San Francisco Superior Court Judge Ernest H. Goldsmith heard arguments on December 7, 2012 in a lawsuit challenging the carbon offset program in California. (Case No. CGC-12-519554). The lawsuit is aimed at invalidating the offset program, but it has the potential to increase compliance costs (perhaps significantly) for California’s Cap-and-Trade Program, a greenhouse gas emission-reduction program. Judge Goldsmith’s court room was filled to capacity.

Under California’s climate change legislation, the Global Warming Solutions Act of 2006, known as AB 32, the state’s Air Resources Board (ARB) has the goal of getting power plants, manufacturers, and other industries to reduce GHG emissions to 1990 levels by 2020, a 17-percent reduction. The primary mechanism for achieving the required reductions is a carbon auction system, and the state held its first carbon allowances auction last month. The offset program is a vital part of the state’s overall effort and is intended to provide flexibility and cost-effective compliance with the reductions mandated by AB 32.

ARB only accepts offset credits from emission-reduction projects that qualify for an established Offset Protocol. An Offset Protocol is a detailed set of requirements that include standardized methods for quantifying emission reductions from an offset project. The state is currently accepting carbon offset credits from four types of projects: (1) forestry/timber management; (2) urban forestry; (3) livestock operations, and, (4) destruction of ozone-depleting substances. Entities that are covered by AB 32 and are required to reduce GHG emissions, such as power plants, may purchase and use offset credits to achieve up to 8 percent of their compliance obligation. Offsets are expected to cost less than allowances under the program, thus reducing the overall cost of compliance for covered entities.

Petitioners in the offset lawsuit, Citizen’s Climate Lobby and Our Children’s Earth Foundation, allege that ARB has exceeded its regulatory authority by promulgating rules that allow for offsets that are not "in addition to any greenhouse gas emission reduction that otherwise would occur," as required under AB 32. In essence, Petitioners contend that ARB, through its Offset Protocols, could issue offset credits for projects that would not actually create additional reductions in greenhouse gas emissions. "Additionality" is a significant component of any offset program from a policy standpoint, one that assures the offsets produce GHG reductions that help the overall cap-and-trade program achieve its emission-reduction goals.

At last week’s hearing Judge Goldsmith asked George Hays, Petitioners’ counsel, for an example of a project that could receive credit without providing "additional" emissions reductions. Mr. Hays described a livestock operation that uses a methane gas digester to reduce GHG emissions. As part of answering the judge’s hypothetical, Mr. Hays added that the methane gas digester, even though it was an expensive investment in the livestock operation, would actually allow the operation to be more profitable. Because the methane gas digester would make the operation more profitable, Mr. Hays argued that the reductions in GHG emissions would not be additional. The livestock operator likely would invest in the digester in order to make more money.

Judge Goldsmith did not appear to be impressed with the argument. "Tisk, tisk, they made money," he said. "What’s wrong with that?"

Judge Goldsmith also appeared to have trouble accepting Petitioners’ premise that the Court should undertake a de novo review of ARB’s regulations implementing the offset provisions of AB 32, rather than give deference to ARB’s admittedly broad authority to implement the climate change legislation. Robert Wyman, counsel for a coalition of business interests that has intervened on the side of ARB, told the Court that the standard of review for the offset regulations is deferential, noting that the state legislature, in passing AB 32, instructed ARB to, among other things, seek advice from other governmental bodies and international agencies in crafting its GHG reduction programs. Judge Goldsmith appeared ready to side with this point of view, moving the parties to another issue even though Mr. Hays clearly had more to say on the standard of review.

Instead, what Judge Goldsmith wanted to hear from Mr. Hays was whether Petitioners’ position was to force ARB to do away with the entire set of Offset Protocols or instruct the agency to make changes. Mr. Hays conceded that he wanted to do away with the whole offsets program. Judge Goldsmith then wanted to know what Mr. Hays proposed should replace the program. Mr. Hays suggested a project-by-project assessment of GHG reduction projects to determine whether the projects would result in real, additional GHG reductions, rather than the standardized approach embodied in the agency’s Offset Protocols. Judge Goldsmith noted that that idea had already been tried under the Kyoto Protocol and it was a disaster.

It is not clear when Judge Goldsmith will issue his decision.