On June 19, 2012, a California Court of Appeal issued its long-awaited decision in Association of Irritated Residents v. California Air Resources Board. The Court of Appeal held that the Climate Change Scoping Plan adopted by the California Air Resources Board ("CARB") complies with AB 32, California's Global Warming Solutions Act of 2006.

The decision brings to a close an early legal challenge to California's greenhouse gas "cap and trade" regulations.

AB 32 requires CARB to prepare a blueprint, known as a "Scoping Plan," for reducing California greenhouse gas emissions to 1990 levels by the year 2020. One of the key programs set out in the Scoping Plan approved and adopted by CARB on December 12, 2008 is a cap and trade program.

As described in Jones Day's Commentary , " California Superior Court Enjoins California's Cap and Trade Program for Greenhouse Gas Emissions," 13 petitioners, including the Association of Irritated Residents ("AIR"), filed suit against CARB on June 10, 2009, alleging that the Scoping Plan did not comply with AB 32, and that CARB's approval of the Scoping Plan did not comply with the environmental review requirements of the California Environmental Quality Act ("CEQA").

On March 18, 2011, the San Francisco Superior Court ruled that while the Scoping Plan did not violate AB 32, CARB had not adequately evaluated alternative approaches to achieving greenhouse gas reductions as required by CEQA. On May 20, 2011, the Superior Court issued a writ of mandate prohibiting CARB from taking any action in reliance on the Scoping Plan (including implementing the cap and trade program) until CARB complied with CEQA. CARB appealed the Superior Court's CEQA decision, and AIR and the other plaintiffs filed a cross appeal on the Superior Court's decision that the Scoping Plan complied with AB 32. On June 24, 2011, the California Court of Appeal, First Appellate District, stayed enforcement of the Superior Court's order. While the stay was in effect, CARB prepared and issued a supplement to its environmental review of the Scoping Plan, which it certified under CEQA on August 24, 2011. On December 5, 2011, the Superior Court discharged the writ of mandate, and the Court of Appeal dismissed CARB's appeal as moot. Thus, what remained was the plaintiffs' cross-appeal of the Superior Court decision that the Scoping Plan complied with AB 32.

In its June 19, 2012 opinion, the Court of Appeal determined that adoption of the Scoping Plan fell within the scope of authority conferred on CARB by AB 32. The Court of Appeal evaluated whether the Scoping Plan "is reasonably necessary to effectuate the purpose of the statute," which "requires the court to determine only whether the Board exercised its discretion arbitrarily and capriciously, without substantial evidentiary support." Using this deferential standard, the court evaluated the plaintiffs' specific challenges to the Scoping Plan, including their assertion that CARB (i) improperly limited the Scoping Plan to only those measures necessary to achieve the minimum reductions required by AB 32; (ii) failed to create and apply standard criteria for cost-effectiveness; and (iii) failed to include feasible and cost-effective direct regulations for the agricultural and industrial sectors (choosing only to regulate industry though the cap and trade program, and allowing agricultural sources to provide carbon offsets to industry).

The Court of Appeal rejected each of these challenges. It found that CARB "went to exceptional lengths" to develop measures to achieve greenhouse gas reductions and that "AIR points to no recommendation included in the plan, and no rejection of a suggested recommendation, for which substantial evidence was not presented and considered" by CARB. The Court of Appeal concluded that tools are not available to compare the cost-effectiveness of one greenhouse gas reduction approach to others, and it was satisfied that there was support in the record for the recommendations adopted by CARB in the Scoping Plan. The Court of Appeal also upheld the Scoping Plan as it applied to the industrial sector, as it did for the agricultural sector, concluding that the record reflects "extensive analysis" of numerous potential measures for the agricultural sector and that CARB's inclusion of only voluntary agricultural measures in the Scoping Plan was reasonable and supported by a sound explanation.