Climate Solutions Group

California Supreme Court Solidifies Cap and Trade Program

California Supreme Court

03

Jul 2017

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After a four-year legal challenge, the California Supreme court declined to hear an appeal by business groups that believed the cap and trade program was equal to an unconstitutional tax. The case firmly establishes the legality of the cap and trade program and will provide regulatory certainty to emitters, carbon market participants, and other stakeholders who are keen to move forward with emission reduction projects.

Cap and trade requires emitters to purchase emission allowances or carbon offset credits which creates a financial incentive to reduce greenhouse gas emissions. The California Chamber of Commerce and the Pacific Legal Foundation thought that the purchase of these emission allowances from government auctions was equal to a tax. In California, a two-thirds vote is required for a new tax to be implemented which was not achieved for the cap and trade program.[1]

The California Appeals Court rejected the business group’s notion of cap and trade as a tax back in April. The attempt to appeal the Appeals Court decision to the Supreme Court was an uphill battle from the start. Review by the California Supreme Court is extremely rare. Only 4 to 5% of cases petitioned for review are granted[2].

Moving Cap and Trade Beyond 2020

Now that the legality of California Cap and Trade program is established, the California government, led by Governor Jerry Brown, must decide on the post 2020 design options. These design options will be critical for Ontario, which is planning to join California and Quebec in the Western Climate Initiative (WCI) in 2018.

Governor Brown is pushing California lawmakers to extend the cap and trade program beyond 2020. The hope is that a decision will be made sometime in July. The goal for cap and trade advocates is to achieve a two-thirds vote in the assembly that would extend the program to 2030. A two-thirds vote would protect the program from future legal challenges. Lawmakers will have until July 21st to vote, which is the start of summer recess.

Potential Effect for Auctions

The Supreme Court decision could signal that cap and trade is here to stay, at least until 2020.  Emitters that were holding out on participating in the cap and trade auction may be more likely to participate in the next WCI auction, which will be held on August 15th. The potential for increased participation in the auction could also increase prices beyond the price floor, which is currently $13.57 USD or $18.51 CAD[3]. In fact, markets have already responded to the supreme court decision with an increase in prices shown in the following figure:

CCA Prices

The results of the upcoming August 15th WCI auction might also affect the next Ontario Auction which is scheduled for September 6th. The past two Ontario auctions have been fully subscribed.

Post 2020 design, Ontario, and Beyond

The post 2020 design decisions could have a direct impact on Ontario’s emitters which plan to participate in WCI cap and trade auctions starting in 2018. Design considerations include a potential cap on the price of emission allowances, the approach to allocating free emission allowances, and the emission cap decline rate. Lawmakers will face the challenging task of finding the right balance between environmental and industry goals.

Post 2020 design will also provide emitters in Ontario, California and Quebec with more regulatory certainty which is necessary to plan long term investments in low carbon projects and operational infrastructure. Regulatory certainty can also shift the perception of low carbon investments from a risk to more of an opportunity, which was a key takeaway from the Ontario Cap and Trade Forum.

The California Supreme Court decision could have broader impacts in other state and provincial jurisdictions. As cap and trade is now firmly established legally, it may be perceived as less risky. As a result, other US states and Canadian provinces may become more open to implementing cap and trade programs in their own jurisdictions rather than a carbon tax.

Photo Courtesy of CoolCaesar

References

[1] Megerian, C. (2017) California Supreme Court leaves in place decision upholding cap-and-trade system. LA Times. Retrieved from: http://www.latimes.com/politics/essential/la-pol-ca-essential-politics-updates-cap-and-trade-supreme-1498684764-htmlstory.html

[2] California Courts (2017) After the Appeal. Retrieved from: http://www.courts.ca.gov/8547.htm

[3] Western Climate Initiative (2017) GHG Allowance Auction & Reserve Sale Platform. Retrieved from: https://www.wci-auction.org/

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