California’s Cap and Trade Program Set Back by Injunction

A California court has enjoined implementation of the state’s cap and trade program pending a review of alternatives, raising uncertainty over whether the nation’s first economy-wide regulatory regime for carbon emissions will go into effect by January 1, 2012, as had been planned. In Association of Irritated Residents v. CARB,[1] the California Superior Court for San Francisco County ruled this week that the California Air Resources Board (CARB) failed to adequately examine the possibility that a carbon tax or other alternative to a cap and trade program could be used to meet California’s greenhouse gas reduction goals.

Background

AB 32 – also known as the Global Warming Solutions Act of 2006[2] – requires California to reduce its statewide greenhouse gas emissions to 1990 levels by 2020. The law requires implementation of a statewide emissions cap and provides wide discretion to the California Air Resources Board to develop regulations, including market based programs, to achieve the required emissions reductions. See California Sets Mandatory Limits on Greenhouse Gas Emissions, Steps Out Ahead of EPA, Marten Law Environmental News (Sept. 20, 2006).

As part of its development of emissions reduction programs, AB 32 requires CARB to develop a “Climate Change Scoping Plan” (the Scoping Plan) “for achieving the maximum technologically feasible and cost-effective reductions in greenhouse gas emissions from sources or categories of sources of greenhouse gases by 2020.”[3] The Scoping Plan provides a roadmap for achieving the AB 32 goals and, as its centerpiece, proposes the adoption of a statewide cap and trade program. Last December, CARB adopted final regulations for a cap-and-trade program covering facilities with emissions exceeding 25,000 metric tons of carbon dioxide equivalents (MtCO2e). See California Unveils Nation’s First Economy-Wide Cap-and-Trade Program, Marten Law Environmental News (November 12, 2010) (describing draft regulations). The program is scheduled to go into effect on January 1, 2012.

CARB’s decision to implement AB 32’s reduction goals through a cap and trade program was challenged by environmental justice advocates. While many environmental interests strongly support the idea of a cap and trade system, there is some disagreement regarding such a program’s eventual impact on low income and minority communities as compared to more direct regulation.[4] Environmental justice groups advocated for adoption of a carbon tax or other alternative program, and took issue with CARB’s focus on cap and trade as the preferred solution.

The environmental challengers (Petitioners) based their suit primarily on the California Environmental Quality Act (CEQA) and CARB’s similar regulations for a “certified regulatory program,” both requiring review of the environmental impacts of regulatory programs. In adopting the Scoping Plan, CARB had published a “Functional Equivalent Document” (FED), so-called because it is functionally equivalent to the programmatic Environmental Impact Statement (EIS, or in California, EIR) it replaced. Petitioners claimed that the FED violated CEQA and AB 32 itself.

The CEQA Rulings

CARB’s Alternatives Analysis Ruled Deficient

The core of the Court’s ruling involved CARB’s analysis of alternatives to the cap and trade program. Petitioners argued that CARB’s discussion of other regulatory alternatives, including particularly of a program based on a carbon tax or “carbon fee,” were not adequately detailed. The Court agreed.[5] Acknowledging that CARB had discussed five alternatives – a “no program” or no-action alternative (explaining the consequences of adopting no restrictions), and four other alternatives with differing regulatory mixes “that rely primarily on cap and trade, source-specific regulations, or a carbon fee,”[6] the Court nonetheless found CARB’s regulatory alternatives analysis to lack necessary depth.

The Court took particular exception to CARB’s conclusion that the other regulatory alternatives’ environmental impacts would be similar to those adopted in the Scoping Plan, concluding that CARB “provide[d] little to no facts or data to support this conclusion,” other than to note the difficulty of predicting the differences.[7] The Court did not accept CARB’s explanation that the FED’s analysis was meant to be programmatic (general), ruling that “[w]hile a program-level EIR need not be as detailed as a project-level EIR, [CARB] must still provide the public with a clear indication based on factual analysis as to why it chose the Scoping Plan over the alternatives,” and “CEQA’s demand for meaningful information is not satisfied by simply stating that it will be provided in the future.”[8]

Although it was not the sole basis for its decision, the Court also focused specifically on the relative length of the several alternatives analyses. While the no-action alternative discussion occupied ten pages, the discussion of the other four alternatives together took up only three, while CARB disposed of the carbon tax in a “scant two paragraphs,” a “brief fifteen line reference.”[9] The Court pointed to CARB’s “extensive evaluation” of the cap and trade program, and concluded that “CEQA requires that [CARB] undertake a similar analysis of the impacts of each alternative so that the public may know not only why cap and trade was chosen, but also why the alternatives were not.”[10]

Regarding what it believed CARB should have done, the Court went into detail with respect to the carbon tax alternative, explaining:

[CARB] fails to describe what a carbon fee program consists of, how fees or taxes are established, criteria for setting amounts, what the California, United States and worldwide experience has been, how it is administered and by who, what are the alternatives for use of the revenue and what sectors of the economy it should be considered for, or not, and why. It does not provide the basic information necessary for [CARB] and the public to be informed about this alternative and its place in California’s massive effort to improve the environment pursuant to legislative mandate.

More generally, the Court ruled that “[CARB] could have, and should have used data from existing programs, studies, and reports to analyze the potential impacts of the various alternatives.”[11]

CARB’s Implementation of the Scoping Plan Ruled Unlawful

In addition to its ruling on the content of the environmental review, the Court identified a separate, procedural flaw in CARB’s adoption of the Scoping Plan.[12] CARB’s final approval, by the agency’s Executive Officer, occurred on May 7, 2009. CARB ensured that before that time it had received and responded to all public comment, as is required by CEQA and CARB’s own regulations. However, prior to reviewing all public comments, in December 2008, CARB had taken steps toward implementing the Scoping Plan, including a public workshop discussing future planned implementation actions. The Court ruled that undertaking implementation steps prior to issuing comment responses and securing final approval “undermine[d] CEQA’s goal of informed decisionmaking,” which is the purpose of accepting comments in the first place.[13]

Petitioners’ Other Sufficiency Claims Rejected

Although the Court found that CARB’s alternatives analysis was deficient, the Court rejected Petitioners’ other sufficiency claims.[14] Petitioners argued that CARB should have fully analyzed the future impacts of facilities that are likely to be built as a result of the new regulations.

However, the Court was satisfied with CARB’s general disclosure of potential future impacts while deferring more specific analyses to project-level environmental reviews. CARB had discussed generally that a number of biofuel production facilities would be built around California, and that these would generate additional, possibly significant air and other impacts. The Court likened this analysis to a previously upheld review of a county hazardous waste management plan, which, despite certain superficial differences, also “could allow certain projects, such as hazardous waste disposal facilities, to proceed, [which projects] could have adverse impacts.”[15] In the Court’s mind, because “[t]he Scoping Plan itself does not recommend or propose any future facilities,” a general discussion would suffice.[16] For similar reasons, the Court upheld CARB’s analysis of cumulative impacts, which Petitioners had argued failed to account for these additional facilities.[17]

The Substantive Rulings—Scoping Plan Upheld

In addition to its CEQA rulings, the Court also addressed a number of challenges brought against the adequacy of the Scoping Plan itself. The heart of Petitioners’ complaint was that CARB had not gone far enough in satisfying AB 32’s mandates.

For example, the Scoping Plan sets California’s 2020 emissions reduction goal to 1990 levels by 2020, apparently in conformance with AB 32.[18] Petitioners argued that statements elsewhere in the statute requiring CARB “to achieve the maximum technologically feasible and cost-effective greenhouse gas emission reductions” meant that CARB was required to use the 1990 levels as a floor, and set reduction levels at the maximum achievable beyond that. The Court rejected this with little discussion.[19]

Petitioners also took issue with CARB’s measurement of the cost-effectiveness of the strategies it adopted, which did not specifically analyze every separate, possible reduction method (adopting what CARB called the “Cost of a Bundle of Strategies” approach). The Court upheld this as consistent with AB 32’s mandate to evaluate the Scoping Plan’s “total potential costs and total potential economic and noneconomic benefits.”[20] The Court also specifically cited the method’s approval by a number of environmental groups as indicating its legitimacy.[21]

Finally, the Court also rejected arguments that CARB should have adopted direct emissions reductions for the agricultural sector,[22] enacted stricter limits on the industrial sector,[23] enacted an entirely direct regulatory regime rather than cap and trade,[24] and broadened its analysis of health impacts,[25] in each case deferring to the agency’s judgment.

The Court’s Injunction and Possible Impact

Having ruled that additional alternatives analysis was required, the Court concluded that “[c]ontinued rulemaking and implementation of cap and trade will render consideration of alternatives a nullity as a mature cap and trade program will be in place.”[26] Consequently, the Court concluded, it “must enjoin any further rulemaking until [CARB] amends the FED in accordance with this decision.”[27] CARB would be enjoined from “any further implementation of the measures contained in the Scoping Plan until after [CARB] has come into complete compliance with its obligations under its certified regulatory program and CEQA.”[28]

As worded in the order, the Court’s injunction is far-reaching: “the measures contained in the Scoping Plan” covers considerably more than just the cap and trade program, including initiatives like California’s low carbon fuel program and renewable portfolio standard. CARB has indicated that it may seek agreement from Petitioners that the injunction does not apply to programs other than cap and trade.

With respect to cap and trade itself, the Court’s intent seems clear: to require an analysis of carbon tax and other alternatives prior to implementing the program. This will take time, as would any appeal. It remains to be seen whether or how long this will delay the implementation of cap and trade in California.

For more information on this decision, contact Adam Orford or any member of Marten Law’s Climate Change practice group.