California’s First Carbon Auction Challenged in Lawsuit

California was sued by the state’s Chamber of Commerce, which seeks to bar the auction of carbon allowances, a key element of the state’s cap-and-trade program aimed at reducing greenhouse gas pollution.

The business group said in a complaint filed yesterday in state court in Sacramento that the California Air Resources Board lacks authority to auction carbon allowances, which it alleges is a paramount to an invalid tax or unconstitutional fee that would cost taxpayers $70 billion. The complaint couldn’t be immediately confirmed in electronic court records. California officials said today’s auction will proceed.

“What the Air Resources Board is doing is illegal,” Steven Merksamer, an attorney for the chamber, said in a phone interview. “This tax wasn’t approved by the voters. We believe the auction is unlawful.”

A delay in the first auction may depress an already-weak market for California carbon futures. Prices based on allowances for 2013 have tumbled more than $6 a metric ton since the beginning of August as legal threats, political opposition and rule changes plague the days leading up to the first sale of permits.

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

Required Reductions

If a business can’t make the required reductions, it can buy emissions permits, called allowances, or offset credits -- investments in off-site forest or urban projects and other programs that reduce emissions. The board plans to auction 23.1 million allowances to be used during the first compliance phase of the program.

California’s budget counts on $500 million in the current fiscal year from cap-and-trade revenue. A successful lawsuit would mean Governor Jerry Brown would need to make up that difference, either by spending cuts or revenue from somewhere else.

The program was developed as part of the state’s 2006 global warming act, known as AB 32.

Twice Delayed

The first auction already has been delayed twice, once last year when the state decided to put off enforcement of the entire cap-and-trade program by a year, and a second time in March when it canceled an August sale.

Merksamer said the lawsuit could take months and he couldn’t speculate on what impact it would have on auctions that are held in the meantime.

“We are reviewing the lawsuit, but are confident that the cap-and-trade program will withstand any court challenge,” Stanley Young, a spokesman for the air resources board, said in an e-mail yesterday. “This market-based approach to cutting greenhouse emissions gives businesses the flexibility to best decide how to reduce their emissions. We are going forward with tomorrow’s auction.”

Samantha Katz, managing director of BGC Environmental Brokerage Services LP in New York, said that on the news yesterday, the market traded at $12.25 a ton for December 2013 futures, “which is consistent for the day.”

“The bids are still there and still above $12,” she said in a phone interview.

Law Professor

Ann Carlson, an environmental law professor at the University of California, Los Angeles, said yesterday it remains unclear whether the allowance auction constitutes a tax.

“The auction could be viewed as akin the selling off of state property, not the levying of a tax,” Carlson said in an e-mailed statement. “If the auction is not a tax, the lawsuit should be dismissed.”

The court will probably defer to the state air resources board about the design choices it made in developing the cap-and-trade program, including the choice to auction a portion of the allowances, she said.

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

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