The California Air Resources Board (CARB), which oversees the cap-and-trade program, hands out emissions permits and auctions off others, but legal challenges and political uncertainty have bogged down the program, causing permit prices to crash.

California’s cap-and-trade system raised $1 billion from selling permits in 2015, but only $500 million in the past year. There were also concerns over lawmakers and Democratic Gov. Jerry Brown pillaging the cap-and-trade fund to pay for high-speed rail and other pet projects.

Environmentalists cheered the decision, but opponents of cap-and-trade are mulling whether to appeal the ruling to the state Supreme Court.

“The court has thoroughly affirmed California’s innovative climate program, including its carbon auctions that serve as vital safeguards to ensure polluters are held accountable for their pollution,” said Erica Morehouse, a senior attorney at the Environmental Defense Fund (EDF).

“I don’t see how they could not appeal, Hadzi-Antich said. “So much time and effort has gone into prosecuting the case. Also, the economic impact — there’s no other state that requires businesses to bid on permits to emit CO2.”

EDF and other environmental groups intervened in the suit to defend California’s carbon program.

However, the cap-and-trade system isn’t out of the water yet. State lawmakers need to reauthorize the program beyond 2020.

If Democrats can’t extend the program with a two-thirds majority vote, the cap-and-trade system could see future legal challenges brought under Proposition 26, which expands Proposition 13 to fees.

The 2006 law authorizes CARB to collect fees from about 250 industrial sources of greenhouse gases, including “oil refineries, electricity power plants (including imported electricity), cement plants and other industrial sources.”

Democrats have already introduced two bills for a cap-and-trade system that would operate beyond 2020.

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