California Defeats Lawsuit Against Cap-and-Trade Program

California environmental regulators running the nation’s first economy-wide carbon cap-and-trade program defeated a lawsuit that claims the system contains a loophole so companies can avoid reducing carbon emissions.

State court Judge Ernest Goldsmith in San Francisco rejected claims by two environmental groups challenging the way the program allows polluters to buy greenhouse gas emission credits from entities that aren’t part of the program.

“The court’s decision is welcome news for one of California’s most important clean energy and clean environment regulations, and provides a bright green light for further investment in pollution reduction projects,” Timothy O’Connor, an attorney for the Environmental Defense Fund, said today in an e-mailed statement. The defense fund sided with state regulators in the case.

Citizens Climate Lobby and Our Children’s Earth Foundation sued California’s Air Resources Board claiming the offsets are a loophole because the projects aren’t new efforts to lower carbon and would occur even without investments from polluters. The complaint sought a court order repealing and invalidating the offset program and prohibiting the state from using offsets as a compliance instrument in the cap and trade program.

State rules prohibit the creation of offsets from ongoing projects and require that credits be given only for carbon reduction beyond what “otherwise would occur,” George Hays, a lawyer for the groups, told Goldsmith at a Dec. 7 court hearing.

No Reductions

If the air resources board “doesn’t ensure the offsets are really additional, you don’t get reductions,” said Hays, adding that the offsets undermine the program’s goal of getting companies to reduce their own emissions.

“Petitioners request the court to do something it does not have the power to do. Rewrite the statute to forbid the use of offsets,” Goldsmith said. The entire cap and trade program might have to be abandoned if he found that the law creating the program was breached “every time a credited reduction was potentially non-additional,” Goldsmith said.

Laurie Williams, an attorney for Citizens Climate Lobby, said in an e-mail the group is reviewing the decision and considering next steps.

The cap and trade program is a key component of California’s 2006 global warming law, which aims to reduce emissions to 1990 levels by 2020.

Offset Projects

California Deputy Attorney General Gavin McCabe told Goldsmith that the law gives the air resources board wide discretion to decide which type of offsets should be part of the program. The environmental groups are free to challenge individual offset projects they think don’t adhere to state rules, he said.

California held its first auction for greenhouse gas allowances Nov. 14, offering 23.1 million carbon allowances for the first phase of compliance, which began Jan. 1, and 39.5 million for the second phase starting in 2015.

California is giving away about 90 percent of allowances in the first phase and auctioning the rest in what is now the second-biggest carbon trading market, after the European Union program.

The California Chamber of Commerce sued on the eve of the first auction, claiming that the allowances are an unlawful tax and that the air resources board lacks authority to sell them. That case is pending in state court in Sacramento.

Futures contracts based on 2013 California carbon allowances, which companies can also use cover their emissions, were offered at $14.35 a metric ton for December delivery, down from $14.60 a ton on Jan. 25, according to data compiled by BGC Environmental Brokerage Services LP in New York.

Prices rose to a 10-month high of $20.25 a metric ton in July on speculation that the lawsuit, along with increased natural gas consumption, would strengthen the demand for allowances, according to data compiled by CME Group Inc.’s Green Exchange.

The case is Citizens Climate Lobby v. California Air Resources Board, CGC-12-519554, California Superior Court (San Francisco). The chamber’s case is California Chamber of Commerce v. Air Resources Board, 34-2012-80001313, California Superior Court (Sacramento).

(Updates with excerpt from ruling in seventh paragraph.)
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