Yesterday, the California Chamber of Commerce filed suit against the California Air Resources Board (CARB) challenging CARB’s authority to generate revenues through the cap-and-trade auction system. The Chamber claims that CARB exceeded the authority granted by the state’s climate change initiative (AB 32) because CARB “allocates to itself an increasing percentage of each year’s authorized emissions allowances and sells them at auction or through reserve sales to the highest bidder.” The Chamber also claims that revenues from the auction sales would result in an unconstitutional tax. The Chamber is not challenging any other provision of the law or the science behind climate change.

The California state legislature passed AB 32 in September 2006 requiring the state to reduce greenhouse gases emissions to 1990 levels by 2020, a 17 percent reduction. By 2050, there must be an 80 percent reduction. To reduce greenhouse gas (GHG) emissions in the state, AB 32 authorizes CARB to establish a “market-based compliance mechanism.” The law also authorizes CARB to adopt a “schedule of fees to be paid by the sources of greenhouse gas emissions regulated by” AB 32 to cover the costs of its market-based system.

The Chamber alleges that the auction is not a “‘fee schedule" authorized by AB 32 nor are the auction’s revenues designated for the purpose of regulating GHG emissions. Nothing in AB 32, nor its legislative history, confers on CARB the authority to allocate to itself emission allowances and become an active participant in the cap and trade program for the purpose of generating revenues to the state of up to $70+ billion over the period 2013–2020.”

The lawsuit further alleges that even if AB 32 authorizes CARB to allocate to itself GHG allowances and sell them off, such regulations would be unconstitutional because they would impose a tax that was not authorized by a two-thirds vote in the California legislature

GHG allowances will go on sale for the first time today at 10:00 a.m. Pacific Time. According to the Chamber of Commerce law suit, CARB will allocate to itself and sell off approximately half of all the GHG allowances that will ever be put into circulation as part of the cap and trade program.”

The lawsuit does not seek an immediate halt to the cap-and-trade auction. It does, however, ask the court (Sacramento County Superior Court) to prohibit CARB from allocating to itself and the state a portion of the GHG emission allowances and selling them off to raise revenues.

A CARB spokesperson told Bloomberg news yesterday that “[w]e are reviewing the lawsuit, but are confident that the cap-and-trade program will withstand any court challenge.” The spokesperson also said, “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 [the] auction.”