Yesterday, the Court of Appeals for California’s Third Appellate District issued its decision in California Chamber of Commerce, et al., vs. State Air Resources Board, et al., upholding the district court’s decision and allowing the cap-and-trade system to remain in place. The suit was filed by business groups just prior to the state’s first auction of allowances in 2012, arguing that the sale of allowances exceeded the Air Resources Board’s authority under AB 32 and is an unconstitutional tax under Proposition 13, which requires a supermajority in the legislature to pass tax increases (AB 32 did not have such a supermajority).

In the 2-1 decision, the court held that the legislature gave broad discretion to the Air Resources Board to design a distribution system to distribute allowances, and the decision to implement auctions was a valid exercise of that discretion. Turning to the Proposition 13 question, the court held that the “tax or fee” analysis in Sinclair Paint is inapplicable to the cap-and-trade system, and that purchase of cap-and-trade allowances at auction is a “voluntary purchase of a valuable commodity and not a tax under any test.” The trial court had treated the auction program as a regulatory fee.

In a vigorous dissent, Justice Hull agreed with the majority that ARB did not exceed its authority in choosing an auction system, but argued that the auctions are an unconstitutional tax because they are not voluntary, because the allowances do not confer any property rights, and because the some of the proceeds have been used for non-regulatory purposes, which Justice Hull called “a hallmark, if not the gold standard,” for determining if a state exaction is a tax. The California Chamber of Commerce and other business groups will likely pay close attention to Justice Hull’s dissent in weighing whether to appeal the decision to the California Supreme Court.