April 13, 2017

The Court of Appeal has upheld the cap-and-trade program that was part of the California Global Warming Solutions Act, also known as AB 32, adopted in 2006.  The lawsuit, brought by business groups, argued that the cap-and-trade program of selling greenhouse gas emission allowances at auction amounted to a tax. Under Proposition 13, taxes require a two-thirds vote of the Legislature. AB 32 was passed with less than a two-thirds vote and plaintiffs argued that the cap-and-trade program violated Proposition 13.  The Court of Appeal, in a 2-1 opinion, rejected that argument. 

The court found instead that participation in the auction is not mandatory, and therefore cannot be considered a tax.  Rather, a decision to purchase GHG credits at the cap-and-trade auction 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.”  Plaintiffs have until mid-May to decide whether to seek review in the California Supreme Court.