10 Cal. App. 5th 604
Cal. Ct. App.2017Background
- California enacted AB 32 (Global Warming Solutions Act of 2006) directing the State Air Resources Board (ARB) to adopt market‑based mechanisms, including design of allowance distribution, to reduce greenhouse gas (GHG) emissions to 1990 levels by 2020.
- ARB implemented a cap‑and‑trade program that allocates some allowances free, retains a price containment reserve, and auctions other allowances; allowances are tradable on secondary markets.
- Plaintiffs (CalChamber, Morning Star, others) challenged the auction component on two main grounds: (1) ARB exceeded legislative delegation in creating auctions; (2) auction revenues constitute a tax requiring a two‑thirds legislative vote under Proposition 13 (and later Prop. 26 arguments were raised).
- The trial court upheld the regulations; the Court of Appeal consolidated appeals and affirmed, rejecting the delegation and tax challenges (though it used different reasoning on the tax issue).
- The court emphasized two dispositive facts on the tax question: (1) purchasing allowances is a voluntary, business decision (entities can reduce emissions, buy secondary allowances, bank offsets), and (2) allowances are valuable, tradable commodities conferring the privilege to emit (no vested right to pollute exists).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether ARB exceeded legislative delegation by adopting auctions | AB 32 did not expressly authorize auctions; delegation should be construed narrowly | Statute broadly authorized design of distribution of allowances and market‑based mechanisms; auctions fit within that delegation | Court: Delegation was broad enough; auction authority was within ARB's discretion and later ratified by 2012 legislation |
| Whether auction revenues are a tax under Proposition 13 (require two‑thirds) | Auctions effectively compel covered entities to pay and generate state revenue — thus a tax | Auctions are voluntary market purchases of valuable allowances (not compelled payments); buyers receive tradable property/privileges so not a tax | Court: Not a tax — purchases are voluntary business choices and convey a thing of value, so Proposition 13 not violated |
| Whether the Sinclair Paint regulatory‑fee test controls | Plaintiffs: Sinclair Paint should be applied to determine if the charge is a disguised tax | ARB: Sinclair Paint addresses regulatory fees; auction sales are purchases of commodities and are different | Court: Sinclair Paint is not controlling here; different legal analysis applies; focused on voluntariness and receipt of value |
| Effect of 2012 legislation and Proposition 26 on validity/ratification | Plaintiffs: Later statutes can’t ratify an unauthorized tax; Prop. 26 alters the tax analysis | State: 2012 statutes ratified ARB’s auction design and prescribed use of proceeds; Prop. 26 is not retroactive and does not bar ratification | Court: 2012 legislation ratified auction system; Prop. 26 does not prevent ratification and is not dispositive here |
Key Cases Cited
- Sinclair Paint Co. v. State Bd. of Equalization, 15 Cal.4th 866 (1997) (framework for distinguishing regulatory fees from taxes under Proposition 13)
- California Farm Bureau Fed’n v. State Water Resources Control Bd., 51 Cal.4th 421 (2011) (fee‑vs‑tax analysis; appellate standard of independent review for such questions)
- Morning Star Co. v. Board of Equalization, 201 Cal.App.4th 737 (2011) (standard for reviewing administrative regulations and burden on challengers)
- Our Children’s Earth Found. v. State Air Resources Bd., 234 Cal.App.4th 870 (2015) (summary of AB 32 and ARB’s market‑based authority)
- Jopson v. Feather River Air Quality Mgmt. Dist., 108 Cal.App.4th 492 (2003) (recognition that tradable emission credits can be valuable commodities)