On April 6, 2017, the California Court of Appeal, in a 2–1 decision, upheld California's sale of greenhouse gas ("GHG") emission allowances in California's cap-and-trade program. In affirming the trial court judgment, the Court of Appeal held that the California Legislature gave broad discretion to the California Air Resources Board ("Board") to sell GHG emissions allowances by auction, and that the revenue generated by the auction sales did not amount to a tax in violation of Proposition 13. This decision preserves a key component of California's cap-and-trade program but leaves open the possibility of a legal challenge to the Legislature's use of auction revenue. A more in-depth analysis of this opinion can be found here


California's cap-and-trade program requires covered entities to surrender GHG emission allowances or credits to offset their GHG emissions. Allowances may be purchased at public auctions from the Board. In two cases consolidated at the trial level and on appeal, the California Chamber of Commerce and Morning Star Packing Company, along with other entities ("Petitioners"), challenged the legality of the Board's auction sale of GHG emission allowances on the grounds that the auctions were not authorized by statute and were an unconstitutional tax. 

Court Ruling

The Court of Appeal first held that the California Legislature conferred on the Board broad discretion to develop a system for distributing allowances that includes use of auctions. The court noted that the Act's directives to the Board are "exceptionally broad and open-ended" and grant the Board authority to design regulations that include "distribution of emissions allowances." The Court of Appeal next held that the GHG emission allowances auction sale is not a tax subject to Proposition 13. Two hallmarks of a tax are that it: (i) is compulsory, and (ii) does not grant any special benefit to the payor. Because the auction system met neither of the twin hallmarks of a tax, the court concluded that it is not a tax. 

Future Legal Challenge

The Petitioners also argued that the state improperly used auction funds to support programs that lacked a connection to the discharge of GHGs by covered entities, as required by law. The Court of Appeal held that this issue is not ripe for decision. None of the petitions at issue sought to invalidate the Legislature's decisions on how to spend auction proceeds; rather, their object was to invalidate the auction sales. The court further stated that the Legislature's expenditure of allotted revenue does not speak to the legality of the collection of that revenue. But the court left open the possibility that "[t]o the extent the proceeds' expenditure may seem inappropriate to some, those who seek to challenge it may do so." 

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