July 3, 2017

California’s Cap-and-Trade Program Just Won a Major Legal Challenge

But now legislators have to figure out what’s next after 2020.

California’s four-year-old cap-and-trade program, which sets a cap on greenhouse gas emissions and incentivizes the state’s biggest polluters to lower emissions, has won a substantial legal battle.

On Wednesday afternoon, the state’s Supreme Court rejected an appeal of a lower court’s ruling over a legal challenge from a group of businesses initiated four years ago. Back then the Chamber of Commerce sued, alleging that the state is imposing an illegal tax on businesses through the cap-and-trade program.

In April, the 3rd District Court of Appeals ruled in favor of state officials. Now the California Supreme Court has essentially ended the legal challenge for good, a decision that has likely pleased Governor Jerry Brown and the Air Resources Board, which manages the cap-and-trade program.

Over the years, the lawsuit added uncertainty and controversy to the state’s program. The state’s auctions, which sell cap-and-trade allowances to companies, have fluctuated wildly, partly due to such uncertainty, sometimes bringing in major revenue and sometimes bringing in very little money. A variety of state clean energy programs, including high speed rail, rely on revenue from the cap-and-trade program.

However, the uncertainty is far from over for California cap-and-trade. State legislators have been in the process of trying to figure out how to extend the program beyond 2020, when by some measures it will lose authority. At the same time, the state is trying to meet more aggressive greenhouse gas reduction targets beyond 2020, and advocates say that a more aggressive cap-and-trade program will be important to make sure the state gets to those goals. 

The governor had wanted to have an agreement on how to extend cap-and-trade in California by the time the state budget was signed. But that deadline came and went earlier this week, and cap-and-trade wasn’t addressed in it.

Several related bills in the Assembly have failed to gain approval. A controversial bill in the Senate hasn’t yet been able to move to a vote.

Legislators and constituents are at odds over a variety of issues including: making sure local air pollution (not just greenhouse gas emissions) is addressed; the use of offsets to meet cap-and-trade reductions, particularly when they’re for out-of-state projects; and the need for a floor and a ceiling for carbon pricing. Some stakeholders want significant changes to California’s cap-and-trade program, while others want it to remain very similar to the current version. 

California’s cap-and-trade program has widely been seen as one of the world’s most sophisticated and ambitious emissions trading schemes. Europe launched one years ago, and Quebec and Ontario both have one as well. Several U.S. states on the East Coast have cap-and-trade programs, but they're specifically for power plant emissions.

But there's more pressure on California to get the design of its program right, given that it’s such a world leader in the clean energy domain. China has been working on trials of cap-and-trade programs in various regions, and has taken lessons learned from California. 

Designing the market mechanisms and economic levers of cap-and-trade programs can be difficult. But it’s even harder to get comprehensive programs approved politically.

The L.A. Times reported late last week that Governor Brown has been hosting a steady stream of meetings to try to come to an agreement on the extension. Brown hopes to find a solution in July, before legislators go to summer recess on July 21. His team has also reportedly been developing and circulating draft proposals.

State legislators are somewhat wary of another controversial vote after recently passing one to raise the state’s gas tax (which triggered a fierce backlash and even a recall campaign). The governor also wants the vote to achieve a two-thirds approval in both houses of the legislature, which will help ward off future lawsuits. 

Governor Brown has taken an increasingly high-profile role on the world stage when it comes to climate change. While President Donald Trump announced that the U.S. would withdraw from the Paris agreement, Brown has visited China and liaised with world leaders on the issue of city and state climate action.

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