California Cap-and-Trade Wars

By Lee N. Smith | June 22, 2011

The California legislature passed AB 32 and former Gov. Arnold Schwarzenegger signed the Global Warming Solution Act of 2006, which aims to reduce current greenhouse gas (GHG) emissions to 1990 levels by 2020. The law requires the Scoping Plan, which was approved on Dec. 12, 2008, and provides a road map and timeline for actions to reduce GHGs in California via regulations, market mechanisms and other actions.

One Scoping Plan item was cap-and-trade regulation, which requires GHG emitters to lower emissions by using allowances for GHG’s that are reduced over time requiring either a reduction, the purchase of allowances or offsets from other sources. In preparation for this regulation, a number of industries have also been required to report their GHG emissions.

As the regulation stands, electrical generators and large industrial facilities would be subject to cap and trade. For most energy generation facilities, the calculations of emissions is based on fossil fuel combustion and any process or vented emissions, as reported under a mandatory reporting rule.

Emissions calculations for biomass facilities, and related compliance obligations are more complicated.
Combustion emissions from biomass-derived fuels (except biogas from digesters) from the following sources do not have compliance obligations: sold waste materials; waste pallets, crates, dunnage, manufacturing and construction wood wastes, tree trimmings, mill residues, and range land maintenance residues; all agricultural crops or waste; or wood and wood wastes that follow specific practices.

In California, the approval of a regulatory action like cap and trade generally requires compliance with the California Environmental Quality Act, which in turn requires an environmental review. In this instance, CARB drafted an environmental document that purportedly reviewed the potential adverse effects on the environment due to the GHG cap-and-trade regulations, including a review of potential alternatives. The document drafted by CARB was the equivalent of an Environmental Impact Report under CEQA.

The regulation and the environmental document were provided for public review and a hearing in December, where a number of supporters and many others expressed that the environmental document and the regulations were not sufficient.

After conditional approval in December, the AB 32 rulemaking process for cap and trade encountered a setback when the lawsuit brought by several environmental groups successfully argued, at the Superior Court level, that the environmental document was deficient at addressing all of the relevant alternatives. The court after providing a tentative order issued a final writ of mandate that arguably prohibited the CARB from continuing to work on the regulations.

CARB appealed the decision and continued to work on the regulations, which prompted objections from the original petitioners. On June 6, the San Francisco Superior Court at petitioners urging issued an order that criticized CARB for continuing to work on AB 32 regulations despite the injunction issued in the CEQA case, and ordered the head of CARB to address these issues or face sanctions. It should be noted that there is a technical legal argument that depending on the form of the writ, the appeal may, on its own have stayed the injunction.

In a strange turn of events, it was discovered that prior to the Superior Courts June 6 order criticizing CARB, the court of appeals had temporarily stayed the trial court’s injunction that prevented the CARB from implementing its cap-and-trade program.

Thus the parties will argue before the appeals court on whether to maintain or lift the stay while the appeal is pending. In our view, one issue the appeals court should be looking at is whether allowing CARB to go forward could foreclose alternatives or mitigation measures that could otherwise be considered when the revised environmental document is finalized. Since the main focus of the new document is alternatives, the further promulgation of regulations could foreclose alternatives.

However, if the implementation of the rules occurs after the environmental document is released, one could argue that the alternatives discussed may not have been ruled out.

Finally, if the rulemaking is stayed or delayed for much longer, the scheduled 2012 start of regulation may have to be postponed as well. In mid-June the appeals court will hear arguments on the issue of the stay and the schedule should become more definitive.

Authors: Lee N. Smith
Stoel Rives LLP