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California Appeals Court Panel Upholds California Carbon Fee

American flags are seen near the Shell refinery, in Martinez, Calif. Californ...

Credit: Associated Press

Above: American flags are seen near the Shell refinery, in Martinez, Calif. California, April 30, 2008.

A state appeals court panel on Thursday upheld California's fee for carbon pollution — a central piece of the state's landmark efforts to fight climate change.

The California Court of Appeal sided with Gov. Jerry Brown's administration and environmental groups in a 2-1 decision.

California's cap-and-trade law caps carbon emissions and auctions off permits allowing companies to release greenhouse gases into the atmosphere.

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Businesses filed suit in 2012 saying the state Air Resources Board lacks authority to collect fees from polluters.

Uncertainty surrounding the case has been a major factor in upending the market for pollution permits, which consistently raised hundreds of millions of dollars a year until demand plummeted in 2016.

The ruling Thursday is unlikely to end wrangling over the program. Lawyers for both sides have previously said they'd appeal if they lost.

The California Chamber of Commerce and the Morning Star Packing Co., a tomato processing company required to buy carbon permits, filed separate lawsuits challenging the state's authority to levy the fee.

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Lawyers argued that the 2006 law that underlies cap-and-trade never authorized the state to conduct an auction. Even if the legislation, AB32, did allow an auction, they argued, it amounts to a tax increase that would require approval of two-thirds of the Assembly and Senate under the state constitution. The bill did not reach that threshold.

The Air Resources Board, which administers the program, says the auctions are similar to regulatory fees, which did not require a two-thirds supermajority in 2006, and are necessary to prevent polluters from getting windfall profits.

Demand for pollution permits has also been affected by questions about whether the bill authorized cap-and-trade to continue beyond 2020 — an issue not in play in the current case.

RELATED: Demand Rebounds For California’s ‘Cap-And-Trade’ Program

Brown, who has urged leaders around the world to adopt carbon regulations, has called for the Legislature to muster a two-thirds vote to explicitly authorize carbon auctions after 2020.

The legislation, in its current form, would put the program on stronger legal footing in the future, but it would not resolve the uncertainty posed by the lawsuit.

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