Nos. C075930 and C075954

COURT OF APPEAL OF THE STATE OF CALIFORNIA THIRD APPELLATE DISTRICT

CALIFORNIA CHAMBER OF COMMERCE et al., Plaintiffs and Appellants,

v. CALIFORNIA AIR RESOURCES BOARD et al.,

Defendants and Respondents. NATIONAL ASSOCIATION OF MANUFACTURERS,

Intervener and Appellant, ENVIRONMENTAL DEFENSE FUND et al.,

Interveners and Respondents. MORNING STAR PACKING COMPANY et al.,

Plaintiffs and Appellants, v.

CALIFORNIA AIR RESOURCES BOARD et al., Defendants and Respondents.

ENVIRONMENTAL DEFENSE FUND et al., Interveners and Respondents.

Appeal from Judgment Entered in Favor of Respondents

Hon. Timothy Frawley, Judge, Sacramento County Sup. Court Case Nos. 34-2012-80001313 and 34-2013-80001464

APPLICATION FOR LEAVE TO FILE AMICUS CURIAE BRIEF IN SUPPORT OF RESPONDENTS; PROPOSED BRIEF OF DALLAS BURTRAW,

LAWRENCE GOULDER, BILL SHOBE, ET AL. AS AMICUS CURIAE

Eric Biber, State Bar No. 218440 UC Berkeley School of Law

Berkeley, California 94720-7200 Telephone: (510) 643-5674 Facsimile: 510-643-2673

Email: eric.biber.environmental.law@gmail.com Counsel for Amicus Curiae

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Table of Contents TABLE OF AUTHORITIES ...............................................................................................ii APPLICATION FOR LEAVE TO FILE AMICUS CURIAE BRIEF AND STATEMENT OF INTERESTS OF AMICUS CURIAE ........................................... 1

AMICUS CURIAE BRIEF .................................................................................................. 3

Introduction ................................................................................................................... 3

I. Using a Cap-and-trade System with an Auction Component was a Well-Established Design for the Reduction of Atmospheric Emissions including Greenhouse Gases when AB 32 was Passed. ........................................ 4

II. Auction Systems of Allowance Distribution Promote Equity, Economic Efficiency, and Environmental Goals. ................................................................... 9

1. Auction Distribution Systems Promote Equity for Both the Public and Regulated Firms ................................................................................................ 10

2. Auction Distribution Systems Ensure Economic Efficiency .............................. 14

3. Auction Distribution Systems Augment Environmental Goals .......................... 15

III. The Use of a Reserve Price in Allowance Distribution Improves Auction Outcomes and Promotes Innovation in Reducing Emissions .............................. 16

CONCLUSION .................................................................................................................. 17

APPENDIX ........................................................................................................................ 19

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TABLE OF AUTHORITIES STATE CASES

Communities for a Better Environment v. South Coast Air Quality Management Dist. (2010) 48 Cal.4th 310 12 STATE STATUTES California Global Warming Solutions Act of 2006 passim Cal. Health & Safety Code § 38500 et seq. (West 2014) passim OTHER AUTHORITIES Athey et al., Comparing open and Sealed Bid Auctions: Evidence from Timber Auctions (2011) 126 The Q. J. of Economics 207 7 Binmore and Klemperer, The Biggest Auction Ever: the Sale of the British 3G Telecom Licenses (2002) 112 Economic J. 74 passim Böhringer et al., Alternative CO2 abatement strategies for the European Union, in Climate Change, Transport and Environmental Policy (Braden & Proost edits.,1998) 6 Burtraw and Palmer, Compensation Rules for Climate Policy in the Electricity Sector (2008) 27 J. of Policy Analysis and Management 819 11 Burtraw and Sekar, Two World Views on Carbon Revenues (2014) 4 J. of Environmental Studies and Sciences 110 9 Burtraw et al. Price Discovery in Emissions Permit Auctions in Experiments on Energy, the Environment, and Sustainability, (Isaac & Norton edits., 2011), in Series: Research in Experimental Economics,14 15 Burtraw et al., A Symmetric Safety Valve (2010) 38 Energy Policy 4921 passim Burtraw et al., Allocation of CO2 Emission Allowances in the Regional Greenhouse Gas Cap-and-Trade Program (June 2005) RFF Discussion Paper 4, 6

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CO2 Auctions, Regional Greenhouse Gas Initiative <http://www.rggi.org/market/co2_auctions> (as of Mar. 31 2015) 7 Cramton and Kerr, Tradeable Carbon Permit Auctions: How and Why to Auction Not Grandfather (2002) 30 Energy Policy 333 5,16 Dixit and Pindyck, Investment Under Uncertainty (1994) 16 Ellerman and Buchner, The European Union Emissions Trading Scheme: Origins, Allocation, and Early Results (2007) 1 Rev. Environmental Economics Policy 66 5,7 Ellerman et al., Markets for Clean Air: The U.S. Acid Rain Program (2000) 14, 15 Fell, EU-ETS and Nordic Electricity: A CVAR Analysis (2010) 31 Energy J. 1 14,15 Fischer et al., Instrument Choice for Environmental Protection When Technological Innovation is Endogenous (2003) 45 J. of Environmental Economics and Management 523 16 Goeree et al., An Experimental Study of Auction Versus Grandfathering to Assign Pollution Permits (2009) 8 J. of the European Economic Assn. 514 passim Goulder et al., Impacts of Alternative Emissions Allowance Allocation Methods Under a Federal Cap-and-Trade Program (2010) 60 J. of Environmental Economics and Management 161 11 Hahn, Market Power and Transferable Property Rights (1984) 99 The Q. J. of Economics 753 15 Haile and Tamer, Inference with an Incomplete Model of English Auctions (2000) <http://papers.ssrn.com/abstract=241133> (as of Apr. 30, 2015) 7 Haile et al., Nonparametric Tests for Common Values at First-Price Sealed-Bid Auctions (2003) <http://www.nber.org/papers/w10105> (as of Apr. 30, 2015) 7

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Hausker, The Politics and Economics of Auction Design in the Market for Sulfur Dioxide Pollution (1992) 11 J. of Policy Analysis and Management 553 13 Hendricks et al., Empirical Implications of Equilibrium Bidding in First-Price, Symmetric, Common Value Auctions (2003) 70 Rev. of Economic Studies 115 7 Hepburn et al., Auctioning of EU ETS phase II allowances: how and why? (2006) 6 Climate Policy 137 7 Holt et al., Auction Design for Selling CO2 Emission Allowances Under the Regional Greenhouse Gas Initiative (2007) passim Holt et al., Teaching Opportunity Cost in an Emissions Permit Experiment (2010) 9 Internat. Rev. of Economics Education 34 5,12 Jensen and Rasmussen, Allocation of CO2 Emissions Permits: A General Equilibrium Analysis of Policy Instruments (2000) 40 J. of Environmental Economics & Management 111 5 Kwerel and Rosston, An Insiders’ View of FCC Spectrum Auctions (2000) 17 J. of Reg. Economics 253 8 Lise et al., The Impact of the EU ETS on Prices, Profits and Emissions in the Power Sector: Simulation Results with the COMPETES EU20 Model (2010) 47 Environmental & Resource Economics 23 11 Martin et al., Industry Compensation under Relocation Risk: A Firm-Level Analysis of the EU Emissions Trading Scheme (2014) 104 American Economic Rev. 2482 13 McMillan, Selling Spectrum Rights (1994) 8 J. of Economic Perspectives 145 Member States look to deal with windfall profits, Carbon Market Europe, Point Carbon (October 14, 2005) 8 Parry et al., Fiscal Interactions and the Costs of Pollution Control from Electricity (2005) 36 RAND J. of Economics 849 5

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Parry et al., When Can Carbon Abatement Policies Increase Welfare? The Fundamental Role of Distorted Factor Markets (1999) 37 J. of Environmental Economics and Management 52 5 Porter et al., The design, testing and implementation of Virginia’s NOx allowance auction (2009) 69 J. of Economic Behavior & Organization 190 5 Sijm et al., CO2 cost pass-through and windfall profits in the power sector (2006) 6 Climate Policy 49 12 Sopher and Mansell, The World’s Carbon Markets: A Case Study Guide to Emissions Trading (2013) <http://www.edf.org/sites/default/files/EDF_IETA_United_Kingdom_Case_Study_May_2013.pdf> (as of Apr. 30, 2015) 7 Stavins, What Can We Learn from the Grand Policy Experiment? Lessons from SO2 Allowance Trading (1998) 12 The J. of Economic Perspectives 69 6 Veith et al., Capital market response to emission rights returns: Evidence from the European Power Sector (2009) 31 Energy Economics 605 11 Wrake et al., Opportunity Costs for Free Allocations of Emissions Permits: An Experimental Analysis (2010) 46 Environmental & Resource Economics 332 10,12,12

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APPLICATION FOR LEAVE TO FILE AMICUS CURIAE BRIEF AND STATEMENT OF INTERESTS OF AMICUS CURIAE

TO THE HONORABLE JUSTICES OF THE CALIFORNIA COURT OF

APPEAL, THIRD APPELLATE DISTRICT:

Pursuant to Rule 8.200(c) of the California Rules of Court, the amici

respectfully request leave to file the accompanying brief in this proceeding in

support of respondents and interveners, California Air Resources Board and

Environmental Defense Fund, et al.1

The amici in this case are a group of seventeen leading economists who

teach and write in the field of environmental economics and who are among the

most respected scholars focusing on the economics of market-based pollution

control regulatory systems. Amici have an interest in seeing that the Court is

informed on the prevalence and benefits of using auctions to distribute tradable

permits for reducing carbon emissions in cap-and-trade regimes. Amici wish to

assist the Court in properly interpreting the California Global Warming Solutions

Act of 2006 (AB 32) by presenting the predominance of auctions in the economics

literature, describing their advantages over free distribution, and demonstrating

that these advantages were known at the time of AB 32’s passage.

The appendix to this brief summarizes the amici’s qualifications and

affiliations. Amici file this brief solely as individuals and not on behalf of the

institutions with which they are affiliated.

Dated: May 15, 2015 By: ___________________________ Eric Biber UC Berkeley School of Law

1 UC Berkeley School of Law students Shampa Panda and Niran Somasundaram contributed significantly to this brief through the Environmental Law Practice Project.

2

Counsel for Amici Dallas Burtraw, et al.

Pursuant to California Rules of Court, Rule 8.200, subd. (c)(3), amicus declares

that this brief was entirely drafted by counsel for the amici and no party or counsel

for a party in a pending case authored the proposed amicus brief in whole or in

part, or made any monetary contribution intended to fund its preparation. (See Cal.

Rules of Court, rule 8.200(c).)

Dated: May 15, 2015 By: ___________________________ Eric Biber UC Berkeley School of Law Counsel for Amici Dallas Burtraw, et al.

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AMICUS CURIAE BRIEF

Introduction

Industry groups (referred to herein as plaintiffs) are challenging the

California Air Resources Board’s decision to include an auction component in the

cap-and-trade system for greenhouse gas emissions established under AB 32, the

California Global Warming Solutions Act.

However, as demonstrated below, the prevailing view in the field of

economics is that using an auction to distribute emission allowances advances

values of equity, economic efficiency and environmental efficacy. Allowing only

free distribution of allowances, as plaintiffs urge, would seriously undercut these

policy goals.

AB 32 uses “design” and “distribution” as terms of art, which should be

understood to allow the implementation of an auction system to allocate pollution

permits. Auctioning allows for significant policy benefits including promoting

transparency in the emissions trading market by establishing a known price and

ensuring equity between new and incumbent firms. Auctions also avoid the

possibility of windfall profits for emitters, who receive pollution allowances for

free yet charge consumers for their value.

Designing a cap-and-trade system with an auction component is a favored

choice for pollution mitigation, as evidenced by examples of successful prominent

emissions trading regimes from the United States and abroad. Polluting firms do

not have a preexisting right to use the atmosphere as a free repository for their

industrial emissions. Having an auction component of California’s cap-and-trade

system advances goals of equity, efficiency, and environmental benefits.

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I. Using a Cap-and-trade System with an Auction Component was a Well-Established Design for the Reduction of Atmospheric Emissions including Greenhouse Gases when AB 32 was Passed.

A necessary component of any cap-and-trade system is a determination as to

how to distribute the permits. There are two main ways to distribute permits: (1)

give the permits away for free, or (2) sell the permits through an auction. (AR

C:1858.)2 The plaintiffs concede that AB 32 gives the California Air Resources

Board (ARB) the authority to create a cap-and-trade system to allocate carbon

emission permits. However, they incorrectly argue that ARB is limited to giving

away all of the permits. (See, e.g. Appellant’s’ Opening Brief (Morning Star) at

44; Appellants’ Opening Brief (California Chamber of Commerce) at 13; Opening

Brief of Appellant the National Association of Manufacturers at 18.)

AB 32 authorized ARB to consider the use of market-based approaches

(Health & Safety Code Section 38570) including the creation of a cap-and-trade

system, which given the understanding among economists at the time, must be

understood to include a potential role for an auction component for allocating

permits. Economists understand the statutory language of AB 32, specifically

“design” and “distribution,” to be terms of art and interpret them to encompass the

option of implementing an auction to allocate permits in the cap-and-trade system.

(Health & Safety Code Section 38562(b)(1) [ARB can “design the regulations,

including distribution of emissions allowances where appropriate”].)3

2 The Administrative Record is divided into parts A through I. Citations to the record are in the format, “lparbl:[Bates number].” Citations to the Addendum to the record are indicated by the prefix “Add. A” or “Add. B” in place of the part. 3 Burtraw et al., Allocation of CO2 Emission Allowances in the Regional Greenhouse Gas Cap-and-Trade Program (June 2005) RFF Discussion Paper (uses the word “distribute” as a term covering various allocation mechanisms.)

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Economists understand auctions are an integral component of allowance

distribution and advocate it as preferable to free distribution.4 “Perhaps no aspect

of allowance allocation is of more interest to economists – and more advocated by

them – than auctioning.”5

Well before the enactment of AB 32, the idea of auctions as a potentially

advantageous means of distributing allowances in cap-and-trade programs was

widely discussed in the academic literature and in applied policy design

discussions.6 At the time when AB 32 was being considered and debated,

numerous published papers advocated the use of auctions for “distributing” or

“allocating” emission allowances.7

There are many instances of an auction of tradable permits being used for

major pollution mitigation initiatives before the 2006 passage of AB 32. Examples

4 See Cramton and Kerr, Tradeable Carbon Permit Auctions: How and Why to Auction Not Grandfather (2002) 30 Energy Policy 333; Goeree et al., An Experimental Study of Auction Versus Grandfathering to Assign Pollution Permits (2009) 8 J. of the European Economic Assn. 514; Hepburn et al., Auctioning of EU ETS phase II allowances: how and why? (2006) 6 Climate Policy 137–160; Holt et al., Teaching Opportunity Cost in an Emissions Permit Experiment (2010) 9 Internat. Review of Economics Education 34. 5 Ellerman and Buchner, The European Union Emissions Trading Scheme: Origins, Allocation, and Early Results (2007) 1 Rev. Environmental Economics Policy 66, 73. 6 Cramton and Kerr. Tradeable Carbon Permit Auctions: How and Why to Auction Not Grandfather (2002) 30 Energy Policy 333; Parry et al., When Can Carbon Abatement Policies Increase Welfare? The Fundamental Role of Distorted Factor Markets (1999) 37 J. of Environmental Economics and Management 52; Parry et al., Fiscal Interactions and the Costs of Pollution Control from Electricity (2005) 36 RAND J. of Economics 849. 7 Cramton and Kerr. Tradeable Carbon Permit Auctions: How and Why to Auction Not Grandfather (2002) 30 Energy Policy 333; Parry et al., Fiscal Interactions and the Costs of Pollution Control from Electricity (2005) 36 RAND J. of Economics 849; Jensen and Rasmussen, Allocation of CO2 Emissions Permits: A General Equilibrium Analysis of Policy Instruments (2000) 40 J. of Environmental Economics & Management 111.

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in the United States prior to the passage of AB 32 include sulfur dioxide (SO2)

emissions trading under the 1990 amendments to the federal Clean Air Act and a

state nitrogen oxide (NOx) program.

The 1990 amendments to the federal Clean Air Act established a SO2 cap-and-

trade allowance program to cut SO2 emissions. Widely considered to be an

extremely effective cap-and-trade pollution mitigation scheme, the SO2 allowance

program included an auction component in addition to the private market for

tradable SO2 permits.8

In 2004, Virginia implemented a cap-and-trade program to regulate NOx

emissions and used an auction to allocate approximately eight percent of the NOx

permits to new sources of NOx emissions.9 Virginia’s decision to auction a portion

of its NOx allowances was noted in the policy literature at least as early as 2005

and presentations on the auction were made at industry and academic conferences

on emission trading starting in 2004.10

While California legislators were debating AB 32, policymakers were

discussing the inclusion of auctions in the Regional Greenhouse Gas Initiative

(RGGI) among the northeastern states of the United States and in the European

Union Emission Trading System (EU ETS).11 In both cases, auctions were

ultimately chosen as the primary distribution mechanism.

RGGI was the first cap-and-trade program in the United States established to

reduce greenhouse gas emissions. Although it was formally implemented after the

8 Stavins, What Can We Learn from the Grand Policy Experiment? Lessons from SO2 Allowance Trading (1998) 12 The J. of Economic Perspectives 69. 9 Porter et al., The design, testing and implementation of Virginia’s NOx allowance auction (2009) 69 J. of Economic Behavior & Organization 190. 10 Burtraw et al., Allocation of CO2 Emission Allowances in the Regional Greenhouse Gas Cap-and-Trade Program (June 2005) RFF Discussion Paper. 11 Ibid.; Böhringer et al., Alternative CO2 abatement strategies for the European Union, in Climate Change, Transport and Environmental Policy (Braden & Proost edits., 1998) pp. 16–47.

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2006 passage of AB 32, policy discussions as early as 2005 included auctions as a

key component of RGGI market design. The first auction in the initiative took

place in 2008 and now RGGI’s member states allocate nearly all of the available

carbon dioxide (CO2) allowances through an auction system.12

The United Kingdom Emissions Trading Scheme, the voluntary precursor to

the European Union Emission Trading Scheme, was established in 2002 and used

auctions to set the initial emission reduction targets for firms.13 The first phase of

the current European Union Emission Trading Scheme was started in 2005 and

included an auction component with the stipulation that member states could

auction 5% of permits in the first phase and up to 10% of permits in the second

phase, which started in 2008.14

In addition to the prevalence of auctions in the air pollutant context, they are

also the default mechanism for distributing public resources in areas as diverse as

the distribution of portions of the broadcast spectrum and assorted natural

resources on public lands.15

12 Holt et al., Auction Design for Selling CO2 Emission Allowances Under the Regional Greenhouse Gas Initiative (2007); CO2 Auctions, Regional Greenhouse Gas Initiative <http://www.rggi.org/market/co2_auctions> (as of Mar. 31 2015) (“The vast majority of CO2 allowances issued by each RGGI state are distributed through quarterly, regional CO2 allowance auctions.”). 13 Sopher and Mansell, The World’s Carbon Markets: A Case Study Guide to Emissions Trading (2013) <http://www.edf.org/sites/default/files/EDF_IETA_United_Kingdom_Case_Study_May_2013.pdf> (as of Apr. 30, 2015). 14 Ellerman and Buchner, The European Union Emissions Trading Scheme: Origins, Allocation, and Early Results (2007) 1 Rev. Environmental Economics Policy 66. 15 For discussion of the use of auctions to lease oil and gas resources on federal lands, see Hendricks et al., Empirical Implications of Equilibrium Bidding in First-Price, Symmetric, Common Value Auctions (2003) 70 Rev. of Economic Studies 115. For discussion of the use of auctions for timber sales on federal lands, see Haile et al., Nonparametric Tests for Common Values at First-Price Sealed-Bid Auctions (2003) <http://www.nber.org/papers/w10105> (as of Apr. 30,

8

In the United States, the Federal Communications Commission provides a

direct precedent for the shift from free distribution of resources by regulators to an

auction. Prior to the 1990s, the use of electromagnetic spectrum in the U.S. was

allocated by regulation.16 Since that time, auctions have become the primary

mechanism for allocating the spectrum.17 This shift from regulatory distribution to

a distribution using an auction for the electromagnetic spectrum occurred well

before AB 32 was drafted. Other countries also use an auction to allocate telecom

permits that were previously distributed by regulation. For example, Britain uses

an auction to allocate telecom permits to the entities that can use them most

valuably.18

In contrast to these widespread examples of auctions being used to distribute

public resources, plaintiffs argue that the auction forces private entities to pay for a

carbon emission permit to pollute. Plaintiffs claim that firms are already

authorized to pollute for free. (See Appellant’s’ Opening Brief (Morning Star) at

19.) This belief is mistaken. In all of the jurisdictions of which we are aware,

emitters do not have a right to use the atmosphere as a repository of industrial

emissions. Emitters that have used the atmosphere for waste disposal have had

limited permission to use the publicly owned resource, but have never had

“ownership” of the atmosphere like that of a protected property interest. (See

Communities for a Better Environment v. South Coast Air Quality Management

Dist. (2010) 48 Cal.4th 310, 324 [there is “no vested right to pollute the air at any

2015); Haile and Tamer, Inference with an Incomplete Model of English Auctions (2000) <http://papers.ssrn.com/abstract=241133> (as of Apr. 30, 2015); Athey et al., Comparing open and Sealed Bid Auctions: Evidence from Timber Auctions (2011) 126 The Q. J. of Economics 207. 16 Kwerel and Rosston, An Insiders’ View of FCC Spectrum Auctions (2000) 17 J. of Reg. Economics 253. 17 McMillan, Selling Spectrum Rights (1994) 8 J. of Economic Perspectives 145. 18 Binmore and Klemperer, The Biggest Auction Ever: the Sale of the British 3G Telecom Licenses (2002) 112 Economic J. 74.

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particular level” (emphasis in original)]; see also Respondent’s Response Brief

(Environmental Defense Fund) at 24). The plaintiff’s argument for the free

distribution of emissions allowances to firms depends on an implicit premise that

the emitting firms, rather than the public, own the atmospheric resource.19

Like any other property that the public owns, the state may decide whether

selling or granting the asset to users will maximize its net value to the public. The

same argument applies to allowances or to an acre of publicly owned real estate.

Ultimately, the distribution of the value of the atmosphere as a publicly owned

asset into the economy is a policy decision because the resource is held in

common.20 As we discuss below, decisions of how this value is distributed can

affect the efficacy and fairness of the policy.

II. Auction Systems of Allowance Distribution Promote Equity, Economic Efficiency, and Environmental Goals.

All cap-and-trade programs, including the one created by AB 32, create an

allowance system to reduce regulatory costs by establishing and distributing

emission allowances. In doing so, cap-and-trade programs create new assets with

substantial economic value. Any governing body designing such a system must

consider how to properly and efficiently distribute these new assets in the

economy. Auctions are the distribution mechanism recommended by many leading

19 Burtraw and Sekar, Two World Views on Carbon Revenues (2014) 4 J. of Environmental Studies and Sciences 110. 20 Plaintiffs argue that ARB should have returned the proceeds of the auction to the plaintiffs (the so-called “revenue-neutral auction”; see National Association of Manufacturers Reply Br. at 7-8, 15 n.5, 31). At the heart of this argument is the claim that any fees plaintiffs pay for the right to emit pollution into the atmosphere should be returned to them. Plaintiffs’ argument assumes that the plaintiffs have the right to emit pollution into the atmosphere: Since they have the right to pollute, any fees they pay for that right should be returned to them. But industries do not have the right to harvest timber or extract oil and gas from public lands, or to use the broadcast spectrum. Accordingly, we do not refund the proceeds from those auctions to industry either. The same principle applies in this case.

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economists for three main reasons: (1) auction systems are more equitable, (2)

auction systems are more economically efficient and (3) auction systems augment

the environmental benefits that cap-and-trade programs seek to achieve.

1. Auction Distribution Systems Promote Equity for Both the Public and Regulated Firms

Auction distribution systems promote equity for the public by preventing

windfall profits for emitting firms and promote fairness among emitting firms by

creating a more equitable mechanism for firms to amass permits. Auctions also

enable the cap-and-trade program to address distributional impacts across the

population as directed by the statutory language of AB 32 and subsequent

legislation.

Firms receive windfall profits from a regulatory program when the increase

in revenue for regulated firms is greater than the actual costs that are associated

with the regulatory program.21 In the context of a cap-and-trade system, this would

mean that the increase in revenue to emitting firms is greater than the cost they

incur to obtain allowances.

Even if a firm receives permits for free, a firm has a choice between using

the permit to cover its own emissions, or selling the permit to another firm to

cover that firm’s emissions. If the firm uses the permit instead of selling it, the

firm incurs an opportunity cost equal to the price that an allowance would have

sold for on the market. Since the firm’s prices are based partly on the opportunity

cost of using emission allowances (as opposed to the actual cost the firm incurred

to obtain the allowance),22 a system that freely allocates allowances with a high

21 Cramton and Kerr. Tradeable Carbon Permit Auctions: How and Why to Auction Not Grandfather (2002) 30 Energy Policy 333; Binmore and Klemperer, The Biggest Auction Ever: The Sale of the British 3G Telecom Licenses (2002) 112 Economic J. 74, 78. 22 Goeree et al., An Experimental Study of Auction Versus Grandfathering to Assign Pollution Permits (2009) 8 J. of the European Economic Assn. 514; Wrake

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market value will increase the prices charged by the firm, and therefore the firm’s

revenue, even though the firm did not pay to obtain the allowance. 23

Another way of understanding this point is that environmental allowances

have an economic value. Once an environmental allowance is created, allowance

ownership will represent a substantial asset on the books of the owner. Allowance

owners may choose to either use them or sell them at the going market price.

Hence, a firm’s value will directly increase by the value of any allowances that it

obtains for free.24

Advocates of free distribution argue that free distribution is necessary to

compensate regulated firms for the increased costs of regulatory compliance.

However, analysis of power markets operating in other cap-and-trade systems

shows that a significant part of those costs is passed through to power prices.25

More generally freely allocating all of the permits would almost certainly

overcompensate nearly all regulated firms while failing to compensate those firm’s

customers who actually bear most of the cost burden of the regulatory system.26

et al., Opportunity Costs for Free Allocations of Emissions Permits: An Experimental Analysis (2010) 46 Environmental & Resource Economics 331. 23 Prevention of windfall profits cannot be achieved through an auction in which all auction proceeds are returned to auction participants. Such a system would leave the regulated firms in the same financial position as they would have had under free distribution. 24 Veith et al., Capital market response to emission rights returns: Evidence from the European Power Sector (2009) 31 Energy Economics 605 (showing that firm value is increased with free distribution allowing for windfall profits by overcompensating for costs). 25 Lise et al., The Impact of the EU ETS on Prices, Profits and Emissions in the Power Sector: Simulation Results with the COMPETES EU20 Model (2010) 47 Environmental & Resource Economics 23, 42; Fell, EU-ETS and Nordic Electricity: A CVAR Analysis (2010) 31 Energy J. 1, 2. 26 See Burtraw and Palmer, Compensation Rules for Climate Policy in the Electricity Sector (2008) 27 J. of Policy Analysis and Management 819; Goulder et al., Impacts of Alternative Emissions Allowance Allocation Methods Under a

12

Experimental studies have provided further evidence of consumers paying

for the opportunity costs of permits under free distribution systems

(AR:B37_EACC_Allocating Emissions_2010 at 12).27 These costs are levied upon

customers through the implementation of higher prices; in fact free distribution

may even lead to higher permit prices than an auction

(AR:B37_EACC_AllocatingEmissions_2010 at 12).28 The result from free

distribution in these experiments was a large increase in the profit of the emitting

firms, who are able to charge customers for allowances they received for free.

Early experience in the EU ETS provides a textbook example of windfall

profits occurring in the real-world practice of emissions trading.29 Government

reports and academic studies examining phase 1 and phase 2 of the EU ETS found

that firms in Germany, The Netherlands, and Belgium amassed billions of Euros in

windfall profits under the free distribution system.30 The clear evidence of these

Federal Cap-and-Trade Program (2010) 60 J. of Environmental Economics and Management 161. 27 Goeree et al., An Experimental Study of Auction Versus Grandfathering to Assign Pollution Permits (2009) 8 J. of the European Economic Assn. 514; Holt et al., Teaching Opportunity Cost in an Emissions Permit Experiment (2010) 9 Internat. Rev. of Economics Education 34; Wrake et al., Opportunity Costs for Free Allocations of Emissions Permits: An Experimental Analysis (2010) 46 Environmental & Resource Economics 331. 28 Goeree et al., An Experimental Study of Auction Versus Grandfathering to Assign Pollution Permits (2009) 8 J. of the European Economic Assn. 514. 29 Windfall profits had emerged as a central concern in the EU ETS in the first year of the program in 2005, well before California’s adoption of AB32. See for example: Member States look to deal with windfall profits, Carbon Market Europe, Point Carbon (October 14, 2005) p. 6. 30 Sijm et al., CO2 cost pass-through and windfall profits in the power sector (2006) 6 Climate Policy 49, 67 (explaining that for wholesale power markets in Germany and The Netherlands, utility customers actually pay between 60-100% of the opportunity cost of freely allocated permits); Wrake et al., Opportunity Costs for Free Allocations of Emissions Permits: An Experimental Analysis (2010) 46 Environmental & Resource Economics 332, 332 (estimating that Belgian firms

13

windfall profits due to free distribution of emissions allowances (estimated

between 5.3-7.7 Billion Euros31) led the EU to move electricity producers to begin

a transition to a 100 percent auction-based distribution for the third phase of the

emissions trading program.32

From the standpoint of regulated firms, auctions are desirable because

auction systems create equity of opportunity for all firms, regardless of size or

influence, to obtain emission allowances. (See

AR:B37_EACC_AllocatingEmissions_2010 at 15.) Under free distribution

systems firms receive permits only to the extent to which they meet eligibility

criteria set by the regulatory agency. Without an auction, firms that could not meet

these criteria would have to rely on the open market to purchase allowances,

introducing a barrier to entry that may be compounded if the market for

allowances is not competitive or liquid.33 Auctions allow these firms to efficiently

acquire allowances by bidding on them from the source, the regulatory agency.34

Compared to free distribution systems that distribute permits only to firms that

received 1.2 billion Euros in profits between 2005 and 2007 generated by charging consumers for emissions permits that had been allocated for free). 31 Sijm et al., CO2 cost pass-through and windfall profits in the power sector (2006) 6 Climate Policy 49, 63. See Martin et al., Industry Compensation under Relocation Risk: A Firm-Level Analysis of the EU Emissions Trading Scheme (2014) 104 American Economic Rev. 2482. 32 Goeree et al., An Experimental Study of Auction Versus Grandfathering to Assign Pollution Permits (2009) 8 J. of the European Economic Assn. 514. Eastern Europe still has the option of free distribution, but there is a schedule for the transition of the industry to an auction. 33 A market is liquid if it is easy to buy a good in the market without major changes in the price of the good. Illiquid markets make it difficult for sellers to sell goods and buyers to buy goods. 34 Hausker, The Politics and Economics of Auction Design in the Market for Sulfur Dioxide Pollution (1992) 11 J. of Policy Analysis and Management 553, 559.

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have historically emitted pollution, auctions have the added benefit of treating new

and existing firms the same.35

Auctions also enable the regulatory program to address broader concerns

about distributional outcomes, concerns expressed in the statutory language of AB

32 and subsequent legislation enacted in 2012. AB 32 requires that any

implementing regulatory program be equitable and minimize impacts on low-

income communities (Health & Safety Code Section 38562(b)(1) & (2)). Auctions

enable the distribution of value created by the introduction of the trading program

to be allocated to advance equity, as reflected in SB 535 which mandates that 25%

of the money collected from the auction or sale of allowances be directed to

projects that both reduce greenhouse gas emissions and provide benefits to

disadvantaged communities. AB 1532 allows for the use of auction proceeds to

invest in energy efficiency improvements. These goals can only be accomplished

with an auction; they are incompatible with the idea of free distribution of

allowances to regulated parties. They are also incompatible with an auction in

which all auction proceeds are returned to regulated parties.

2. Auction Distribution Systems Ensure Economic Efficiency If markets functioned perfectly and covered all emitters in all economies,

the method of distribution of allowances to firms should not matter.36 Regulators

could distribute the allowances in an arbitrary way, and the owners could buy and

sell them until those who value them the most would have them (thus achieving

economic efficiency, meaning generally that resources are allocated to their

highest valued use). If markets do not function well, then the initial distribution

35 Ellerman et al., Markets for Clean Air: The U.S. Acid Rain Program (2000) pp. 8-9 (explaining that a motivation for the auction of Title IV allowances was to ensure access to allowances for new investors). 36 Specifically, a perfectly functioning market in this context would mean that the market is perfectly competitive, and there were low costs for transactions between participants in the market.

15

may matter, and a regulatory body would expect to get more efficient outcomes

from an auction-based distribution relative to free distribution. This result is

supported by both theoretical and experimental studies of emission markets.37 In

the case of the California cap and trade program, where there are a few very large

incumbent firms, there may be considerable efficiency gains from auctioning

allowances relative to distributing them all for free.38

Auctions further contribute to an efficient market by accelerating the discovery

of a market-clearing price,39 which is valuable at the start of the market or if there

is any change in market fundamentals such as fuel prices. This contribution was

evident at the outset of the SO2 cap-and-trade program where the auction prices

played an important role in launching the permit trading market by helping

regulated parties determine what the market prices were for permits.40

3. Auction Distribution Systems Augment Environmental Goals

Auctions play an important role in augmenting the environmental goals of a

cap and trade system. By setting a price for emissions, the auctioning of

allowances encourages larger firms to invest in innovation of pollution abatement

37 Hahn, Market Power and Transferable Property Rights (1984) 99 The Q. J. of Economics 753, 753-54; Goeree et al., An Experimental Study of Auction Versus Grandfathering to Assign Pollution Permits (2009) 8 J. of the European Economic Assn. 514. 38 Goeree et al., An Experimental Study of Auction Versus Grandfathering to Assign Pollution Permits (2009) 8 J. of the European Economic Assn. 514. 39 The market-clearing price is the price for which all sellers are willing and able to pay to receive goods in a market, and all buyers are willing and able to sell their goods. In other words, it is the point at which the willingness to pay of the buyer is equal to the willingness to accept of the seller. 40 Ellerman et al., Markets for Clean Air: The U.S. Acid Rain Program (2000) pp. 8-9; Burtraw et al. Price Discovery in Emissions Permit Auctions in Experiments on Energy, the Environment, and Sustainability, (Isaac & Norton edits., 2011), in Series: Research in Experimental Economics, 14: pp.11-36.

16

technology; free distribution does not provide the same kind of incentive to

innovate.41

III. The Use of a Reserve Price in Allowance Distribution Improves Auction Outcomes and Promotes Innovation in Reducing Emissions

ARB’s decision to provide for a reserve price is also in accord with the widely

accepted thinking of economists. (A reserve price is an auction price below which

the seller chooses to retain ownership of an item rather than sell it.) When

designing CO2 allowance markets, economists understand that a reserve price - a

common feature of many auction designs- protects against auction price volatility

and preserves incentives to innovate.

Price volatility is an important concern in allowance markets. Because there is

a fixed supply of emissions allowances, the price of allowances will be more

volatile than traditional goods where supply can respond to price.42 Historically,

prices in environmental allowance regimes have been surprisingly volatile.43 Price

volatility can reduce the incentives for firms to invest in research in or adoption of

carbon abatement or non-carbon technology because additional price risk provides

an incentive to delay irreversible investments.44 For example, steep price falls

occurred in the EU ETS Phase 1 allowance program and the United States SO2

41 Fischer et al., Instrument Choice for Environmental Protection When Technological Innovation is Endogenous (2003) 45 J. of Environmental Economics and Management 523, 532; see Cramton and Kerr, Tradeable Carbon Permit Auctions: How and Why to Auction Not Grandfather (2002) 30 Energy Policy 333. 42 Holt et al., Auction Design for Selling CO2 Emission Allowances Under the Regional Greenhouse Gas Initiative (2007) p. 54. 43 Burtraw et al., A Symmetric Safety Valve (2010) 38 Energy Policy 4921, 4925. 44 Holt et al., Auction Design for Selling CO2 Emission Allowances Under the Regional Greenhouse Gas Initiative (2007) p. 54; Burtraw et al., A Symmetric Safety Valve (2010) 38 Energy Policy 4921, 4931; Dixit and Pindyck, Investment Under Uncertainty (1994).

17

allowance program, thereby reducing incentives for emission reduction.45

Accordingly, most economists would agree that reducing investment risk by

reducing excess allowance price volatility is beneficial for both the carbon market

and the electricity market, and that a credible reserve price is one of the most

important aspects of auction design because it reduces excess price volatility.46

Establishing a reserve price for auctions is also important in the event that an

auction has too few bidders. Limited potential buyers can result in artificially low

prices for allowances and inaccurate signals about the true market price for

allowances.

Reserve prices are a common feature of auctions. The FCC has utilized reserve

prices for its 700MHz spectrum auction.47 Reserve prices are also commonly used

in standard auctions for art, wine, and other valuable commodities.48 They are an

element of all three North American carbon trading programs (California, Quebec

and RGGI).

CONCLUSION

AB 32 gave CARB the authority to create a cap and trade system to reduce

greenhouse gas emissions. A necessary component of that authority was CARB’s

decision as to how to distribute carbon emission permits. There are two widely

accepted mechanisms of distribution: (1) to distribute the allowances to firms for

free and (2) to sell the permits to firms through an auction. As explained above,

45 Burtraw et al., A Symmetric Safety Valve (2010) 38 Energy Policy 4921, 4922-25; Binmore and Klemperer, The Biggest Auction Ever: The Sale of the British 3G Telecom Licenses (2002) 112 Economic J. 74. 46 Burtraw et al., A Symmetric Safety Valve (2010) 38 Energy Policy 4921, 4931; Holt et al., Auction Design for Selling CO2 Emission Allowances Under the Regional Greenhouse Gas Initiative (2007) pp. 54-57. 47 Holt et al., Auction Design for Selling CO2 Emission Allowances Under the Regional Greenhouse Gas Initiative (2007) p. 56. 48 Ibid.

18

auctions have been widely recommended by economists, and have been used in

numerous allowance distribution schemes and in the sale of many other publicly

owned assets. Economists advocate for auctions because auctions ensure equity

for the public and for regulated firms, promote economically efficient allocation,

and augment goals of environmental innovation. Economists also recommend the

use of a reserve price component in auction design to prevent excess price

volatility that could prevent the allowance market from achieving goals clearly

stated in the statutory language. These principles were well understood before

California enacted AB 32.

19

APPENDIX Severin Borenstein E.T. Grether Professor of Business Administration and

Public Policy at the Haas School of Business. He teaches courses in Energy &

Environmental Markets, and is a Research Associate of the Energy Institute at

Haas. He is also Director emeritus of the University of California Energy Institute

and the Energy Institute at Haas. He received his A.B. from U.C. Berkeley and

Ph.D. in Economics from M.I.T. His research focuses on business competition,

strategy, and regulation. He has published extensively on the airline industry, the

oil and gasoline industries, and electricity markets. Borenstein is also a research

associate of the National Bureau of Economic Research in Cambridge, MA. He

served on the Board of Governors of the California Power Exchange from 1997 to

2003. During 1999-2000, he was a member of the California Attorney General's

Gasoline Price Task Force. In 2012-13, he served on the Emissions Market

Assessment Committee, which advised the California Air Resources Board on the

operation of California’s Cap and Trade market for greenhouse gases. Since 2014,

he has been a member of the California Energy Commission’s Petroleum Market

Advisory Committee. A list of his publications can be accessed at:

http://faculty.haas.berkeley.edu/borenste/CV.pdf.

Dallas Burtraw, PhD., Senior Fellow, Resources for the Future. Dr. Burtraw

holds a Ph.D. in economics and a master’s degree in public policy from the

University of Michigan. Burtraw has written on electricity restructuring and

competition, including economic deregulation and environmental regulations. His

work focuses on incentive-based approaches for environmental regulation,

especially tradable permit systems. He provided technical guidance in the design

of the northeast Regional Greenhouse Gas Initiative and California’s cap and trade

programs. He also has examined the cost-effectiveness of trading programs for

CO2 emissions trading in the EU. A list of his publications can be accessed at:

http://www.rff.org/burtraw.

20

Peter Cramton, Professor of Economics at the University of Maryland. Since

1983, Dr. Cramton has conducted widely cited research on auction theory and

practice. The main focus is the design of auctions for many related items.

Applications include auctions for radio spectrum, electricity, financial securities,

rough diamonds, pollution emissions, and timber. He has introduced innovative

market designs in many industries. He has advised numerous governments on

market design and has advised dozens of bidders in major auction markets. He

received his B.S. in Engineering from Cornell University and his Ph.D. in

Business from Stanford University. A list of his publications can be accessed at:

http://www.cramton.umd.edu/cramton-list-of-publications.pdf

Carolyn Fischer, senior fellow at Resources for the Future and Marie

Skłodowska–Curie Fellow of the European Commission, visiting at the

Fondazione Eni Enrico Mattei (FEEM) in Venice, Italy. Her research focuses

on policy mechanisms and modeling tools that cut across a variety of

environmental and resource management issues. In the areas of climate change

and energy policy, she has published articles on designing cap-and-trade

programs, fuel economy standards, renewable portfolio standards, energy

efficiency programs, technology policies, the Clean Development Mechanism, and

the evaluation of international climate policy commitments. A recent focus of her

research is the interplay between international trade and climate policy, options for

avoiding carbon leakage, and the implications for energy-intensive, trade-exposed

sectors. In areas of natural resources management, she has addressed issues of eco-

certification, wildlife conservation, invasive species, and biotechnology, with

particular emphasis on the opportunities and challenges posed by international

trade. She received her PhD in economics from the University of Michigan. A list

of her publications can be accessed at:

http://www.rff.org/Documents/CV/RFF_CV_Fischer.pdf.

21

Meredith Fowlie, Associate Professor of Agriculture and Resource Economics

at the University of California, Berkeley. Prior to joining UC Berkeley, she was

an Assistant Professor of Economics and Public Policy at the University of

Michigan. She received an MSc in Environmental Economics from Cornell

University in 2000 and PhD in Environmental and Resource Economics from UC

Berkeley in 2006. Her interests lie at the intersection of empirical industrial

organization, environmental economics, and public policy. Much of her work

involves positive, and some normative, analysis of policy interventions designed

to reduce the environmental impacts of energy production and consumption. Her

work on the electricity sector has emphasized interactions between electricity

markets and emissions permit markets. She is a Faculty Research Fellow at the

National Bureau of Economic Research in the Environmental and Energy

Economics A list of her publications can be accessed at: A list of her publications

can be accessed at: http://nature.berkeley.edu/~fowlie/CV.pdf.

Don Fullerton, Edward William and Jane Marr Gutgsell Endowed Professor

in the Finance Department at the University of Illinois at Urbana-

Champaign. He is Associate Director of the Institute of Government and Public

Affairs, and he is Director of the National Bureau of Economic Research (NBER)

research program on Environmental and Energy Economics. He teaches graduate

courses in business and public policy, and his research includes distributional and

efficiency effects of carbon pricing through taxation or cap-and-trade systems. He

has a BA in Economics from Cornell University and a PhD in Economics from the

University of California at Berkeley. From 1985 to 1987, he served in the U.S.

Treasury Department as Deputy Assistant Secretary for Tax Analysis. A list of his

publications can be accessed at: http://works.bepress.com/don_fullerton/

22

Lawrence H. Goulder, Shuzo Nishihara Professor in Environmental and

Resource Economics at Stanford and Director of the Stanford Environmental

and Energy Policy Analysis Center. Goulder's research examines the

environmental and economic impacts of U.S. and international environmental

policies, including policies to deal with climate change and pollution

from power plants and automobiles. At Stanford he teaches undergraduate

and graduate courses in environmental economics and policy, and

co-organizes a weekly seminar in public and environmental economics. He

graduated from Harvard College with an A.B. in philosophy and received his

Ph.D. in Economics from Stanford. A list of his publications can be accessed at:

http://web.stanford.edu/~goulder/

Cameron Hepburn, Professor of Environmental Economics at the University

of Oxford. He is based at the Smith School and the Institute for New Economic

Thinking at the Oxford Martin School, and is Professorial Research Fellow at the

Grantham Research Institute at the London School of Economics. He has degrees

in law and engineering from Melbourne and a PhD (DPhil) in economics from

Oxford. He has published in the economics and philosophy peer-reviewed

journals on the design of emissions markets, including on the allocation of

tradable permits. His work has been referred to in publications such as the

Economist and the Financial Times, and he has been interviewed on television and

radio in various countries. He has provided advice on energy and environmental

markets and policy to governments (e.g. UK, EU, China, Australia) and various

international institutions around the world. A list of his publications can be

accessed at: http://www.cameronhepburn.com/research/bytopic/all/

23

Charles Holt is the A. Willis Robertson Professor of Political Economy at the

University of Virginia, where he also teaches in the Batten School of

Leadership and Public Policy. He is the currently the director of the

Experimental Economics Laboratory at Virginia. His publications include over a

hundred articles in academic journals, focused on game theory, auctions,

experimental economics, and the teaching of economics. He has written and edited

several books on topics in experimental economics, and was a founding co-editor

of the journal, Experimental Economics. He has previously served as President of

the Economic Science Association, the Southern Economic Association, and the

Society of Economic Educators. Much of his research pertains to auction design,

e.g. for greenhouse gas allowances, spectrum licenses, auto license plates, and

toxic banking assets. Other work includes measures of risk aversion and subjective

beliefs, and studies of strategic behavior in games and bargaining, using a mix of

theory and experiment. A list of his publications can be accessed at:

http://economics.virginia.edu/sites/economics.virginia.edu/files/holtvitasept2013.p

df

Charles D. Kolstad, Ph.D., Senior Fellow, Stanford University. Prof. Kolstad’s

research focuses on the economics of environmental regulation, with an emphasis

on greenhouse gases and climate change. He is a former director of the University

of California Center for Energy and Environmental Economics, a past president of

the Association of Environmental Economists, and a Coordinating Lead Author

for the Intergovernmental Panel on Climate Change (IPCC), focusing on the

economics of climate change. He has served on many advisory boards, including

the US EPA Science Advisory Board’s Environmental Economics

Committee. Prof. Kolstad is the author of a leading undergraduate textbook in

environmental economics and, at Stanford, teaches environmental and natural

resource economics. A list of his publications can be accessed at:

www/colstad.org.

24

Brian C. Murray, Director of Economic Analysis at Duke University’s

Nicholas Institute for Environmental Policy Solutions, Research Professor of

Environmental Economics at Duke’s Nicholas School of the Environment,

and Fulbright Research Chair in Environment and Economy at University of

Ottawa. Dr. Murray is widely recognized for his work on the economics of

climate change policy. This includes the design of cap-and-trade policy elements

to address cost containment and inclusion of offsets from traditionally uncapped

sectors such as agriculture and forestry. Murray is among the original designers of

the allowance price reserve approach for containing prices in carbon markets that

was adopted by California and the Regional Greenhouse Gas Initiative (RGGI)

cap-and-trade programs. He is providing counsel to the government of Ontario as

it seeks to develop the cap and trade system it announced in 2015. Throughout his

25-year research career, he has produced many peer-reviewed publications on

topics ranging from the design of market-based environmental policies and the

effectiveness of renewable energy subsidies to the evaluation of programs to

protect natural habitats such as forests, coastal and marine ecosystems. A list of

his publications can be accessed at:

http://nicholasinstitute.duke.edu/sites/default/files/cv/brian_murray_duke_cv_may

_2015.pdf

Karen Palmer is a Senior Fellow and Research Director at Resources for the

Future in Washington, DC. Dr. Palmer received her Ph.D. in economics from

Boston College in 1990. Dr. Palmer specializes in the economics of

environmental regulation and public utility regulation, particularly on issues at the

intersection of air quality regulation and the electricity sector. Her work seeks to

improve the design of incentive-based environmental and technology regulations

that influence the electric utility sector. She has done research on the design of

both the RGGI cap-and-trade program for CO2 emissions in the northeast and on

25

the design of the AB 32 cap-and-trade program in California. She is a co-author of

the report, Auction Design for Selling CO2 Emissions Allowances under the

Regional Greenhouse Gas Initiative. She has published two books on policy and

market design in a restructured electricity sector. A list of her publications can be

accessed at: http://www.rff.org/palmer.

John C.V. Pezzey, Ph.D., Senior Fellow, Fenner School of Environment and

Society, Australian National University. Dr Pezzey holds a BA in mathematics

from the University of Cambridge and a PhD in economics from the University of

Bristol. Pezzey has written on the economics of sustainability, and on the

efficiency and equity aspects of tradable pollution permits and pollution

taxation. His work on the latter has focused on the parallels between free permits

in carbon trading systems and thresholds in carbon taxation systems, and on the

political economy of Australian carbon pricing policy. A list of his publications

can be accessed at: https://researchers.anu.edu.au/researchers/pezzey-j-cv

William M. Shobe, J.D., Ph.D., Professor of Public Policy; University of

Virginia. Dr. Shobe earned his law degree from Lewis & Clark Law School and

his Ph.D. in economics from the University of Minnesota. He has taught

undergraduate environmental economics, law and economics, property rights, and

managerial economics as well as graduate level statistics, public policy, and

environmental economics. He headed the Economic and Regulatory Analysis

Division for the Commonwealth of Virginia where he evaluated state

environmental regulatory policies, and in 2004 directed the design and

implementation of the ground-breaking Virginia NOx Auction. He was part of the

team of researchers who designed the allowance auctions for the Regional

Greenhouse Gas Initiative, and he has undertaken experimental investigations of

the California allowance market and the European Union Emission Trading

26

System. A list of his publications can be accessed at:

http://people.virginia.edu/~wms5f/

Thomas Sterner, Professor of Environmental Economics, University of

Gothenburg, Sweden. Prof. Sterner’s work is focused on the design of policy

instruments to deal with resource and environmental problems. He established the

Unit for Environmental Economics as a leading European centre for

environmental economics that gives a unique PhD program in climate economics

with students from developing countries. Sterner has published more than a dozen

books and a hundred articles in refereed journals, mainly on environmental policy

instruments with applications to energy, climate, industry, transport economics

and resource management. Sterner is the recipient of the Myrdal Prize, past

president for the European Association of Environmental and Resource

Economists and Associate Editor of Environmental and Resource Economics. He

is also a Fellow or researcher at Resources for the Future, The Beijer Institute, and

Statistics Norway. With Gunnar Köhlin, he has founded the Environment for

Development Initiative. During 2012 and 2013 he served as Visiting Chief

Economist of the Environmental Defense Fund in New York. He has recently been

elected as a guest professor at the Collège de France for 2015-16. He was also

Coordinating Lead Author for the chapter on Policy Instruments in the 5th

Assessment report of the IPCC. A list of his publications can be accessed at:

http://economics.handels.gu.se/english/staff/professors/thomas_sterner

Peter J. Wilcoxen, Professor in the Department of Public Administration and

International Affairs at Syracuse University's Maxwell School. Prof.

Wilcoxen is a Nonresident Senior Fellow at the Brookings Institution, co-directs

the Brookings Climate and Energy Economics Project, and is a member of the US

Environmental Protection Agency’s Science Advisory Board. His research

focuses on the design and analysis of environmental and energy policies,

27

especially those connected with national or international measures to address

climate change. His work often involves the design, construction and use of large-

scale intertemporal general equilibrium models such as IGEM, a model of the US

economy that has been extensively used by the US EPA to analyze the impacts of

the Clean Air Act and proposed climate legislation. He is the author or coauthor of

more than 60 articles and three books including most recently Double Dividend:

Environmental Taxes and Fiscal Reform in the United States, which examines the

prospects for using carbon taxes to reduce climate change and improve efficiency

of the tax system. He received his BA in physics from the University of Colorado

and his AM and PhD in economics from Harvard University. He taught at the

University of Texas at Austin prior to moving to Syracuse University. In addition,

he has served as a Review Editor for the Intergovernmental Panel on Climate

Change and has been a member of the US EPA's Environmental Economics

Advisory Committee. Dr. Wilcoxen's research has been supported by the EPA,

the National Science Foundation, the Department of Energy, and a range of

foundations and private sector organizations. A list of his publications can be

accessed at: http://wilcoxen.maxwell.insightworks.com/pages/795/wilcoxen.pdf.

Roberton C. Williams III, Ph.D., Professor of Agricultural and Resource

Economics, University of Maryland, and Senior Fellow and Director of

Academic Programs, Resources for the Future. Prof. Williams’s research

focuses primarily on the effects of environmental regulation and how regulations

can be designed to achieve particular goals. It covers broad theoretical

questions such as how to measure the effects of environmental taxes and

regulations on the economy as well as applied work on policy issues such

as gasoline taxation and climate change policy. Before moving to Maryland,

Williams was an Associate Professor of Economics at the University of Texas

at Austin, and he has served as a Co-Editor of the Journal of Public

Economics and the Journal of Environmental Economics and Management. He

28

holds a Ph.D. from Stanford University and an A.B. from Harvard College, both

in economics. A list of his publications can be accessed at:

http://www.arec.umd.edu/sites/default/files/_docs/cv/WilliamsCV_2015.pdf

Dated: May 15, 2015 Respectfully Submitted,

Eric Biber

By: ________________________________

Eric Biber

UC Berkeley School of Law

Counsel for Amici Dallas Burtraw, et al.

29

CERTIFICATION OF WORD COUNT

I certify that the total word count of this brief, including footnotes, is 7,962 words, as determined by the word count of the Microsoft Word program on which this brief was prepared.

Dated: May 15, 2015 Respectfully Submitted,

Eric Biber By: ________________________________ Eric Biber UC Berkeley School of Law Counsel for Amici Dallas Burtraw, et al.

30

PROOF OF SERVICE

California Chamber of Commerce, et al. v. California Air Resources Board et al.

Morning Star Packing Company et al. v. California Air Resources Board et al.

Case Nos. C075930 & C075954

Court of Appeal, Third Appellate District

At the time of service, I was over 18 years of age and not a party to this action. I am employed in the City of Berkeley, County of Alameda, in the State of California, and I reside in the City and County of San Francisco, in the State of California. My business address is UC Berkeley School of Law, Berkeley, CA 94720.

On May 15, 2015, I served true copies of the following document(s) described as:

APPLICATION FOR LEAVE TO FILE AMICUS CURIAE BRIEF IN SUPPORT OF RESPONDENTS; PROPOSED BRIEF OF AMICUS CURIAE

Dallas Burtraw, et al.

on the parties in this action as follows:

SEE ATTACHED SERVICE LIST

BY U.S. MAIL: I am readily familiar with the organization’s practice of collection and processing correspondence for U.S. Mail. It is deposited with the U.S. Mail on that same day in the ordinary course of business. I am aware that on motion of party served, service is presumed invalid if postal cancellation date or postage meter date is more than one day after deposit for mailing in affidavit.

I declare under penalty of perjury under the laws of the State of California that the foregoing is true and correct.

Executed on May 15, 2015, at Berkeley, California.

Hailey Anderson

31

SERVICE LIST

California Chamber of Commerce, et al. v.

California Air Resources Board et al. C075930 (Related Case C075954)

Court of Appeal, Third Appellate District

Kamala D. Harris Attorney General of California Gavin G. McCabe Supervising Deputy Attorney General Office of the Attorney General 455 Golden Gate, Suite 11000 San Francisco, CA 94102 Telephone: (415) 703-5500 Gavin.McCabe@doj.ca.gov Attorneys for Defendants and Respondents CALIFORNIA AIR RESOURCES BOARD, et al.

David A. Zonana M. Elaine Meckenstock Bryant B. Cannon Deputy Attorneys General Office of the Attorney General 1515 Clay Street, 20th Floor P.O. Box 70550 Oakland, CA 94612 Telephone: (510) 622-2145 Facsimile: (510) 622-2270 David.Zonana@doj.ca.gov Attorneys for Defendants and Respondents CALIFORNIA AIR RESOURCES BOARD, et al.

Robert E. Asperger Office of the State Attorney General P.O. Box 944255 1300 I Street, Suite 125 Sacramento, CA 94244 Telephone: (916) 445-9555 bob.asperger@doj.ca.gov Attorneys for Defendants and Respondents CALIFORNIA AIR RESOURCES BOARD, et al

James R. Parrinello Nielsen Merksamer Parrinello Gross & Leoni LLP 2350 Kerner Blvd., Suite 250 San Rafael, CA 94901 Telephone: (415) 389-6800 Facsimile: (415) 388-6874 jparrinello@nmgovlaw.com Attorneys for Plaintiffs and Appellants CALIFORNIA CHAMBER OF COMMERCE, et al.

32

R.S. Radford Theodore Hadzi-Antich Pacific Legal Foundation 930 G Street Sacramento, CA 95814 Telephone: (916) 419-7111 Facsimile: (916) 419-7747 rsr@pacificlegal.org tha@pacificlegal.org Attorneys for Plaintiffs and Appellants MORNING STAR PACKING CO., ET AL.

Sean A. Commons SIDLEY AUSTIN LLP 555 West Fifth Street Los Angeles, CA 90013 Telephone: (213) 896-6010 Facsimile: (213) 896-6600 scommons@sidley.com Attorneys for Inervenor and Appellant NATIONAL ASSOCIATION OF MANUFACTURERS

Steven A. Merksamer Richard D. Martland Kurt R. Oneto Nielsen Merksamer Parrinello Gross & Leoni LLP 1415 L Street, Suite 250 Sacramento, CA 95814 Telephone: (916) 327-7852 Facsimile: (916) 327-2247 smerksamer@nmgovlaw.com rmartland@nmgovlaw.com koneto@nmgovlaw.com Attorneys for Plaintiffs and Appellants CALIFORNIA CHAMBER OF COMMERCE, et al.

Roger R. Martella, Jr. Paul J. Zidlicky Eric D. McArthur Matthew D. Krueger SIDLEY AUSTIN LLP 1501 K Street NW Washington, D.C. 20005 Telephone: (202) 736-8000 Facsimile: (202) 736-8711 rmartella@sidley.com pzidlicky@sidley.com emcarthur@sidley.com mkrueger@sidley.com Attorneys for Intervenor and Appellant NATIONAL ASSOCIATION OF MANUFACTURERS

33

Erica Morehouse Martin Timothy J. O’Connor ENVIRONMENTAL DEFENSE FUND 1107 9th St., Suite 1070 Sacramento, CA 95814 Telephone: (916) 492-4680 Facsimile: (916) 441-3142 Email: emorehouse@edf.org Email: toconnor@edf.org Attorneys for Intervenor and Respondent ENVIRONMENTAL DEFENSE FUND

Sean H. Donahue Donahue & Goldberg, LLP 2000 L St., NW Suite 808 Washington, DC 20036 Telephone: (202) 277-7085 Email: sean@donahuegoldberg.com Attorneys for Intervenor and Respondent ENVIRONMENTAL DEFENSE FUND

David Pettit Alexander J. Jackson Natural Resources Defense Council 1314 2nd Street Santa Monica, CA 90401 Telephone: (310) 434-2300 Facsimile: (310) 434-2399 dpettit@nrdc.org ajackson@nrdc.org Attorneys for Intervenor and Respondent NATURAL RESOURCES DEFENSE COUNCIL, INC.

Matthew D. Zinn Joseph D. Petta Shute, Mihaly & Weinberger, LLP 396 Hayes Street San Francisco, CA 94102 Tel: (415) 552-7272 Zinn@smwlaw.com Attorneys for Interveners & Respondents ENVIRONMENTAL DEFENSE FUND

CALIFORNIA SUPREME COURT Clerk of the Court 350 McAllister Street San Francisco, CA 94102 Via E-Submission

SACRAMENTO COUNTY SUPERIOR COURT Hon. Timothy M. Frawley 720 Ninth Street Sacramento, CA 95815 Via U.S. Mail only