The California Air Resources Board (CARB) hit a road block on the way to implementing a key element of its plan to reduce global warming when a California court found that the agency’s adoption of the plan violates the California Environmental Quality Act (CEQA), creating uncertainty for the regulated community whose operations are subject to the cap-and-trade program central to that plan.  

At issue is CARB’s implementation of its Scoping Plan, the key document that specifies the various greenhouse gas (GHG) reduction measures to achieve the goals of California’s Global Warming Solutions Act of 2006, commonly known as AB 32. A ruling by San Francisco Superior Court Judge Ernest Goldsmith, finalized on March 18, 2011 (Ruling), granted a Petition for Writ of Mandate challenging the Scoping Plan, primarily due to the agency’s failure to adequately consider alternatives to its adopted cap-and-trade program.

While the Ruling is a significant impediment to the GHG reduction measures in CARB’s Scoping Plan and AB 32 as a whole, it is a temporary one that is unlikely to threaten the long-term implementation of those measures. The Ruling does, however, require CARB to analyze the impacts of alternatives to the Scoping Plan’s cap-and-trade program, and to provide that analysis to the public, in order for the Scoping Plan to move forward. In the interim, the Ruling creates uncertainty for those members of the regulated community whose operations are subject to the first round of the cap-and-trade program, which is scheduled to take effect in January 2012.  

First Challenge: The Scoping Plan Was Not Compliant with AB 32

The Petitioners who challenged the Scoping Plan did so under two broad challenges: that CARB’s adoption of the Scoping Plan violated AB 32 and CEQA. While the precise arguments advanced under these two challenges differ, they all contain the same basic allegation – that CARB treated the Scoping Plan “as a post hoc rationalization for [CARB’s] already chosen policy approaches.”

With respect to AB 32 compliance, the Petitioners argued that: (1) the Scoping Plan failed to achieve “the maximum technologically feasible and cost-effective reductions in GHG emissions;” (2) CARB failed to adequately justify its selection of the market-based cap-and-trade system as the primary GHG reduction vehicle over other direct regulation methods; (3) CARB’s analysis of the costs and benefits of the cap-and-trade system falls short of AB 32’s mandate to use the “best available economic models, emission estimation techniques, and other scientific methods;” and (4) CARB failed to assess the performance of cap-and-trade systems already used in other jurisdictions outside California, another AB 32 requirement. However, the Court did not find these arguments persuasive, in large part due to the wide latitude afforded to administrative agencies by the arbitrary and capricious standard, which applies when agencies exercise quasi-legislative authority.

Second Challenge: The Scoping Plan Violated CEQA

A different outcome resulted from Petitioners’ CEQA challenges, to which the less stringent abuse of discretion standard applies. CEQA requires that government agencies consider the environmental impacts of their actions, and potential alternatives to those actions, before approving projects and policies that could adversely affect the environment. Although the Court deemed CARB’s impacts analysis sufficient, it found defects in CARB’s analysis of potential alternatives to the cap-and-trade system.

Specifically, the Court found that CARB’s selection of the cap-and-trade system was not supported by facts and analysis in the administrative record, such that the agency’s “analytic route . . . traveled from evidence to action” was identified. Instead, according to the Court, CARB’s actions were supported almost entirely by bare conclusions justifying selection of the cap-and-trade system, and informative analysis of alternatives such as a carbon tax was “absent.” Consequently, CARB failed to explain to the public its reasoning for choosing the cap-and-trade system instead of the other potential GHG reduction alternatives.

The Court rejected CARB’s argument that detailed analysis of alternatives will be provided later in the rulemaking process when project-level measures are considered, such as the construction of biofuel production facilities. As explained in the Ruling, such an approach would create a fait accompli – allowing the adoption of the cap-and-trade system without adequate alternatives analysis, and providing for analysis of specific projects only after the cap-and-trade system is in place would “render consideration of alternatives a nullity.” The Court also noted that “data from existing programs, studies, and reports” existed and should have been analyzed as part of CARB’s consideration of alternatives to a cap-and-trade system. The absence of substantial evidence in the record to support the agency’s action constituted an abuse of its discretion.

Additionally, the Court ruled that CARB had approved and commenced implementation of the Scoping Plan’s proposed GHG reduction measures at a January 2009 workshop, even though it had not yet reviewed and responded to public comments it had received at that time. Doing so violated one of CEQA’s goals – to provide the public with information allowing for a reasonable choice of alternatives – and constituted a separate abuse of discretion.

The Court’s Decision: Before Scoping Plan Can Move Forward, CARB Must Comply with CEQA

In sum, due to CARB’s adoption of the Scoping Plan in the absence of substantial evidence in the record to support that action, and its failure to assess public comments raising significant environmental issues prior to adopting the Scoping Plan, the Court ruled that CARB failed to proceed in the manner prescribed by law and abused its discretion.

The Court’s writ of mandate orders CARB to set aside its certification of the environmental review document assessing the Scoping Plan, and enjoins any further implementation of the Scoping Plan’s GHG reduction measures until CARB has complied with CEQA and the agency’s own certified regulatory program adopted pursuant to CEQA. Specifically, CARB must now properly analyze potential alternatives to the cap-and-trade system and publish that analysis for the public, and must also consider and respond to all public comments on the Scoping Plan. Once CARB has complied with these conditions, the Court will allow implementation of the Scoping Plan to proceed.

Challenges for the Regulated Community

While the Ruling may only have a temporary impact on the long-term implementation of the Scoping Plan and the cap-and-trade system it aims to create, the Ruling could have a significant impact on the regulated community. In particular, those entities required to participate in the first round of the cap-and-trade system, which is scheduled to take effect in January 2012, must take certain actions to participate in that system. These actions are costly, both in terms of employee time and hard costs, and may also be disruptive to business operations. In light of the now uncertain status of Scoping Plan implementation, the decision whether to commence these actions is less clear and more difficult to justify, particularly in the current economic climate.

However, given that the Ruling poses only a temporary delay and not a complete invalidation of the Scoping Plan, CARB is likely to satisfy the Ruling’s additional requirements and thus, the question is more likely when, not if, the Scoping Plan and the cap-and-trade system take effect. As such, the regulated community may take some comfort in the fact that any resources expended now will be required at some point in the future, perhaps just not as early as the current January 2012 timetable.