On April 6, 2017, by a 2-1 vote, the Third Appellate District affirmed a Sacramento County Superior Court ruling that the California Air Resources Board (ARB) acted within the scope of the authority delegated by the Legislature to create the Cap-and-Trade Program’s auction system. The appellate court also affirmed the trial court’s ruling that auction sales do not constitute a tax subject to Proposition 13, but on different grounds, as discussed below.
The appellate court found that the auction system component of the Cap-and-Trade Program does not meet the “hallmarks of a tax” because: (1) a tax is compulsory and (2) the payor receives nothing of specific value for the tax itself. Instead, the appellate court found that the “twin aspects” of the auction, voluntary participation and purchase of a specific thing, weighed against the conclusion that the auction system is a tax. The court also concluded that the use of the cap-and-trade auction revenue did not in-and-of itself render the sale of allowances a tax.
First, the appellate court determined that participation in the auction system is voluntary, emphasizing that the purchase of emissions allowances is not required “unless an entity chooses to pollute beyond a certain level, something the government does not compel it to do,” particularly because the purchase of emissions allowances is only one manner in which covered entities can achieve compliance. As a result, the court found that the purchase of emissions allowances is a “business-driven decision, not a governmentally compelled decision.” The dissenting opinion strongly disagreed with this contention.
Second, the appellate court determined that the auction system involved the purchase of a specific thing of value, an emissions allowance. Specifically, the appellate court found that the purchase of an emissions allowance in the auction system conveyed a valuable property interest, “the privilege to pollute California’s air”, which may be freely sold or traded on the secondary market. The court dismissed the fact that the Cap-and-Trade regulations themselves explicitly state that allowances are not property. The appellate court also pointed to participation in the auction system by non-covered entities, such as environmental groups, as demonstrating the voluntary nature of the auction system. Based on these two factors, the appellate court concluded that the auction system is not a tax.
If you have any questions about these developments, please contact Brian Biering at bsb(at)eslawfirm.com or Samantha Neumyer at sgn(at)eslawfirm.com