First District Court of Appeal Rejects Challenge to California Air Resources Board’s Regulations Implementing the Cap-and-Trade Program

The First District Court of Appeal has held the California Air Resources Board (CARB) did not exceed its authority under the California Global Warming Solutions Act of 2006 (2006 Act) in implementing the Compliance Offset Protocols and the early action offset provision of its Cap-and-Trade program. Our Children’s Earth Foundation v. California Air Resources Board, Case No. A138830 (Feb. 23, 2015).

Under the 2006 Act, CARB is required to adopt regulations specifying GHG emission limits and emission reduction measures in furtherance of achieving the statewide GHG emissions limit. The 2006 Act expressly authorizes CARB to adopt regulations establishing market-based compliance mechanisms to reduce GHG emissions. Every CARB regulation adopting GHG emission limits and measures must ensure that GHG emissions reductions are “real, permanent, quantifiable, verifiable, and enforceable” by CARB. (Health & Saf. Code, § 38562, subd. (d)(1).) Those regulations must also ensure that the emissions reduction “is in addition to any greenhouse gas emission reduction otherwise required by law or regulation, and any other greenhouse gas emission reduction that otherwise would occur.” (Health & Saf. Code, § 38562, subd. (d)(2), italics added.) This latter provision is known as the “additionality” requirement.

Pursuant to its authority under the 2006 Act, CARB implemented in January 2012 a Cap-and-Trade program regulation, a market-based compliance mechanism for achieving reductions in GHG emissions. The Cap-and-Trade program imposes a cap on the aggregate GHG emissions that covered entities may emit during the annual compliance period. Covered entities include industries who have previously reported exceedances of emissions above CARB’s threshold established for that industry. CARB enforces the cap by issuing a limited number of compliance instruments known as “allowances,” the total value of which is equal to the cap amount. Subject to limitations, participants can buy, bank, or sell allowances which are used by the covered entities to comply with their compliance obligations.

In March 2012, Appellant Our Children’s Earth Foundation (OCEF) (and another organization who is not a party on appeal) filed a petition for writ of mandate and complaint for declaratory and injunctive relief against CARB. OCEF claimed that CARB’s Compliance Offset Protocols and early offset credit provision violated the additionality requirement of the 2006 Act because they did not ensure the offsets would be truly additional to any GHG reductions that would otherwise occur.

The First District Court of Appeal affirmed the lower court’s denial of the petition. On appeal, OCEF first claimed that CARB exceeded its authority by adopting a market-based compliance mechanism that fails to ensure offset credits are additional to “any” GHG emissions reductions “that otherwise would occur.” The 2006 Act does not define “additional” or “otherwise would occur.” But the 2006 Act does define “market-based compliance mechanism” as including GHG emissions exchanges, banking, credits, and other transactions, governed by rules and protocols to be established by CARB. Within this authority delegated to CARB by the Legislature, the court concluded that CARB appropriately established rules and protocols that ensure additionality with respect to offset credits accepted under the Cap-and-Trade program.

The court also found it problematic that OCEF failed to articulate how a project operator could prove the GHG reduction would not otherwise occur or how CARB could provide the certainty that OCEF claims the 2006 Act demands. Whether a project would have been implemented without the offset incentive can never be proven with absolute certainty. The court found OCEF’s interpretation unworkable and, in practice, would preclude CARB from implementing market-based compliance mechanisms. That result is not what the Legislature intended, the court believed.

The court also rejected OCEF’s claim related to the early offset credit program. OCEF claimed that CARB exceeded its statutory authority by allowing offset credits for projects that were already occurring. According to the court, however, OCEF incorrectly assumed that a project that began before the Cap-and-Trade program was adopted could never satisfy the additionality requirement. That assumption was not supported by the provisions of the 2006 Act itself, which reflected the Legislature’s intention that there could be incentives for voluntary early reductions even before the Act was passed for which CARB could give credit.

Finally, the court considered OCEF’s challenge to the effectiveness of specific measures included in several of the Compliance Offset Protocols. As to this claim, the court made it clear that it would not substitute its judgment for that of the agency regarding CARB’s factual and policy considerations supporting the regulation. Pointing to the record, the court found that evidence substantially supported CARB’s policy decisions in formulating the protocols.