California’s Landmark Cap-and-Trade Program Upheld by California Supreme Court

(SACRAMENTO, California – June 28, 2017)  California’s ambitious cap-and-trade program cleared a final legal hurdle today when the California Supreme Court declined to review a lower court decision upholding the program’s design. The Supreme Court’s denial to review the Third Court of Appeals’ decision is another major victory for California’s fight against climate change, and means the lower court ruling – which upheld the design of California’s program, including one of its key features, carbon auctions – stands. This was the final legal step available to industry groups, led by the California Chamber of Commerce, challenging the program.

The Third District Court of Appeal ruled in April in favor of the California Air Resources Board, Environmental Defense Fund (EDF) and Natural Resources Defense Council (NRDC). The court said the carbon auctions are within the Board’s statutory authority, and rejected the argument from the California Chamber of Commerce that auctioning carbon allowances constitutes an unlawful tax. Cap and trade guarantees the state will reach its climate targets by placing a firm limit on emissions. By creating a market for companies to buy and sell emission allowances, the program also provides flexibility to businesses on how to comply cost-effectively.

EDF senior attorney Erica Morehouse said: “This is the final step in this case to affirm California’s innovative climate program, including its carbon auctions, which serves as a vital safeguard to ensure polluters are held accountable for their pollution. Today’s decision helps clear the way for California to continue its ambitious, globally significant climate leadership, and to do so in a way that promotes the best interest of Californians – especially those in pollution-burdened communities that will be hit hardest by climate change impacts.”

EDF was party to the consolidated cases in the Third District Court of Appeal, California Chamber of Commerce et al. v. California Air Resources Board, et al., and Morning Star Packing Co. et al. v. California Air Resources Board et al.

In the Third District Court of Appeal decision, the court stated: “The purchase of allowances is a voluntary decision driven by business judgments as to whether it is more beneficial to the company to make the purchase than to reduce emissions. Reducing emissions reduces air pollution, and no entity has a vested right to pollute.”

The April 6 decision is available at: https://www.edf.org/sites/default/files/content/decisionchambermorningstar.pdf

California’s allowance trading market and the use of auctions promote equity, provide useful information to the carbon market, and prevent windfall profits to polluters. Auctions are a key component of how California expects to meet its carbon pollution targets of reducing emissions to 1990 levels by 2020, and 40 percent below 1990 levels by 2030. California included auctions in its cap-and-trade program after considering the experience of other cap-and-trade programs and heeding the advice of experts in designing the program. Economists, environmental groups, and regulated parties – including some of California’s major utilities such as PG&E – have all voiced support for California’s landmark program.

California has committed to using the proceeds from the cap-and-trade auction – almost 5 billion to date – for investments that reduce climate pollution while also benefiting the state’s overall health and economy. A significant portion of these investments are targeted at disadvantaged communities.