cap and trade under fire
TRANSCRIPT
CALIFORNIA CAP AND TRADE UNDER FIRE:
AN EXAMINATION OF THE CHALLENGES TO THE CONSTITUTIONALITY OF THE
GLOBAL WARMING SOLUTIONS ACT‘S CONTROVERSIAL CARBON MARKET
Sean M. Jones
LL.M. Candidate
University of San Diego School of Law
Professor Timothy Duane, J.D., Ph.D.
Climate Change
Fall 2015
ii
Table of Contents
I. Introduction …………………………………………..……..…..…….…....1
II. “Tax” or “Not a Tax” - that is the Question ………………………….……..1
III. Cap and Trade in a Nut Shell ……………………………………..………….3
IV. Cap and Trade’s Constitutionality a Close Question …..……..……………...4
V. The Case Against Cap and Trade’s Constitutionality ..…….….….…………..6
a. Cap and Trade is a Tax and is Unconstitutional without
2/3 Approval Pursuant to Proposition 13 …….….……….………..….….6
b. A Tax by Any Other Name ……………………………………….……......8
c. California Cap and Trade‘s Proposed Federal Counterpart,
which is Almost Functionally Identical, is Widely
Considered to be a Tax ……….……………………………………....11
d. CARB‘s Carbon Permit Program Matches the Dictionary
Definition of a Tax………………………….…………………….................12
e. Cap and Trade is Generating Billions of Dollars
of Revenue for the State .………………………………………………13
f. The State‘s Delegation of Power to the CARB Should
Not Circumvent Voters‘ Rights to be Heard ….……………………...…….14
g. The Distinction between Taxes and Fees is Not Well Settled ……….15
VI. The Case for Cap and Trade’s Constitutionality ……….………………15
a. Regulatory Fees are Not Taxes – Just ask Sinclair ……………………….16
b. The Dictionary Definition of Tax is Irrelevant
to the Discussion ……………………………………………………….20
c. Revenue Generation is Incidental to, Not the Purpose of,
Regulation …………………………….…………………………………21
d. Carbon Permit Auctions do Not Contradict the
Legislative Intent of Proposition 13 ……………………………………….22
e. AB 32 Does Not Specifically Recognize the Sales of
Carbon Permits ……………………………………………………….22
f. Auction Prices are Set by Market Forces, Not the
Government ……………………………………………………………….23
g. No Meaningful Remedy is Realistically Available at
this Point ……………………………………………………………….23
VII. Judicial Analysis ………….……………………………………………………24
a. How Should the Language of AB 32 be Construed? ………….....................24
b. The Effect of Proposition 13 ………….……………………………………26
c. The Effect of Proposition 26 ……………………………………………….27
d. Common Sense Approach ……………………………………………….29
e. Justiciability and Practicality Considerations .………………………………30
VIII. Conclusion ……………………………………………………………….31
1
I. Introduction
California Assembly Bill 32, titled ―The Global Warming Solutions Act of 2006‖ (―AB
32‖ or ―the Act‖) was signed into legislation by then Governor, Arnold Schwarzenegger, making
California the first state in the nation to officially confront the threats of anthropogenic global
warming. Since its passage in 2006, one of AB 32‘s hallmark elements, ―Cap and Trade,‖ has
come under fire from some business owners who claim that the regulations imposed on carbon
dioxide emission are making it harder to conduct business in the State, all while generating
billions of dollars of revenue for the Government. In 2011, the California Chamber of Commerce
and the Pacific Legal Foundation took up the cause of these proclaimed struggling businesses
and filed twin lawsuits in Sacramento Superior Court alleging Cap and Trade‘s emissions permit
auctions, which allow businesses to purchase additional permits in order to emit more pollution,
constitute a tax and therefore violate the California Constitution which requires two-thirds
approval by the State legislature for the enactment of new taxes – a requirement that was never
actually satisfied.
This paper seeks to provide a comprehensive background of California‘s Cap and Trade
regime as it exists under AB 32, to analyze the attacks its opponents have leveled at its
constitutionality, to address all counter-arguments by AB 32‘s proponents, and, finally, to
evaluate the validity of these respective positions from the perspective of the judiciary.
II. “Tax” or “Not a Tax” - That is the Question
In 2013, Chief Justice of the United States Supreme Court, John Roberts, made history by
casting a surprising swing vote, effectively saving the Patient Protection and Affordable Care
Act (ACA) and declaring its constitutionally-questionable ―individual mandate,‖ which imposes
a penalty on anyone without health insurance, a ―tax.‖ Although the text of the ACA never
2
specifically identified the penalty as a tax, and President Obama (the namesake of the ACA‘s
popular nickname, ―Obamacare‖) even rejected early claims that it was a tax,1 the Supreme
Court, in assessing the totality of the circumstances determined that the penalty enforcing the
individual mandate effectively served as a tax and was thus properly imposed within the scope of
Congress‘s taxing and spending power.2
Around the same time the United States Supreme Court was labeling one penalty a tax,
the California Supreme Court was doing quite the opposite and rejecting claims that California
Air Resource Board‘s (―CARB‖) carbon permit auctions serve the essential function of a tax3
and should be labeled accordingly. The significance of the penalty‘s label owes to the
requirement under Proposition 13 (and its more rigid successor, Proposition 26) of the California
1 ―Consider the recent exchange between President Obama and George Stephanopoulos of ABC News. Appearing
on ABC's "This Week," Obama was asked by Stephanopoulos about Sen. Baucus‘s ―individual mandate‖ in the
Senate health care bill. The Senate bill, which Obama supports, requires everyone to buy health insurance or else
pay a penalty as high as $3,800 a year. Stephanopoulos asked that if "the government is forcing people to spend
money, fining you if you don't [buy insurance]. . . . How is that not a tax?" *** "Well, hold on a second, George,"
Obama said. "Here's what's happening. You and I are both paying $900, on average—our families—in higher
premiums because of uncompensated care. Now what I've said is that if you can't afford health insurance, you
certainly shouldn't be punished for that. That's just piling on. If, on the other hand, we're giving tax credits, we've set
up an exchange, you are now part of a big pool, we've driven down the costs, we've done everything we can and you
actually can afford health insurance, but you've just decided, you know what, I want to take my chances. And then
you get hit by a bus and you and I have to pay for the emergency room care, that's . . ." *** "That may be," Mr.
Stephanopoulos responded, "but it's still a tax increase." Mr. Obama: "No. That's not true, George. The—for us to
say that you've got to take a responsibility to get health insurance is absolutely not a tax increase. What it's saying is,
is that we're not going to have other people carrying your burdens for you anymore . . ." **** ―I don't think I'm
making it up," Stephanopoulos said. He cited Merriam Webster‘s dictionary definition of tax: "a charge, usually of
money, imposed by authority on persons or property for public purposes." Dempsey, Matt. ―Fact Check: Cap-and-
Trade is a Tax.‖ U.S. Senate Committee on Environment and Public Works. 22 September 2009.
(http://www.epw.senate.gov/public/index.cfm/2009/9/post-e41b6ac3-802a-23ad-4ba4-2746e4458a1b) 2 ―[T]he individual mandate was a ‗tax‘ that was within Congress's taxing powers.‖ Nat'l Fed'n of Indep. Bus. v.
Sebelius, 132 S. Ct. 2566, 183 L. Ed. 2d 450 (2012). 3 ―AB 32 authorizes the collection of a fee from sources of GHGs. In 2010, ARB adopted a regulation to collect a
fee to administer the program, called the AB 32 Cost of Implementation Fee Regulation. This fee is collected
annually from large sources of GHGs, including oil refineries, electricity power plants (including imported
electricity), cement plants and other industrial sources. There are approximately 250 fee payers that emit 330
million metric tons of GHG emissions per year. Funds collected are used to cover annual expenses for ARB and
other State agencies to implement AB 32.‖ California Air Resources Board.
<http://www.arb.ca.gov/cc/ab32/ab32.htm>.
3
Constitution that all new taxes must gain two-thirds approval in the State Senate before being
imposed on Californians.4
Despite the similarities between the monetary penalties imposed on California‘s carbon
emitters and Americans who fail to obtain health insurance, as well as the fact that the revenues
generated from the penalties both serve to fund operations closely related to the penalized acts or
omissions, the U.S. and California Supreme Courts appear to have arrived at two different
determinations as to what constitutes a tax.
So why does cap and trade escape the designation of a tax, and how is it likely to fare
against continuing challenges to its constitutionality at the third district court of appeal and
beyond? To answer these questions it is important to first understand exactly what cap and trade
is and how it operates.
III. Cap and Trade in a Nut Shell
Cap and trade is one of the most common and effective methods of curtailing carbon
emissions being used in the world today.5 As the name suggests, there are two distinct aspects to
this regulatory regime. First, the ―cap‖ sets a specific limit on the total amount of carbon that can
be emitted by each company in the State. The allowable emissions are then quantified by
permits, which are then distributed among certain California businesses, known as ―qualifying
entities.‖ The ―trade‖ portion of the program allows businesses that pollute less to sell their
unused emissions permits to heavier polluters. In theory, this creates a monetary incentive for
businesses to pollute less, thereby reducing the need to buy additional permits or even generating
4 California Constitution Article XIII A (Limitation on Taxation, see infra)
5 Center for Climate and Energy Solutions. ―Summary of California‘s Cap and Trade Program.‖ 20 October 2011.
<http://www.c2es.org/us-states-regions/action/california/cap-trade-regulation#sub2>.
4
additional revenue by selling unused permits. The graph below provides a good visual
representation of the program.6
7
The term ―carbon market‖ stems from the economic fundamentals of supply and demand.
By creating a finite supply of carbon permits, the State has been able to place a monetary value
on the freedom to pollute. As a result, like anything else with monetary value, a market arises
around the trade of permits, with prices fluctuating according to supply and demand.8
The issue, then, is whether the state government acted within the bounds of the California
Constitution when conscripting polluting businesses into an artificially created carbon market.
IV. Cap and Trade’s Constitutionality a “Close Question”
Two separate but nearly identical lawsuits were filed in 2012 and 2013 attacking the
constitutionality of AB 32‘s delegation of power to CARB to create a carbon market which
6 Id.
7 http://cacs.org/wp-content/uploads/2015/04/smokestack.jpg (Copyright CC Newton, 2015). 8 C2ES, supra.
5
would serve as the vehicle by which the ―trade‖ portion of the cap and trade program would be
carried out.9 The first lawsuit was filed by the Chamber of Commerce in late 2012. Shortly
thereafter, in the Spring of 2013, the Pacific Legal Foundation filed a similar lawsuit on behalf of
a group of California businesses. 10
Both suits were filed in the Superior Court of Sacramento and
were ultimately heard by Judge Timothy Frawley who ruled on the cases simultaneously,
dismissing both lawsuits.11
For purposes of clarity and simplicity, the term ―plaintiffs‖ as used
from this point on shall refer collectively to the plaintiffs in both suits.
In his decision, declaring cap and trade not a tax, Judge Frawley acknowledged that the
issue was a ―close question‖12
and to some extent dodged the issue of whether cap and trade
actually crosses the line of being a tax. Frawley was able to avoid basing his decision solely on
the tax issue by pointing to the fact that cap and trade under AB 32 itself does not explicitly
recognize the sale of allowances at the carbon permit auctions. Instead, the act merely delegates
broad discretion to CARB to establish a carbon market that comports with the emissions cap set
9 ―The cases are California Chamber of Commerce et al. v. California Air Resources Board et al., case number 34-
2012-80001313; and Morning Star Packing Co. et al. v. California Air Resources Board et al., case number 34-
2013-80001464, both in the Superior Court of the State of California, County of Sacramento.‖ Sistrunk, Jeff. ―Calif.
Cap-and-Trade Auctions Are Legal, Judge Says. LAW360. 14 November 2013.
<http://www.law360.com/articles/488965/calif-cap-and-trade-auctions-are-legal-judge-says>. 10
―CARB began holding quarterly auctions in November 2012 to accept bids for emission allowances from
refineries, utilities and other polluters under California Assembly Bill 32, which set up the cap-and-trade program to
cut the state's emissions to 1990 levels by 2020. As the cap on emissions gradually declines, companies that emit
more than the limit can either reduce their pollution or purchase emission allowances. The state Chamber of
Commerce lodged a suit against the cap-and-trade auction that same month, asserting that A.B. 32, aka the Global
Warming Solutions Act of 2006, did not authorize CARB to impose any fees other than those needed to cover the
administrative costs of the regulatory program. The Pacific Legal Foundation subsequently filed suit in April 2013
on behalf of Merit Oil Co., Morning Star Packing Co. and others, alleging CARB's regulation for the cap-and-trade
auction constituted an improper tax because it was not enacted by two-thirds majorities in both houses of the state
Legislature, as required for new taxes by California's constitution under Propositions 13 and 26. The April complaint
claimed that CARB devised the auction plan as a way to raise billions of dollars in revenue without any instruction
from the Legislature.‖ (See Id). 11
Id. 12
―The charges have some traditional attributes of a tax and some traditional attributes of a regulatory fee but, on
balance, the court finds the charges to be more like a regulatory fee … than a traditional tax,‖ the judge wrote.
KQED News Staff and Wires, Court Rejects Challenge to California‟s Cap-and-Trade System, KQED INC. Nov.
14, 2013. http://ww2.kqed.org/news/2013/11/14/118302/cap-and-trade-California.
6
by the AB 32. Still, despite finding additional authority for upholding AB 32‘s cap and trade
policy, Frawley penned his determination that California‘s cap and trade program does not
constitute a tax.13
Unsurprisingly this decision has done little to placate the concerns of distressed
businesses who allege their ability to compete in the national market has been impaired by
California‘s unique emissions regulations14
. Immediately after the decisions were handed down,
the Pacific Legal Foundation filed for appeal. The Chamber of Commerce, however, did not.
V. The Case Against Cap and Trade’s Constitutionality
The arguments against cap and trade‘s constitutionality exist at two levels, both of which
merit individual analysis. First, opponents raise a set of arguments supporting the conclusion that
AB 32 as drafted and adopted violates the California Constitution. The defendants have argued
that this question is irrelevant because it is not AB 32 that established the carbon permit auctions,
but rather the CARB, acting under its delegation of authority via AB 32. Thus, the second level
of attacks is aimed at whether this delegation of power adequately circumvents the legislative
approval requirement.
a. Cap and Trade is a Tax and is Unconstitutional without 2/3 Approval Pursuant to the
California Constitution
There are three interconnected pieces of California law at play in this matter: Proposition
13, Proposition 218, and Proposition 26, all of which are Amendments to the California State
Constitution.
13
―On balance, the court agrees that the charges are more like traditional regulatory fees than taxes, but it is a close
question.‖ J. Frawley. Joint ruling on submitted matters, Aug. 28, 2013.
14
At the time of enactment, California was the only state in the union with a carbon emissions cap. Assembly Bill 32
Overview, California Air Resources Board (Page last reviewed Aug. 5, 2014).
http://www.arb.ca.gov/cc/ab32/ab32.htm.
7
1. Proposition 13
Passed in 1978 under the name ―People‘s Initiative to Limit Property Taxation,‖
Proposition 13 amended the California Constitution, imposing a new requirement that all tax
increases in the State be approved by a two-thirds majority in both legislative houses. 15
Proposition 13 thus serves as the basic framework for the plaintiffs‘ contention that, if
considered a tax, cap and trade should have only been passed upon approval by a two-thirds
―supermajority.‖
2. Proposition 218
The next legislative element in the plaintiffs‘ case arises out of Proposition 218, passed in
1996, which extended the supermajority vote requirement one step further. Proposition 13
applies to all taxes, but Proposition 218 looks past the labels given to government programs and
instead focuses on their purpose. In the wake of Proposition 13‘s limitation on new taxes, many
voters and political commentators suspected that local governments had simply begun relabeling
revenue generating programs from ―taxes‖ to ―fees‖ in order to bypass the supermajority
approval requirement.16
Voters reacted by expanding the scope of Proposition 13 to eliminate
these perceived loopholes by passing Proposition 218.17
3. Proposition 26
15
Emphasis added. As discussed, supra, this phrase serves the pivotal function of distinguishing cap and trade from
the type of tax that was made unlawful under Proposition 13 of the California Constitution (author‘s note). 16
―Nearly two decades ago, Proposition 13 sharply constrained local governments' ability to raise property taxes, the
mainstay of local government finance. Proposition 13 also specified that any local tax imposed to pay for specific
governmental programs--a "special tax"--must be approved by two-thirds of the voters. Since that time, many local
governments have relied increasingly upon other revenue tools to finance local services, most notably: assessments,
property-related fees, and a variety of small general purpose taxes (such as hotel, business license, and utility user
taxes). It is the use of these local revenue tools that is the focus of Proposition 218.‖ O‘Malley, Marianne; Taylor,
Mac, Understanding Proposition 218, Legislative Analyst‘s Office. Dec. 1996. 17
Id.
8
The final, and most important, piece of the puzzle is Proposition 26, which was passed in
2010. Also known as the ―Supermajority Vote to Pass New Taxes and Fees Act‖ and
alternatively, the ―Stop Hidden Fees Initiative,‖ Proposition 26 greatly expands the scope of
government programs subject to the supermajority requirement, by making all forms of charges
subject to the rule and carving out a short list of well-settled exceptions.18
Although Proposition
26 was passed after AB 32 and carries no binding retroactive effect on the instant matter, it does
wield significant persuasive authority for two reasons. First, it crystallizes the initiatives set forth
in Proposition 13 and seeks to cure some of the defects of this closely related piece of legislation.
Second, Proposition 26 reflects the most current mindset of California taxpayers, thereby
suggesting that to read Proposition 13 as lacking the specificity of Proposition 26 would be to
discount the taxpayers‘ sentiments underlying their votes on the earlier legislation.19
While all three of these pieces of legislation work together to prevent excessive costs
being imposed on the residents of California without supermajority approval, Proposition 13 has
received, by far, the most intense analysis, having been in play the longest and having been the
subject of previous disputes at the California Supreme Court.
The plaintiffs contend that because AB 32 was enacted after the passage of Proposition
13 and concerns an increased cost of doing business in California and results in significant
revenues for the state, its passage by a simple majority vote failed to satisfy the heightened
requirement of the two-thirds vote required for imposing new taxes.
b. A Tax by Any Other Name…
18
Sinclair Paint Co. v. State Bd. of Equalization, 15 Cal. 4th 866, 872-73, 937 P.2d 1350, 1353 (1997). 19
―The Findings and Declarations of Purpose section of Proposition 26 indicates that the purpose of Proposition 26
is to address the ―recent phenomenon whereby … local governments have disguised new taxes as ‗fees‘ in order to
extract even more revenue from California taxpayers without having to abide by [Proposition 13‘s and Proposition
218‘s] constitutional voting requirements.‖ Proposition 26 Implementation Guide. League of California Cities. Apr.
2011.
9
Based on the legal foundation established by the three aforementioned amendments to the
California Constitution, AB 32‘s challengers contend that cap and trade was required, and failed,
to obtain a two-thirds vote in the State Senate, and therefore was passed in violation of the State
Constitution. Still, in order to prevail on this claim, the challengers would need to prove that cap
and trade does in fact constitute a tax in order for the supermajority rules to even apply. The
State has maintained that cap and trade is not a tax, that its purpose is purely to reduce carbon
emissions in the State of California, and that any revenues reaped as a result of its
implementation are strictly incidental. But the Pacific Legal Foundation and the businesses it
represents remain unconvinced; essentially arguing that if it looks like a tax, feels like a tax, and
smells like a tax, it‘s probably a tax.
According to the Center for Climate and Energy Solutions (C2ES), emission permit
trading and taxation are two separate solutions to a singular problem. In an online infographic
titled ―Climate Change 101: Cap and Trade,‖ the Center explains the key functions of
California‘s cap and trade program, the manner in which the carbon emissions cap is enforced,
and the market mechanisms by which permit trading is allowed. In a section titled, ―Tax or
Trade,‖ the Center breaks down the key differences as follows:
“In addition to cap and trade, another type of market mechanism
sometimes discussed as a means of reducing GHG emissions is a
carbon tax, which would require emitters to pay a tax for every ton
of GHGs they emit. The key difference between the two approaches
is that cap and trade provides environmental certainty, since the
quantity of total allowable emissions is set, while a tax provides
price certainty, since the cost of emitting a given amount of GHGs
is set. In response to a tax, many emitters will reduce their
emissions, but others might simply accept the additional cost and
continue to emit. Determining the correct level at which to set a
tax in order to drive any given level of emissions reductions is
difficult. Cap and trade and a tax have to address many of the
same issues. Both cap and trade and a carbon tax use economic
incentives to promote least-cost emission reductions and drive
10
climate-friendly innovation. Both approaches would require
careful monitoring and enforcement, and both must address the
question of how to distribute costs and benefits. For cap and trade
that means figuring out how to distribute and/or auction emission
allowances; under a tax that means figuring out who pays the tax
and what to do with the tax revenue.”20
This article appears to draw the distinction between a carbon tax and a cap and trade
system based on whether or not a specific carbon emissions limit is imposed and increased
carbon costs developed subsequently, versus carbon costs being directly imposed and no specific
cap being set.21
But while there are substantial differences between the two programs, as far as
applying the label of ―tax‖ goes, the contrast is less stark. Both drive up the cost of doing
business in California and both generate significant revenue for the state by penalizing pollution.
So while only one is called a tax, both programs entail the same tax-like measures that AB 32‘s
opponents disfavor.
Additionally, simply rebranding a tax as a regulatory fee has no effect on the
constitutionality of the policy. Cap and trade‘s opponents make this argument in their 2011
lawsuits, claiming, ―This escalation in taxation does not account for the recent phenomenon
whereby the Legislature and local governments have disguised new taxes as ‗fees‘ in order to
extract even more revenue from California taxpayers without having to abide by these
constitutional voting requirements. Fees couched as ‗regulatory‘ but which exceed the reasonable
costs of actual regulation or are simply imposed to raise revenue for a new program and are not
part of any licensing or permitting program are actually taxes and should be subject to the
limitations applicable to the imposition of taxes.‖22
20
Climate Change 101: Cap and Trade, Center for Climate and Energy Solutions.
http://www.c2es.org/docUploads/climate101-captrade.pdf 21
Id. 22
Morningstar, id. [citing Voter information guide, Gen. Elec. (Nov. 2, 2010) text of Prop.26, § 1(c) at p. 114].
11
c. California Cap and Trade‘s Proposed Federal Counterpart, which is Almost Functionally
Identical, Is Widely Considered to be a Tax
In addition to virtually all of its detractors (overwhelmingly Republican-affiliated)23
,
even some of cap and trade‘s biggest supporters have conceded that it is a tax. Granted, most of
the high profile discussion on cap and trade regards a hypothetical, federally instituted regime,
not the cap and trade program as it exists in California pursuant to AB 32. However, the salient
tenets of any cap and trade program, including those at the heart of the instant lawsuits, would
exist as a matter of necessity. Thus, it is worth examining criticisms leveled at proposed federal
cap and trade programs in assessing the perceived constitutionality of California‘s existing
program.
Libertarian think-tank, the Competitive Enterprise Institute, has argued that the bill
(referring to the proposed federal iteration of cap and trade) would essentially be the "largest tax
hike in world history."24
Famed libertarian author, Thomas Friedman, has similarly contended
that ―[a]dvocates of cap-and-trade argue that it is preferable to a simple carbon tax because it
fixes a national cap on carbon emissions and it ‗hides the ball‘ — it doesn‘t use the word ‗tax‘ —
even though it amounts to one. So it can get through Congress. That was true as long as no one
thought cap-and-trade could ever pass, but now that it might under Mr. Obama, opponents are
not playing hide the ball anymore.‖25
AB 32‘s opponents have been quick to point out that even a number of environmentally-
minded democratic politicians have conceded that cap and trade constitutes a tax. For instance,
Senior Congressman John Dingell (D-MI) said during an Energy and Commerce Committee
23
AB 32 passed by a narrow margin of 47 to 32. Of the 47 ―yea‖ votes, only one, Shirley Horton, was a republican. 24
Lewis Jr., Marlo, Cap-and-Trade Schemes are Not Markets, Competitive Enterprise Institute, Sept. 22, 2010. 25
Friedman, Thomas L., Show us the Ball, The New York Times. Apr. 7, 2009.
12
Hearing that ―Nobody, nobody in this country realizes that cap-and-trade is a tax and it‘s a great
big one.‖26
Similarly, Senator Ben Cardin (D-MD) has publicly called cap-and-trade ―the most
significant revenue-generating proposal of our time.‖27
―Politicians in Washington pushing this plan know full well that ‗Cap and Trade‘ is really
an elaborate plan to bring more money into the Federal government -- taking hundreds of billions
of additional dollars out of the weekly paychecks of millions of families in order to create and
fund lavish new unaffordable government programs. (Also, H.R. 2454 would have taken tens of
billions of your tax dollars and put them in the coffers of politicians favored companies who get
special carbon breaks in H.R. 2454.)‖28
While certainly not dispositive of the issue, the bipartisan recognition of cap and trade as
a sort of tax lends credence to the plaintiffs‘ claims.
d. CARB‘s Carbon Permit Program Matches the Dictionary Definition of a Tax
The crux of this argument perhaps rests on the construction of the act and the definition
of the word tax.
The plain dictionary definition of a tax is ―a compulsory contribution to state revenue,
levied by the government on workers' income and business profits or added to the cost of some
goods, services, and transactions.‖29
Although courts are rarely persuaded by non-legal
definitions set forth in dictionaries aimed at the layperson, the plaintiffs contend that legislation
affecting everyday voters should be grounded in common sense.
26
Thrush, Glenn, Dingell: Cap and trade a „great big‟ tax, Politico. Apr. 27, 2009. 27
Montgomery, Lori. Congress Approves Budget, The Washington Post. Apr. 3, 2009. 28
Posey, Bill, U.S. Congressman, Cap & Trade – National Energy Tax, U.S. Congressman Bill Posey. 29
Merriam-Webster Collegiate Dictionary, 10th
Ed., Merriam-Webster Incorporated, 2015.
13
Taken at face value, the sale of carbon permits, appear to fall squarely within this
definition.30
The permits must be purchased by certain businesses in order to carry on business as
usual, remain profitable, and continue employing workers. This added cost, which arises out of
State legislation is certainly levied by the government and is added to the cost of some goods,
services and transactions.
Still, opponents of cap and trade contend that regardless of the Act‘s stated intent, the
fact of the matter remains that cap and trade is a compulsory contribution to state revenue levied
by the government which is added to the cost of goods, services and transactions, and that the
State government should not be allowed to hide behind its self-congratulatory motives of saving
the planet and hiding the fact that billions of dollars of revenue31
have been reaped by the State
since AB 32‘s passage.
e. Cap and Trade is Generating Billions of Dollars of Revenue for the State
The purpose of taxation, generally, is to generate funding for goods and services that
benefit the entire taxed population.32
In the case of cap and trade, the State of California has
generated hundreds of millions of dollars at each carbon auction, with the projected total haul
during the course of AB 32‘s first, seven year regulatory phase-in period reaching into the tens of
30
It should be noted, however, that, as argued below, Proposition 26‘s definition of a tax differs significantly from
the definition found in the standard, household Merriam-Webster dictionary. Specifically, Proposition 26 includes a
critical element of intent, which legally requires that the penalty imposed be for the purpose of generating revenue. 31
―California‘s Cap-and-Trade program could generate an estimated $20 to $60 billion in state revenue through
2020.‖ ―Making Sense of California‘s Cap and Trade System.‖ California Common Sense (see supra). May 4, 2014.
http://cacs.org/research/californias-cap-and-trade-and-what-will-influence-its-future (last visited Dec. 7, 2015). 32
―Throughout history, every organized society had some form of government. In free societies, the goals of
government have been to protect individual freedoms and to promote the well-being of society as a whole. To meet
their expenses, government need income, called "revenue," which it raises through taxes. In our country,
governments levy several different types of taxes on individuals and businesses. The Federal Government relies
mainly on income taxes for its revenue. State governments depend on both income and sales taxes. Most county and
city governments use property taxes to raise their revenue.‖ U.S. Department of the Treasury. Economics of
Taxation. http://www.treasury.gov/ resource-center/faqs/Taxes/Pages/economics.aspx (last visited Dec. 7, 2015).
14
billions.33
Plaintiffs argue that the sheer volume of revenue generated through CARB‘s carbon
permit auctions is evidence of the Act‘s impropriety.
As discussed at various other points herein, Proposition 13 only applies to taxes which
are imposed for the purpose of generating revenue. The State has argued that cap and trade was
established not for the purpose of generating revenue to the State government, but rather that
these revenues are a natural and incidental byproduct of the legislation; not the motivating factor.
Challengers to AB 32‘s constitutionality, however, refute this claim by pointing out just
how much money the State has made and continues to make by selling carbon permits, arguing
that State programs don‘t just incidentally generate tens of billions of dollars.34
f. The State‘s Delegation of Power to CARB Should not Circumvent Voters‘ Rights to be Heard
Finally, AB 32‘s opponents have insisted that the State should be allowed to delegate
such broad discretion to another entity with knowledge of a likelihood that any program
instituted by that entity would impose expenses on voters while generating revenue to the State.
When Judge Frawley of the Sacramento Superior Court struck down plaintiffs‘ initial lawsuits,
he explained that regardless of whether the carbon permit auctions constitute a tax, those
auctions were not specifically included in the text of AB 32. Rather, the act merely delegated
power to CARB to create a carbon market to govern AB 32‘s cap and trade provisions.35
Although damning to the plaintiffs‘ case, this ruling suggests that state and local governments
can easily sidestep Propositions 13 and 26‘s voting requirement by essentially imposing taxes
under a two-step process: Hypothetically, the government could (1) pass, by a simple majority, a
bill containing a general legislative framework which delegates the implementations of the bill‘s
33
Verified Petition for Writ of Mandate and Complaint for Declaratory Relief. Morning Star Packing Company, et
al. v. CARB, et al. 34
Id. 35
Frawley, supra.
15
specific goals to an administrative agency. Then, (2) once the bill has passed, that agency could
impose penalties serving the functional equivalent of taxes without having to clear the
supermajority hurdle.
Although there is no concrete evidence of this tactic being deployed elsewhere, it seems
at least plausible under the Superior Court‘s reasoning. And the fact that the taxation issue was
considered as a secondary issue makes the shaky foundation for the primary ruling all the more
important.
g. The Distinction between Taxes and Fees is Not Well Settled
So far, California courts have tended to give programs purportedly assessing ―regulatory
fees‖ that blur the line of taxation the benefit of the doubt. Numerous cases decided in relatively
close proximity to AB 32‘s passage have embraced similar issues and the resulting decisions
have repeatedly maintained that similar fees assessed for similar purposes escape the voting
requirements of Propositions 13 and 26 and related legislation.36
However, many of these cases
contain lengthy and passionate dissenting opinions.37
Opponents point to the prevalence of such
dissenting opinions as evidence that cap and trade‘s survival is the product of politically
influenced judicial activism and therefore subject to reversal.
Thus, while the judicial trend in similarly situated cases disfavors the challengers‘ views,
the distinction between taxes and fees in the realm of Constitutional analysis remains hotly
contested.
VI. The Case for Cap and Trade’s Constitutionality
36
Sinclair and LACTC, infra, as well as Cabrera v. City of Huntington Park, 159 F.3d 374 (9th Cir. 1998;
Apartment Ass'n of Los Angeles Cty., Inc. v. City of Los Angeles, 24 Cal. 4th 830, 14 P.3d 930 (2001); and Howard
Jarvis Taxpayers Ass'n v. City of La Habra, 25 Cal. 4th 809, 23 P.3d 601 (2001) all resolved similar issues
concerning the application of Proposition 13. 37
Notably, Justice Richardson‘s dissenting opinion in Los Angeles County Transportation Com. V. Richmond,
which exceeds the majority opinion in length and depth of analysis.
16
Having already faced judicial analysis at the Superior Court level, and prevailing against
a battery of constitutional attacks, proponents of California‘s cap and trade regime appear to, at
least at the moment, have the upper hand. However, despite the fact that each of the following
arguments were found persuasive in the lower court,38
there is no guarantee that the higher courts
will arrive at the same conclusion.
a. Regulatory Fees are Not Taxes – Just ask Sinclair
According to Judge Frawley of the California Superior Court, the payments made by
businesses at the carbon auction are more aptly categorized as ―traditional regulatory fees than
taxes‖ similar to hunting permits and mineral extraction licenses.39
Plaintiffs‘ constitutional challenges to CARB‘s revenue-generating carbon permit sales
harken back to a similar, and unsuccessful charge by Sinclair Paint Company against California‘s
State Board of Equalization with regards to fees assessed against paint manufacturers under the
Childhood Lead Poisoning Prevention Act. The facts of that case are as follows:
In 1991, by simple majority vote, the Legislature enacted the Childhood Lead Poisoning
Prevention Act of 1991 (the Act) (Stats.1991, ch. 799, § 3, amended Stats.1995, ch. 415, § 5; see
870 Health & Saf.Code, § 105275 et seq.).1 The Act provided evaluation, screening, and
medically necessary follow-up services for children who were deemed potential victims of lead
poisoning. The Act's program was entirely supported by ―fees‖ assessed on manufacturers or
other persons contributing to environmental lead contamination. (See §§ 105305, 105310.) The
38
Frawley, supra. 39
―In sum, the charges have some traditional attributes of a tax and some traditional attributes of a regulatory fee
but, on balance, the court finds the charges to be more like a regulatory fee/charge than a traditional tax.
Accordingly, the court shall review the charges using the regulatory fee framework.‖ Id.
17
question arose whether these fees were in legal effect ―taxes‖ required to be enacted by a two-
thirds vote of the Legislature. (See Cal. Const., art. XIII A, § 3.)40
The California Supreme Court ruled, ―Contrary to the trial court and Court of Appeal, we
conclude that the Act41
imposed bona fide regulatory fees, not taxes, because the Legislature
imposed the fees to mitigate the actual or anticipated adverse effects of the fee payers'
operations, and under the Act the amount of the fees must bear a reasonable relationship to those
adverse effects. Accordingly, the trial court erred in granting summary judgment to award
plaintiff Sinclair Paint Company (Sinclair) a refund of the fees it paid under the Act.‖ Sinclair
Paint Co. v. State Bd. of Equalization, 15 Cal. 4th 866, 869-70, 937 P.2d 1350, 1351 (1997).
The Sinclair court labored over the distinction of taxes and fees, as well as a third
category of ―special taxes,‖42
which might be labeled ―fees‖ or ―assessments‖ but are the
functional equivalent of taxes and subject to the voting requirements of Propositions 13 and 2643
.
The deliberation undertaken by the State Supreme Court in Sinclair in 1997 demonstrates just
how fine of a line the law draws between taxes and fees.
40
Sinclair Paint Co. v. State Bd. of Equalization, 15 Cal. 4th 866, 869-70, 937 P.2d 1350, 1351 (1997). 41
The ruling in the Sinclair case applies strictly to the Childhood Lead Poisoning Prevention Act of 1991. However,
it is applicable to the instant discussion because it too was passed by a simple majority and imposed a monetary
penalty on certain businesses while generating revenue for the state government, leading some California businesses
to decry the act as an unconstitutional tax – much like the those opposing AB 32. 42
[T]o show a fee is a regulatory fee and not a special tax, the government should prove (1) the estimated costs of
the service or regulatory activity, and (2) the basis for determining the manner in which the costs are apportioned, so
that charges allocated to a payor bear a fair or reasonable relationship to the payors' burdens on or benefits from the
regulatory activity. San Diego Gas & Elec. Co. v. San Diego Cnty. Air Pollution Control Dist., 203 Cal. App. 3d
1132, 1146, 250 Cal. Rptr. 420, 429 (Ct. App. 1988). 43
Article XIII A of the Constitution is the product of Proposition 13, a 1978 initiative aimed at reducing property
taxes. Section 4 of that article provides that ―Cities, Counties and special districts, by a two-thirds vote of the
qualified electors of such district, may impose special taxes on such district ....‖ Although this section appears to be
a grant of power allowing local entities to enact special taxes, it actually has the effect of limiting their enactment
(City and County of San Francisco v. Farrell (1982) 32 Cal.3d 47, 53, 184 Cal.Rptr. 713, 648 P.2d 935). Huntington
Park Redevelopment Agency v. Martin, 38 Cal. 3d 100, 105, 695 P.2d 220, 222 (1985)
18
Are the ―fees‖ section 105310 imposes in legal effect ―taxes
enacted for the purpose of increasing revenues‖ under article XIII
A, section 3, and therefore subject to a two-thirds majority vote?
Although we have found no cases that interpret the language of
section 3, several California appellate decisions have considered
whether various fees are really ―special taxes‖ under article XIII A,
section 4. (See also City and County of San Francisco v. Farrell
(1982) 32 Cal.3d 47, 57, 184 Cal.Rptr. 713, 648 P.2d 935 [―special
taxes‖ are taxes levied for a specific purpose rather than for
general governmental purposes]; Gov.Code, § 50076 [excluding
from the term ―special tax‖ in article XIII A, section 4, ―any fee
which does not exceed the reasonable cost of providing the service
or regulatory activity for which the fee is charged and which is not
levied for general revenue purposes‖].) Because of the close,
―interlocking‖ relationship between the various sections of article
XIII A (see Amador Valley, supra, 22 Cal.3d at p. 231, 149
Cal.Rptr. 239, 583 P.2d 1281), we believe these ―special tax‖ cases
may be helpful, though not conclusive, in deciding the case before
us. The reasons why particular fees are, or are not, ―special taxes‖
under article XIII A, section 4, may apply equally to section 3
cases.2
***
We first consider certain general guidelines used in determining
whether ―taxes‖ are involved in particular situations. The cases
agree that whether impositions are ―taxes‖ or ―fees‖ is a question
of law for the appellate courts to decide on independent review of
the facts. (Bixel Associates v. City of Los Angeles (1989) 216
Cal.App.3d 1208, 1216, 265 Cal.Rptr. 347; California Bldg.
Industry Assn. v. Governing Bd. (1988) 206 Cal.App.3d 212, 234,
253 Cal.Rptr. 497; Russ Bldg. Partnership v. City and County of
San Francisco (1987) 199 Cal.App.3d 1496, 1504, 246 Cal.Rptr.
21.)
***
The cases recognize that ―tax‖ has no fixed meaning, and that the
distinction between taxes and fees is frequently ―blurred,‖ taking
on different meanings in different contexts. (Russ Bldg.
Partnership v. City and County of San Francisco, supra, 199
Cal.App.3d at p. 1504, 246 Cal.Rptr. 21; Terminal Plaza Corp. v.
City and County of San Francisco (1986) 177 Cal.App.3d 892,
905, 223 Cal.Rptr. 379; Mills v. County of Trinity (1980) 108
Cal.App.3d 656, 660, 166 Cal.Rptr. 674; County of Fresno v.
Malmstrom (1979) 94 Cal.App.3d 974, 983–984, 156 Cal.Rptr.
777.) Sinclair, supra, at 937.
19
At the heart of the Sinclair decision is the basic rule that regulatory fees are not taxes if
the revenue they generate is sufficiently tied to regulating the entities paying the fees. Plaintiffs
in Sinclair argued – successfully, at the trial and appellate levels – that fees imposed to generate
revenue to fund a program that provides medical screening and treatment for children exposed to
lead paint, did not directly regulate the paint manufacturers and that the connection between the
collection of the fees and the expenditure of the revenues raised was too tenuous. However, the
California Supreme Court ultimately held otherwise, finding that there was a sufficient nexus
between the purpose of the statute and the expenditures of the government monies raised by its
enforcement.
A nearly identical discussion arises in the matter of cap and trade. The plaintiffs argued in
the first round of lawsuits that the programs being funded by the revenues generated by carbon
permit sales do not serve a sufficiently regulatory function to escape designation as a ―tax.‖44
The California Supreme Court, in Sinclair, applied a fairly liberal definition for
regulatory fees, explaining, ―[c]ontrary to the Court of Appeal, we believe that section 105310
imposes bona fide regulatory fees. It requires manufacturers and other persons whose products
have exposed children to lead contamination to bear a fair share of the cost of mitigating the
adverse health effects their products created in the community. Viewed as a ‗mitigating effects‘
measure, it is comparable in character to similar police power measures imposing fees to defray
the actual or anticipated adverse effects of various business operations.‖ Sinclair, supra, at 1356.
The California government, in defending AB 32, has emphasized the similarities between the
Lead Paint Act and AB 32 and the types of activity they regulate.45
Both acts were motivated by
an intent to increase public health and safety, both increase the cost of doing business for entities
44
Morningstar v. CARB, supra; Chamber of Commerce v. CARB, supra. 45
―Answer By California Air Resources Board, et al., to Amici Curiae.‖ 25 June 2015.
20
whose activities produce potentially harmful chemicals, and both generate revenue which is then
used to enforce their own implementation and regulation. AB 32 further benefits from Sinclair‟s
decision that ―remediation measures‖ need only be tied to the regulated entities in nature, and not
proportion. The plaintiffs attacking the Lead Paint Act in Sinclair, as well as the AB 32
challengers have both argued that today‘s polluters should not bear the burden of correcting
problems created by yesterday‘s polluters. The Sinclair court ruled that it only matters that
―charges allocated to a payor bear a fair or reasonable relationship to the payor's burdens on or
benefits from the regulatory activity‖ and not whether such charges are perfectly proportionate to
the individual payor‘s contribution to the overall problem.46
The question then becomes whether CARB‘s use of cap and trade revenues is tailored
closely enough to promoting the regulation of carbon emitting entities to be afforded analogy to
Sinclair.
b. The Dictionary Definition of ―Tax‖ is Irrelevant to the Discussion
As noted, supra, the broad dictionary definition of ―tax‖ may likely apply to the sale of
carbon emission permits. However, as Sinclair points out, the categorization of a fee as a tax is
not something that can be ―reverse engineered.‖ That is to say, the courts will not look at a
regulation that results in revenue generation and agree that it is a tax. Instead, they must look at
whether the regulation was imposed for the purpose of generating revenue.47
Essentially, where
revenue generation is merely incidental, the regulation cannot be said to constitute a tax. See
further discussion, infra.
One of the challengers‘ fundamental claims is that all taxes imposed in California after
1978 must be approved by a two-thirds supermajority vote in accordance with Proposition 13.
46
Sinclair, supra. 47
Sinclair, supra, at 937.
21
However, this claim is not completely accurate. Proposition 13 imposes the heightened voting
requirement on all taxes as defined in Proposition 13. Thus, it is of critical importance to
determine whether cap and trade actually falls within the category of taxes prescribed by
Proposition 13 (Proposition 26 reflects the same language),‖ which states ―From and after the
effective date of this article, any changes in State taxes enacted for the purpose of increasing
revenues collected pursuant thereto whether by increased rates or changes in methods of
computation must be imposed by an Act passed by not less than two-thirds of all members…of
the legislature.‖48
The key portion of Proposition 13 is the phrase ―enacted for the purpose of
increasing revenues.‖ According to the defendants, AB 32 was enacted for the purpose of
reducing carbon emissions, not for the purpose raising revenues.49
Further, although cap and
trade has proved extremely lucrative, these revenues have been purely incidental and not the
driving force behind the policy. Defendants further highlight the gap between the purpose of the
policy and the money it has generated by limiting the expenditure of that money on expenses
related to the general purpose of establishing and enforcing ―global warming solutions‖ – such as
AB 32‘s textual name would suggest. ―As stated in United Business, if regulation is the primary
purpose of the fee measure, the mere fact that the measure also generates revenue does not make
the imposition a tax. (United Business, supra, 91 Cal.App.3d at p. 165, 154 Cal.Rptr. 263; see
also Mills v. County of Trinity, supra, 108 Cal.App.3d at p. 660, 166 Cal.Rptr. 674 [rejecting
broad definition of ‗tax‘ as including all fees and charges that exact money for public
purposes].)‖ Sinclair, supra, at 880.
c. Revenue Generation is Incidental to, not the Purpose of, Regulation
48
Morningstar, supra. 49
Id.
22
Although the Superior Court found the issue of whether CARB‘s permit auctions should
be considered a type of tax to be a deciding factor in the outcome of the case, CARB urges that
―the issue is not whether the auction and reserve sales are ‗fees‘ under Sinclair Paint. Under the
language of section 3 of Proposition 13, the issue is whether the auction and reserve sales are
‗taxes‘ that were ‗enacted for the purpose of increasing revenues.‘‖50
By citing to the specific
language of Proposition 13, CARB argues that even if the auctions constitute a tax, that is not
enough to run afoul of the State Constitution. Rather, the challengers must prove an additional
element of intent: the intent to generate revenue. CARB claims that such cannot be proven
because the purpose of establishing a carbon market is not motivated by revenue creation, but
rather by a desire to limit the amount of greenhouse gases emitted by businesses in the State and
to encourage development of sustainable and more efficient energy production and use.51
d. Carbon Permit Auctions do not Contradict the Legislative Intent of Proposition 13
The sister argument to the above claim that revenue generation through cap and trade is
merely incidental to the primary goal of curtailing emissions, rests on the legislative intent of
Proposition 13. While AB 32‘s challengers argue that Proposition 13 requires that all taxes be
passed by a two-thirds senate vote, the reasons for enacting Proposition 13 were more nuanced.
According to CARB, ―Section 3 of Proposition 13 was intended to restrict the state from
attempting to make up for lost property tax revenues by increasing other taxes or creating new
ones.‖ In the case of cap and trade, the apparent intent behind establishing a restricted carbon
market was not to ―make up for lost property tax revenues.‖ Rather, the purpose was to confront
50
Answer by California Air Resources Board to Amici Curiae, COC v. CARB, Cal.App.3 Dist. at 16 (2015). 51
Id.
23
global warming. After all, AB 32‘s textual name is ―The Global Warming Solutions Act of
2006.‖52
e. AB 32 Does Not Specifically Recognize the Sales of Carbon Permits
Supporting its claim that cap and trade was not enacted for the purpose of raising
government revenues, the state has pointed to the fact that AB 32 does not specifically create the
carbon permit auctions, set the price of the permits, or otherwise prescript the manner and extent
of revenue generation. These are all tasks delegated to CARB. Thus, since AB 32 does not create
the money-making mechanism, it should not be found to have been passed with the intention of
making money.53
In his decision upholding the constitutionality of California cap and trade, Judge Frawley
relied heavily on the fact that AB 32 gives broad discretion to the CARB to impose limitations
on pollution and construct incentives for businesses to improve efficiency, but does not directly
levy any financial burden on California businesses.54
f. Auction Prices are Set by Market Forces, Not the Government
In the typical tax scenario, the population subject to the taxation is broken into specific
brackets, with members of the various brackets paying to the state, some predetermined
percentage in addition to the base cost of a specific set of goods or services. These percentages
are both static and dictated by the government. Not so with the prices of carbon permits sold
under CARB‘s auctions. Instead, the price of said permits is subject to fluctuation, like any other
52
Center for Climate and Energy Solutions (C2ES), supra. 53
Id. 54
―The first objection was relatively easy to dismiss. AB32, the 2006 law that began California‘s efforts to limit
greenhouse gas (GHG) emissions to 1990 levels by 2020, give ARB ―wide discretion to design a system of
emissions reductions,‖ according to Cara Horowitz, a lawyer and the Executive Director of UCLA‘s Emmett Center
on Climate Change and the Environment.‖ Goldstein, Allie. Cap-and-Trade Is Not A Tax, California Court Says,
Ecosystems Marketplace, 18 November 2013.
24
commodity traded on the free market. Judge Frawley relied in part on this fact in his
determination that CARB‘s permit auctions were sufficiently distinguishable from a tax.
g. No Meaningful Remedy is Realistically Available at this Point
Though not specifically cited by Judge Frawley, another reason for the survival of cap
and trade is the timing of the challenges. The law officially went into effect in 2006, and carbon
permit auctions have been held semi-annually since. As time continues to pass and the web of
permit purchases and trades becomes more and more tangled, the less likelihood there is that a
court ruling in favor of the challengers can adequately right the alleged wrongs.
The passage of time also continues to disprove many of the nightmare scenarios the
challengers have predicted to result from the increased burden on commercial enterprise in
California. Plaintiffs argued in their original complaint that ―The regulation creates a quarterly
auction program requiring many California employers to bid significant amounts of money for
the privilege of continuing to emit carbon dioxide – or be faced with closing their doors in
California, laying off their employees, and moving their business to other states.‖55
CARB and
its supporters argue that California‘s businesses have been fully capable of complying with the
new rules and have not only maintained commercial viability, but have succeeded in innovating
and developing more sustainable and more efficient manners of operation, allowing these
businesses to remain profitable while at the same time becoming leaders in tomorrow‘s energy
market.56
VII. Judicial Analysis
55
Hadzi-Antich, Theodore, Cap and trade auction is an unconstitutional tax, Pacific Legal Foundation, 2014. 56
―Critics such as the California Chamber of Commerce and the Pacific Legal Foundation—which are suing the
state to block the program—say it increases the cost of doing business, though no measurable estimate
exists. Severin Borenstein, co-director at the Energy Institute at the University of California, Berkeley's Haas School
of Business, says costs so far have been marginal, as most allowances were given away and remain relatively
inexpensive.‖ Lazo, Alejandro, How Cap-and-Trade is Working in California, The Wall Street Journal, Sept. 28,
2014.
25
a. How Should the Language of AB 32 be Construed?
The rules of construction are a funny thing. Complete elimination of ambiguities amongst
the English language is a daunting task which is certainly not made easier by trying to appease a
diverse field of legislators on the road to congressional approval. Many a law has been undone
merely by virtue of what Chief Justice John Roberts has referred to as ―inartful drafting.‖57
For
instance the Affordable Care Act almost suffered a fatal blow because a portion of its massive
text referred to the United States Government in general as ―the State‖ which opponents of the
law argued could be interpreted as one of the fifty states.58
Arguably the keystone case for statutory construction in California is Yamaha v. Board of
Education, which determined that the definitions provided by the government administration
overseeing the enactment and enforcement of the law in question may be given deference.
―Courts must, in short, independently judge the text of the statute, taking into account and
respecting the agency's interpretation of its meaning, of course, whether embodied in a formal
rule or less formal representation. Where the meaning and legal effect of a statute is the issue, an
agency's interpretation is one among several tools available to the court. Depending on the
context, it may be helpful, enlightening, even convincing. It may sometimes be of little worth.
Considered alone and apart from the context and circumstances that produce them, agency
interpretations are not binding or necessarily even authoritative.‖ Yamaha Corp. of Am. v. State
Bd. of Equalization, 19 Cal. 4th 1, 7, 960 P.2d 1031, 1033 (1998) (referencing Traverso v.
People ex rel. Dept. of Transportation (1996) 46 Cal. App. 4th 1197, 1206 [54 Cal. Rptr. 2d
434].).
57
―And rigorous application of that canon does not seem a particularly useful guide to a fair construction of the
Affordable Care Act, which contains more than a few examples of inartful drafting.‖ King v. Burwell, 135 S. Ct.
2480, 2483, 192 L. Ed. 2d 483 (2015) 58
Id. at 2494 (footnote 4).
26
The inquiry then turns on whether the California Air Resources Board – the agency
governing the enforcement of the carbon permit auctions in accordance with the state‘s cap and
trade program – has offered an interpretation of the permit auctions, and whether such an
interpretation has merit, given the circumstances.
Under the ―Definitions‖ section of AB 32, codified as California Health and Safety Code
§ 38505, the Act describes the permit auctions as follows: ―(k) ―Market-based compliance
mechanism‖ means either of the following: (1) A system of market-based declining annual
aggregate emissions limitations for sources or categories of sources that emit greenhouse gases.
(2) Greenhouse gas emissions exchanges, banking, credits, and other transactions, governed by
rules and protocols established by the state board, that result in the same greenhouse gas
emission reduction, over the same time period, as direct compliance with a greenhouse gas
emission limit or emission reduction measure adopted by the state board pursuant to this
division.‖59
Given the overall tone of AB 32 as an initiative to confront anthropogenic global warning
and the definitions of the cap and trade portion of the act, which reflect an apparent focus on
environmental protection rather than revenue generation, CARB‘s interpretation of the permit
auctions as a regulatory fee rather than a tax certainly has merit. This conclusion largely
discredits allegations by cap and trade‘s opponents that the policy is intended to syphon more
money out of the pockets of tax payers, and, in doing so, tips the scales in favor of the
defendants.
b. The Effect of Proposition 13
59
Cal. Health & Safety Code § 38505 [Definitions] (West)
27
As noted earlier, CARB contends that Proposition 13 only restricts the passage of taxes
which are imposed for the explicit purpose of generating revenue, not regulatory measures which
incidentally result in revenue generation.
The Sinclair and LACTC cases decided in the California Supreme Court in the years
leading up to AB 32‘s enactment lend support to CARB‘s arguments that the intent behind a fee
or penalty should be a primary inquiry in assessing its compliance with Proposition 13.60
Still, the stated purpose of a particular regulation should never be given absolute
deference. Statements in the legislative history of Proposition 218,61
also known as the ―right to
vote‖ rule, are indicative of the concern that regulations asserting one purpose may actually seek
to achieve another altogether, relying on semantic loopholes to sidestep procedural impediments.
To address these concerns, Yamaha proposes a ―totality of the circumstances‖ approach to
determine the merits of an agency‘s purpose.62
As resolved in section VII(a) above, the totality
of the circumstances likely supports a finding that CARB‘s stated purpose for the permit auctions
is legitimate and not motivated by revenue generation. Thus, while CARB‘s definition may not
given absolute deference, it is given sufficient weight to, combined with the apparent intent of
AB 32 overall, pass muster. As such, a reasonable court would not conclude that cap and trade‘s
permit auction is merely passing off a tax as a regulatory fee in an effort to sidestep
constitutional limitations on taxation.
c. The Effect of Proposition 26
60
Sinclair Paint Co. v. State Bd. of Equalization, 15 Cal. 4th 866, 872-73, 937 P.2d 1350, 1353 (1997); Los Angeles
Cnty. Transp. Com. v. Richmond, 31 Cal. 3d 197, 643 P.2d 941 (1982)
61
Author‘s note: Proposition 218 is not discussed at length on account of being almost entirely subsumed and
replaced by proposition 26. 62
Yamaha Corp. of Am. v. State Bd. of Equalization, 19 Cal. 4th 1, 7, 960 P.2d 1031, 1033 (1998)
28
While Proposition 13 is easily overcome based on its text, CARB will likely face more of
a fight over plaintiffs‘ attacks under Proposition 26. That is, however, only if the plaintiffs are
able to somehow bundle the more refined language of Proposition 26 into the intent and purpose
of its predecessors. The reason for this is that Proposition passed in 2010, four years after AB 32
went into effect. Lacking retroactive effect, Proposition 26 carries no actual binding authority.
However, being that Proposition 26 was intended to simply tighten up Proposition 13‘s loose
ends and carry out its intended purpose, it is worth examining plaintiffs arguments based on the
most recent effort to curtail the imposition of hidden fees on California‘s taxpayers.
In order for a government action to escape the supermajority requirement of Proposition
26, it must fall within one of the enumerated exceptions.63
Of the available exceptions, the one
arguably most favorable to CARB reads as follows: ―A charge imposed for the reasonable
regulatory costs to a local government for issuing licenses and permits, performing
investigations, inspections, and audits, enforcing agricultural marketing orders, and the
administrative enforcement and adjudication thereof.‖ Judge Frawley reasoned that revenues
generated under AB 32 have been reallocated in a manner that is sufficiently related to the
funding and enforcement of AB 32 so as to be availed of this exception to Proposition 26, but his
basis for doing so is largely cursory. Rather than elaborate on the salient qualities of hunting
permits and carbon permits, Frawley‘s explanation in his ruling simply states, ―If the
atmosphere‘s capacity to assimilate GHGs is viewed as a limited public resource, selling
emissions allowances can be analogized to selling a right to use a public resource, similar to a
hunting/fishing license, a mineral extraction permit, or a wireless electromagnetic spectrum
license.‖ But Frawley‘s reasoning omits to even acknowledge one of the plaintiffs‘ more
63
1. Charges for a Specific Benefit or Privilege; 2. Charges for a Specific Government Service of Product; 3. True
Regulatory Charges; 4. User Charges; 5. Fines and Penalties.
29
compelling arguments. In its complaint, Pacific Legal Foundation admits that certain licensing
and permitting fees are exempt from Proposition 26, but only because the cost imposed on
businesses and individuals in those other scenarios is equivalent to the cost of enforcing such
programs.64
By contrast, the costs of polluting go far beyond merely funding the operations of
CARB‘s carbon market. Therefore, according to the plaintiffs, only those fees which are strictly
necessary to fund AB 32‘s specified functions may find refuge under Proposition 26‘s ―True
Regulatory Charges‖ exemption, while all excess penalties, which essentially go into an AB 32
slush fund, should be considered illegal taxes.65
Notwithstanding Judge Frawley‘s disinclination for specifically addressing these
arguments, the ultimate decision is most likely well-founded. The language of Proposition 26 is
sufficiently ambiguous as to the extent to which charges imposed must be tethered to the
regulatory costs for government agencies, stating only that ―Charges imposed for reasonable
regulatory costs are charges that fund the administrative cost related to issuing licenses and
permits, performing investigations, inspections, audits, and enforcing agricultural orders.‖ For a
piece of legislation as expansive as AB 32, one would be hard-pressed to make the argument that
charges imposed via carbon permits are not, in some way, being used to ―fund the administrative
cost‖ of AB 32.
Based on this analysis and the ease with which the trial court dismissed plaintiffs‘
arguments in this regard, it seems that, unfortunately for the plaintiffs, Proposition 26 has fallen
victim to the dreaded fate of ―the exception swallowing the rule.‖ The enumerated exemptions
are simply too many and too broad to supply the basis for any actual misfeasance on CARB‘s
part. Compounded with the obvious fact that Proposition 26 was enacted after AB 32 and carries
64
Morningstar v. Carb, supra. 65
Id.
30
no retroactive authority, the lower court‘s ruling on this issue is certain to withstand appellate
review.
d. Common Sense Approach
The importance of common sense also should not be ignored. While the stated purpose of
cap and trade may be to confront global warming, it is hard to overlook the fact that it has been a
major boon to the State budget. It is also difficult to blindly accept that the State‘s returns are
simply a happy accident. The financial gains to be realized under a cap and trade regime were
arguably foreseeable and likely appealing. According to projections from the California
Legislative Analyst‘s Office at the inception of the carbon permit auctions, the state is expected
to reap an average of $1 billion to $3 billion per year throughout the life of the current scoping
plan, which lasts until 2020.66
From a common-sense perspective, it would seem that the State knew businesses would
end up paying significant amounts of money to continue carrying on and that those payments
would yield substantial revenues to the government. However, a careful review of the AB 32‘s
legislative history yields no indication that revenue generation played any role in the bill‘s
journey to the governor‘s desk.67
Still, the sheer volume of the money flowing into the state since
AB 32‘s passage has invited speculation on the matter.
While such speculation could potentially lead a layperson to a common-sense conclusion
that a penalty on certain businesses capable of raising so much state revenue must certainly be a
66
―The California Legislative Analyst's Office estimates that these auctions will yield anywhere from $1 billion to
$3 billion a year for the state, possibly rising as high as $14 billion a year in 2015. This is significant, considering
that in 2012, the state's budget deficit is approximately $9 billion.‖ Ballotpedia. California's AB 32, the „Global
Warming Solutions Act of 2006,‘ 2013. 67
ENVIRONMENTAL PROTECTION—AIR POLLUTION—GREENHOUSE GASES, 2006 Cal. Legis. Serv.
Ch. 488 (A.B. 32) (WEST)
31
tax, it will no doubt fail to persuade the third district court of appeal or any higher court that
might hear the claim.
e. Justiciability and Practicality Considerations
Finally, the judiciary must look not only at the merits of the case, but also whether a
judicially mandated remedy is even available in this case. Even where the facts and the law may
point to one conclusion, the timing of the claims and the ability of the courts to address them
could possibly yield a contrary, and conclusory, decision.
Cap and trade has now been in effect for almost a decade, and has largely been viewed as
a success.68
Even if the higher courts ultimately side with the plaintiffs, what remedy could
adequately redress the alleged injury? Would the state be required to refund the price of the
permits? Would the refund price account for inflation during the years between the purchase and
the refund? What about consequential damages? Would businesses be able to collect for profits
they might have generated with the extra cash flow that carbon permit purchases impeded?69
These questions pose as much of a practical concern as a legal one. Considering how long cap
and trade has endured and the positive impact it has yielded for the environment, it is
understandable that judges would be reluctant to unravel decade-old legislation based on flimsy
precedent and a series of arguments largely based on superficial syntax.
The plaintiffs in the Morningstar case conclude their complaint by requesting a judicial
declaration that the carbon permit auctions are illegal and for a writ of mandate suspending all
future auctions.70
This proposed remedy itself provides little relief to the plaintiffs, but rather
68
Lazo, supra. 69
Lawsuits brought by business owners in the gulf area following the BP Horizon oil spill demonstrate how
complicated and attenuated damages calculations can be when addressing lost business opportunities after the fact
(see Light, Alfred, The Deepwater Horizon Oil Spill Trust and the Gulf Coast Claims Facility: The Superfund Myth
and the Law of Unintended Consequences, 5 Golden Gate University Environmental Law Journal, 5, 2011). 70
Morningstar, supra, at page 21, line 1.
32
signals a wave of impending litigation fueled by the desired declaration of the auctions‘
unconstitutionality. From the perspective of the judiciary, the grant of such a declaration would
seem tantamount to inviting a flood of plaintiffs seeking incalculable damages, while
simultaneously crippling California‘s climate change initiatives, and possibly setting a dangerous
precedent for future applications of Propositions 13 and 26.
VIII. Conclusion
Sacramento Superior Court Judge, Timothy Frawley, was correct to note that this issue
poses a close question. Logically, the penalty imposed on polluting business by AB 32 seems
like a tax, regardless of how it is framed. And the fact that AB 32 is one degree of separation
from the actual imposition of the penalty could arguably be a disingenuous attempt to circumvent
Propositions 13 and 26. That said, precedent clearly supports the preservation of the Act. The
California Supreme Court has established a body of law that certainly favors cap and trade‘s
defenders, with Sinclair providing a strong case for upholding the Act based on a highly
analogous factual basis. First, precedent generally disfavors overturning legislation. Second,
under a Yamaha analysis, deference should be afforded to the stated intent behind CARB‘s
permit auctions. In this case, the text of AB 32 frames the carbon permits as the means of
funding the other environmentally-minded initiatives of the Act, and not the generation of state
revenue, which would mean that neither Proposition 13 nor Proposition 26 was actually offended
by the passage of AB 32 by a simple majority.71
Third, there has been no clear injury to be
redressed as there has been no measurable job loss or market disruption attributable to cap and
trade. Rather, California‘s impressive carbon emissions reductions since AB 32‘s enactment
71
―Legislation - Concurrence Vote Passed (House) (47-32) - Aug. 31, 2006.‖ VoteSmart.com: AB 32 - Greenhouse
Gases Emission Limits - Key Vote (2006).
33
have been widely viewed as an unqualified success.72
Fourth, and finally, even if the alleged
violations were clear and the injury apparent, the courts would likely struggle to craft an
appropriate remedy and would instead invite an onslaught of new lawsuits surrounding the
calculation and payment of damages. Although concerns of convenience alone carry no
substantive weight in judicial analysis, where other legitimate grounds exist for a particular
outcome, matters of practicality could understandably dissuade a skeptical jurist from laboring to
accommodate less-than-perfectly founded challenges.
Considering the totality of the facts, application of the law, and matters of procedure and
practicality, California‘s cap and trade program under AB 32 is sure to survive the pending
challenges and any further appeals that may follow.
72 Lazo, supra.
a
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