California Authorized to Hold Carbon Auctions, Judge Says

California’s environmental regulators are authorized to auction carbon allowances under a cap-and-trade program aimed at reducing pollution, a state judge tentatively ruled in a Chamber of Commerce lawsuit challenging the sales.

Judge Timothy Frawley in Sacramento issued a ruling today that California lawmakers gave the state’s Air Resources Board the authority to choose a method for distributing carbon allowances when they passed the state’s 2006 global warming act, known as AB 32.

“At the time AB 32 was enacted, both auctioning and free distribution were widely recognized methods of distributing allowances,” he said in a provisional ruling. “In delegating to ARB the authority to ‘design’ the ‘distribution of emissions allowances,’ the Legislature delegated to ARB the choice of distribution method.”

The California Chamber of Commerce alleged in a complaint filed last year that the board lacks authority to auction carbon allowances, which it says is paramount to an invalid tax or unconstitutional fee that would cost taxpayers $70 billion.

Frawley heard arguments today on the chamber’s claims that the sale of carbon allowances violates the state’s Proposition 13, which requires that efforts to increase taxes to raise revenue be passed by a two-thirds super-majority vote of the legislature. He didn’t issue a ruling today.

Under California’s first-in-the-nation economy-wide cap-and-trade program, the state’s Air Resources Board sets a maximum for carbon emissions from power generators, oil refineries and other industrial plants and cuts that limit gradually to achieve a reduction of about 15 percent by 2020.

If a business can’t make the required reductions, it can buy emissions permits, called allowances, in auctions overseen by the board or from other companies. They can also purchase offset credits -- investments in off-site forest or urban projects and other programs that reduce emissions -- to cover a portion of their pollution.

The case is California Chamber of Commerce v. Air Resources Board, 34-2012-80001313, California Superior Court (Sacramento).

To contact the reporter on this story: Karen Gullo in San Francisco at kgullo@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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