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CalChamber Pursues Litigation of Illegal Cap and Trade Auction

Loren Kaye
President of the California Foundation for Commerce and Education

California businesses and consumers are paying hundreds of millions in illegal taxes levied by the Air Resources Board that were never authorized by the Legislature.

That is the case being made by the California Chamber of Commerce* in an appeal filed yesterday in litigation to overturn the cap-and-trade revenue-raising auction.

The appeal was filed with the 3rd District Court of Appeal in Sacramento.

“We stand by our belief that the Legislature in passing AB 32 did not authorize the ARB to raise revenue for the state beyond those costs necessary to administer the program,” said Allan Zaremberg, president and CEO of CalChamber. “We also believe the ARB’s auction violates Proposition 13, because it imposes a new tax that did not receive two-thirds approval by the Legislature.”

The lawsuit does not challenge any of the provisions of AB 32 nor the merits of climate change science. The only issue addressed in the litigation is the portion of ARB’s regulatory program that seeks to permit the Board to allocate to itself GHG emissions allowances and to raise billions of dollars selling them to GHG emitters. Removing the revenue raising auction does not interfere with the “cap,” which requires that major energy users and producers to reduce their emissions to 1990 levels.

In filing the original lawsuit, CalChamber had argued that 1) the ARB did not have the legal authority to conduct an auction, and 2) the auction constituted an illegal tax in violation of Proposition 13.

On November 12, 2013, Sacramento Superior Court Judge Timothy Frawley decided, in California Chamber of Commerce v. California Air Resources Board (#34-2012-80001313), that AB 32 gave the ARB sufficient authority to adopt the auction regulation, and that the regulation imposing the costly auction did not violate Proposition 13’s prohibition against imposing new taxes without a two-thirds legislative vote.

On the tax issue, Judge Frawley was tentative, essentially admitting he was in uncharted waters. After going back and forth, he decided to treat auctioning of the allowances as regulatory fees. Then, after opining that the Supreme Court’s Sinclair test (which established the rules under Proposition 13 to distinguish a fee from a tax) did not apply in this case, the Judge in effect established a new legal test, ruling that:

“Under the unique circumstances of this case, the court is not persuaded that the amounts charged for allowances must be closely linked to the payers’ burdens on the specific regulatory programs that will be funded by them. Rather, all that is required is a reasonable relationship between the charges and the covered entities’ (collective) responsibility for the harmful effects of GHG emissions.”

Judge Frawley himself admitted this was “a close question,” and found that “the charges at issue do not fit squarely within any of the recognized fee classifications.” But in the end the judge created a new category fees, which would seem to open the door to all types of new taxes disguised as fees.

* My employer

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