Cal. Chamber of Commerce v. State Air Res. Bd.

• Decision Date: 06 April 2017
• Docket Number: C075954,C075930
• Court: California Court of Appeals Court of Appeals
• Parties: CALIFORNIA CHAMBER OF COMMERCE et al., Plaintiffs and Appellants, v. STATE 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. State Air Resources Board et al., Defendants and Respondents; Environmental Defense Fund et al.; Interveners and Respondents.

10 Cal.App.5th 604

216 Cal.Rptr.3d 694

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

v.STATE 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.State Air Resources Board et al., Defendants and Respondents;

Environmental Defense Fund et al.; Interveners and Respondents.

C075930

C075954

Court of Appeal, Third District, California.

Filed April 6, 2017

Nielsen Merksamer Parrinello Gross & Leoni, James R. Parrinello, San Rafael, Steven A. Merksamer, Kurt R. Oneto, Christopher E. Skinnell and Eric J. Miethke, Sacramento, for Plaintiffs and Appellants California Chamber of Commerce and Larry Dicke.

Sidley Austin, Sean A. Commons, Los Angeles, Roger R. Martella, Jr., Paul J. Zidlicky and Eric D. McArthur for Plaintiff and Appellant The National Association of Manufacturers.

Pacific Legal Foundation, James S. Burling, SacramentoTheodore Hadzi-Antich, Harold E. Johnson, Sacramento, and Anthony L. François for Plaintiffs and Appellants Morning Star Packing Company, Dalton Trucking, Inc., California Construction Trucking Association, Merit Oil Company, Ron Cinquini Farming, Construction Industry Air Quality Coalition, Robinson Enterprises, Inc., Loggers Association of Northern California, Inc., Norman R. "Skip" Brown, Joanne Browne, Robert McClernon and the National Tax Limitation Committee.

National Federation of Independent Business Small Business Legal Center and Luke A. Walke; Benbrook Law Group, Bradley A. Benbrook, Sacramento, and Stephen M. Duvernay for National Federation of Independent Business Small Business Legal Center, Owner-Operated Independent Drivers Association, Inc., and Associated California Loggers, as Amici Curiae on behalf of Plaintiffs and Appellants.

Pillsbury WinthropShaw Pittman, Kevin M. Fong, Jeffrey M. Vesely and Richards E. Nielsen, San Francisco, for California Taxpayers Association, as Amicus Curiae on behalf of Appellants.

Alston & Bird, Maureen F. Gorsen, Los Angeles, and Damien M. Schiff, Sacramento, for California Manufacturers and Technology Association, as Amicus Curiae on behalf of Appellants.

Kamala D. Harris and Xavier Becerra, Attorneys General, Robert W. Byrne, Senior Assistant Attorney General, Gavin G. McCabe, Molly K. Mosley, Deputy Attorney General, David A. Zonana, Robert E. Asperger, M. Elaine Meckenstock, and Bryant B. Cannon, Deputy Attorneys General, for Defendants and Respondents California Air Resources Board; Mary Nichols, in her official capacity as Chair of the California Air Resources Board; John Balmes, M.D., Sandra Berg, John Gioia, Hector De La Torre, John Eisenhut, Judy Mitchell, Barbara Riordan, Ron Roberts, Phil Serna, Alexander Sherriffs, M.D., and Daniel Sperling, in their official capacities as members of the California Air Resources Board; and Richard W. Corey, in his official Capacity as Executive Officer of the California Air Resources Board.

Shute, Mihaly & Weinberger, Matthew D. Zinn, San Francisco, and Catherine Malina for Interveners and Respondents Environmental Defense Fund and Natural Resources Defense Council.

Environmental Defense Fund, Erica Morehouse Martin and Timothy J. O'Connor; Donahue & Goldberg and Sean H. Donahue for Intervener and Respondent Environmental Defense Fund.

Natural Resources Defense Council, David Pettit and Alexander L. Jackson for Intervener and Respondent Natural Resources Defense Council.

UC Berkeley School of Law and Eric Biber for Dr. Dallas Burtraw and 16 other economics and public policy scholars, as Amici Curiae on behalf of Respondents.

Frank G. Wells Environmental Law Clinic, UCLA School of Law and Cara A. Horowitz for The Nature Conservancy, as Amicus Curiae on behalf of Respondents.

Beveridge & Diamond and Nicholas W. van Aelstyn, San Francisco, for International Emissions Trading Association, as Amicus Curiae on behalf of Respondents.

Duarte, J.

These two consolidated cases involve the California Global Warming Solutions Act of 2006 (the Act) (Health & Saf. Code, § 38500 et seq. ; Stats. 2006, ch. 488; § 1, p. 3419, enacting Assem. Bill No. 32 (2005-2006 Reg. Sess.), popularly known as "AB 32").¹ The Act was passed by a simple majority vote of both legislative houses. Its general purpose is to reduce greenhouse gas (GHG) emissions to protect the environment.

Plaintiffs and allied amici curiae do not quarrel with the Act or its goals, but attack one part of the implementing regulations adopted by the State Air Resources Board (Board). (§ 39003.) The Board created a "cap-and-trade" program that includes the auction sale of some—but not all—GHG emissions allowances. Covered entities-generally large emitters of GHGs—must either surrender sufficient compliance instruments (emissions allowances or offset credits) to cover the amount of pollutants they discharge, or face monetary penalties or other negative consequences. (See § 38580; Cal. Code Regs., tit. 17, §§ 96012 -96014.) The Board distributes some emissions allowances for free, but sells others at quarterly auctions. A covered entity that cannot reduce its emissions below the amount authorized by its free allowances and any offset credits it has obtained must purchase more allowances at the Board's quarterly auctions, or on a secondary market where allowances are sold or traded without Board control.

As in the trial court, on appeal plaintiffs assert (1) the auction sales exceed the Legislature's delegation of authority to the Board to design a market-based emissions reduction system, and (2) the revenue generated by the auction sales amounts to a tax that violates the two-thirds supermajority vote requirement of Proposition 13. (Cal. Const., art. XIII A, § 3.) The trial court rejected these two claims in a thorough written decision.

As for the first question, we hold that the Legislature gave broad discretion to the Board to design a distribution system, and a system including the auction of some allowances did not exceed the scope of legislative delegation. Further, the Legislature later ratified the auction system by specifying how to use the proceeds derived therefrom.

As for the second question, although our reasoning differs from that of the trial court, we agree that the auction sales do not equate to a tax. As we shall explain, the hallmarks of a tax are: 1) that it is compulsory; and 2) that the payor receives nothing of particular value for payment of the tax, that is, the payor receives nothing of specific value for the tax itself . Contrary to plaintiffs' view, the purchase of allowances is a voluntary decision driven by business judgments as to whether it is more beneficial to the company to make the purchase than to reduce emissions. Reducing emissions reduces air pollution, and no entity has a vested right to pollute. Further, once purchased, either from the Board or the secondary market, the allowances are valuable, tradable commodities, conferring on the holder the privilege to pollute. Indeed, speculators have bought allowances seeking to profit from their sale, and as one party puts it, taxes do not attract volunteers. These twin aspects of the auction system, voluntary participation and purchase of a specific thing of value, preclude a finding that the auction system has the hallmarks of a tax.

The bulk of the briefing in the trial court and on appeal discusses the test to determine whether a purported regulatory fee is instead a tax subject to Proposition 13. The key authority is Sinclair Paint Co. v. State Bd. of Equalization (1997) 15 Cal.4th 866, 64 Cal.Rptr.2d 447, 937 P.2d 1350 (Sinclair Paint ) and its progeny. However, as we explain in more detail, post , the Sinclair Paint test is not applicable herein, because the auction system is unlike other governmental charges that may raise the "tax or fee" question resolved thereby. The system is the voluntary purchase of a valuable commodity and not a tax under any test.

Accordingly, we shall affirm the judgments denying the petitions in these consolidated cases.

BACKGROUND

In 2006 the Legislature passed and Governor Schwarzenegger signed the Act, which requires that covered entities reduce GHG emissions to 1990 levels by the year 2020. The Act did not pass by a two-thirds vote of each legislative house.

A decision by another appellate court summarized the Act as follows:

"The [Act] is supported by legislative findings that global warming poses a ‘serious threat’ to the ‘economic well-being, public health, natural resources, and the environment of California,’ and that global warming will have ‘detrimental effects on some of California's largest industries.’ (§ 38501, subds. (a), (b).) ...

"The [Act] designates the Board as ‘the state agency charged with monitoring and regulating sources of emissions of greenhouse gases that cause global warming in order to reduce emissions....' (§ 38510.) In making this designation, the Legislature codified its intention that the Board ‘design emissions reduction measures to meet the statewide emissions limits for greenhouse gases ... in a manner that minimizes costs and maximizes benefits for California's economy, improves and modernizes California's energy infrastructure and maintains electric system reliability, maximizes additional environmental and economic co-benefits for California, and complements the state's efforts to improve air quality.’ (§ 38501, subd. (h).)

"The [Act] subjects the Board to several directives. Among other things, the Board is required to (1) adopt regulations for statewide reporting and monitoring of GHG emissions (§ 38530); (2) establish a statewide GHG emissions limit to be achieved by 2020 that is equivalent to the 1990 state GHG emissions level (§ 38550); (3) adopt rules and regulations to ‘achieve the maximum technologically feasible and cost-effective greenhouse gas emission reductions ... subject to the criteria and schedules' set

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