CALIFORNIA CAP AND TRADE UNDER FIRE:

AN EXAMINATION OF THE CHALLENGES TO THE CONSTITUTIONALITY OF THE

GLOBAL WARMING SOLUTIONS ACT‘S CONTROVERSIAL CARBON MARKET

Sean M. Jones

LL.M. Candidate

University of San Diego School of Law

Professor Timothy Duane, J.D., Ph.D.

Climate Change

Fall 2015

ii

Table of Contents

I. Introduction …………………………………………..……..…..…….…....1

II. “Tax” or “Not a Tax” - that is the Question ………………………….……..1

III. Cap and Trade in a Nut Shell ……………………………………..………….3

IV. Cap and Trade’s Constitutionality a Close Question …..……..……………...4

V. The Case Against Cap and Trade’s Constitutionality ..…….….….…………..6

a. Cap and Trade is a Tax and is Unconstitutional without

2/3 Approval Pursuant to Proposition 13 …….….……….………..….….6

b. A Tax by Any Other Name ……………………………………….……......8

c. California Cap and Trade‘s Proposed Federal Counterpart,

which is Almost Functionally Identical, is Widely

Considered to be a Tax ……….……………………………………....11

d. CARB‘s Carbon Permit Program Matches the Dictionary

Definition of a Tax………………………….…………………….................12

e. Cap and Trade is Generating Billions of Dollars

of Revenue for the State .………………………………………………13

f. The State‘s Delegation of Power to the CARB Should

Not Circumvent Voters‘ Rights to be Heard ….……………………...…….14

g. The Distinction between Taxes and Fees is Not Well Settled ……….15

VI. The Case for Cap and Trade’s Constitutionality ……….………………15

a. Regulatory Fees are Not Taxes – Just ask Sinclair ……………………….16

b. The Dictionary Definition of Tax is Irrelevant

to the Discussion ……………………………………………………….20

c. Revenue Generation is Incidental to, Not the Purpose of,

Regulation …………………………….…………………………………21

d. Carbon Permit Auctions do Not Contradict the

Legislative Intent of Proposition 13 ……………………………………….22

e. AB 32 Does Not Specifically Recognize the Sales of

Carbon Permits ……………………………………………………….22

f. Auction Prices are Set by Market Forces, Not the

Government ……………………………………………………………….23

g. No Meaningful Remedy is Realistically Available at

this Point ……………………………………………………………….23

VII. Judicial Analysis ………….……………………………………………………24

a. How Should the Language of AB 32 be Construed? ………….....................24

b. The Effect of Proposition 13 ………….……………………………………26

c. The Effect of Proposition 26 ……………………………………………….27

d. Common Sense Approach ……………………………………………….29

e. Justiciability and Practicality Considerations .………………………………30

VIII. Conclusion ……………………………………………………………….31

1

I. Introduction

California Assembly Bill 32, titled ―The Global Warming Solutions Act of 2006‖ (―AB

32‖ or ―the Act‖) was signed into legislation by then Governor, Arnold Schwarzenegger, making

California the first state in the nation to officially confront the threats of anthropogenic global

warming. Since its passage in 2006, one of AB 32‘s hallmark elements, ―Cap and Trade,‖ has

come under fire from some business owners who claim that the regulations imposed on carbon

dioxide emission are making it harder to conduct business in the State, all while generating

billions of dollars of revenue for the Government. In 2011, the California Chamber of Commerce

and the Pacific Legal Foundation took up the cause of these proclaimed struggling businesses

and filed twin lawsuits in Sacramento Superior Court alleging Cap and Trade‘s emissions permit

auctions, which allow businesses to purchase additional permits in order to emit more pollution,

constitute a tax and therefore violate the California Constitution which requires two-thirds

approval by the State legislature for the enactment of new taxes – a requirement that was never

actually satisfied.

This paper seeks to provide a comprehensive background of California‘s Cap and Trade

regime as it exists under AB 32, to analyze the attacks its opponents have leveled at its

constitutionality, to address all counter-arguments by AB 32‘s proponents, and, finally, to

evaluate the validity of these respective positions from the perspective of the judiciary.

II. “Tax” or “Not a Tax” - That is the Question

In 2013, Chief Justice of the United States Supreme Court, John Roberts, made history by

casting a surprising swing vote, effectively saving the Patient Protection and Affordable Care

Act (ACA) and declaring its constitutionally-questionable ―individual mandate,‖ which imposes

a penalty on anyone without health insurance, a ―tax.‖ Although the text of the ACA never

2

specifically identified the penalty as a tax, and President Obama (the namesake of the ACA‘s

popular nickname, ―Obamacare‖) even rejected early claims that it was a tax,1 the Supreme

Court, in assessing the totality of the circumstances determined that the penalty enforcing the

individual mandate effectively served as a tax and was thus properly imposed within the scope of

Congress‘s taxing and spending power.2

Around the same time the United States Supreme Court was labeling one penalty a tax,

the California Supreme Court was doing quite the opposite and rejecting claims that California

Air Resource Board‘s (―CARB‖) carbon permit auctions serve the essential function of a tax3

and should be labeled accordingly. The significance of the penalty‘s label owes to the

requirement under Proposition 13 (and its more rigid successor, Proposition 26) of the California

1 ―Consider the recent exchange between President Obama and George Stephanopoulos of ABC News. Appearing

on ABC's "This Week," Obama was asked by Stephanopoulos about Sen. Baucus‘s ―individual mandate‖ in the

Senate health care bill. The Senate bill, which Obama supports, requires everyone to buy health insurance or else

pay a penalty as high as $3,800 a year. Stephanopoulos asked that if "the government is forcing people to spend

money, fining you if you don't [buy insurance]. . . . How is that not a tax?" *** "Well, hold on a second, George,"

Obama said. "Here's what's happening. You and I are both paying $900, on average—our families—in higher

premiums because of uncompensated care. Now what I've said is that if you can't afford health insurance, you

certainly shouldn't be punished for that. That's just piling on. If, on the other hand, we're giving tax credits, we've set

up an exchange, you are now part of a big pool, we've driven down the costs, we've done everything we can and you

actually can afford health insurance, but you've just decided, you know what, I want to take my chances. And then

you get hit by a bus and you and I have to pay for the emergency room care, that's . . ." *** "That may be," Mr.

Stephanopoulos responded, "but it's still a tax increase." Mr. Obama: "No. That's not true, George. The—for us to

say that you've got to take a responsibility to get health insurance is absolutely not a tax increase. What it's saying is,

is that we're not going to have other people carrying your burdens for you anymore . . ." **** ―I don't think I'm

making it up," Stephanopoulos said. He cited Merriam Webster‘s dictionary definition of tax: "a charge, usually of

money, imposed by authority on persons or property for public purposes." Dempsey, Matt. ―Fact Check: Cap-and-

Trade is a Tax.‖ U.S. Senate Committee on Environment and Public Works. 22 September 2009.

(http://www.epw.senate.gov/public/index.cfm/2009/9/post-e41b6ac3-802a-23ad-4ba4-2746e4458a1b) 2 ―[T]he individual mandate was a ‗tax‘ that was within Congress's taxing powers.‖ Nat'l Fed'n of Indep. Bus. v.

Sebelius, 132 S. Ct. 2566, 183 L. Ed. 2d 450 (2012). 3 ―AB 32 authorizes the collection of a fee from sources of GHGs. In 2010, ARB adopted a regulation to collect a

fee to administer the program, called the AB 32 Cost of Implementation Fee Regulation. This fee is collected

annually from large sources of GHGs, including oil refineries, electricity power plants (including imported

electricity), cement plants and other industrial sources. There are approximately 250 fee payers that emit 330

million metric tons of GHG emissions per year. Funds collected are used to cover annual expenses for ARB and

other State agencies to implement AB 32.‖ California Air Resources Board.

<http://www.arb.ca.gov/cc/ab32/ab32.htm>.

3

Constitution that all new taxes must gain two-thirds approval in the State Senate before being

imposed on Californians.4

Despite the similarities between the monetary penalties imposed on California‘s carbon

emitters and Americans who fail to obtain health insurance, as well as the fact that the revenues

generated from the penalties both serve to fund operations closely related to the penalized acts or

omissions, the U.S. and California Supreme Courts appear to have arrived at two different

determinations as to what constitutes a tax.

So why does cap and trade escape the designation of a tax, and how is it likely to fare

against continuing challenges to its constitutionality at the third district court of appeal and

beyond? To answer these questions it is important to first understand exactly what cap and trade

is and how it operates.

III. Cap and Trade in a Nut Shell

Cap and trade is one of the most common and effective methods of curtailing carbon

emissions being used in the world today.5 As the name suggests, there are two distinct aspects to

this regulatory regime. First, the ―cap‖ sets a specific limit on the total amount of carbon that can

be emitted by each company in the State. The allowable emissions are then quantified by

permits, which are then distributed among certain California businesses, known as ―qualifying

entities.‖ The ―trade‖ portion of the program allows businesses that pollute less to sell their

unused emissions permits to heavier polluters. In theory, this creates a monetary incentive for

businesses to pollute less, thereby reducing the need to buy additional permits or even generating

4 California Constitution Article XIII A (Limitation on Taxation, see infra)

5 Center for Climate and Energy Solutions. ―Summary of California‘s Cap and Trade Program.‖ 20 October 2011.

<http://www.c2es.org/us-states-regions/action/california/cap-trade-regulation#sub2>.

4

additional revenue by selling unused permits. The graph below provides a good visual

representation of the program.6

7

The term ―carbon market‖ stems from the economic fundamentals of supply and demand.

By creating a finite supply of carbon permits, the State has been able to place a monetary value

on the freedom to pollute. As a result, like anything else with monetary value, a market arises

around the trade of permits, with prices fluctuating according to supply and demand.8

The issue, then, is whether the state government acted within the bounds of the California

Constitution when conscripting polluting businesses into an artificially created carbon market.

IV. Cap and Trade’s Constitutionality a “Close Question”

Two separate but nearly identical lawsuits were filed in 2012 and 2013 attacking the

constitutionality of AB 32‘s delegation of power to CARB to create a carbon market which

6 Id.

7 http://cacs.org/wp-content/uploads/2015/04/smokestack.jpg (Copyright CC Newton, 2015). 8 C2ES, supra.

5

would serve as the vehicle by which the ―trade‖ portion of the cap and trade program would be

carried out.9 The first lawsuit was filed by the Chamber of Commerce in late 2012. Shortly

thereafter, in the Spring of 2013, the Pacific Legal Foundation filed a similar lawsuit on behalf of

a group of California businesses. 10

Both suits were filed in the Superior Court of Sacramento and

were ultimately heard by Judge Timothy Frawley who ruled on the cases simultaneously,

dismissing both lawsuits.11

For purposes of clarity and simplicity, the term ―plaintiffs‖ as used

from this point on shall refer collectively to the plaintiffs in both suits.

In his decision, declaring cap and trade not a tax, Judge Frawley acknowledged that the

issue was a ―close question‖12

and to some extent dodged the issue of whether cap and trade

actually crosses the line of being a tax. Frawley was able to avoid basing his decision solely on

the tax issue by pointing to the fact that cap and trade under AB 32 itself does not explicitly

recognize the sale of allowances at the carbon permit auctions. Instead, the act merely delegates

broad discretion to CARB to establish a carbon market that comports with the emissions cap set

9 ―The cases are California Chamber of Commerce et al. v. California Air Resources Board et al., case number 34-

2012-80001313; and Morning Star Packing Co. et al. v. California Air Resources Board et al., case number 34-

2013-80001464, both in the Superior Court of the State of California, County of Sacramento.‖ Sistrunk, Jeff. ―Calif.

Cap-and-Trade Auctions Are Legal, Judge Says. LAW360. 14 November 2013.

<http://www.law360.com/articles/488965/calif-cap-and-trade-auctions-are-legal-judge-says>. 10

―CARB began holding quarterly auctions in November 2012 to accept bids for emission allowances from

refineries, utilities and other polluters under California Assembly Bill 32, which set up the cap-and-trade program to

cut the state's emissions to 1990 levels by 2020. As the cap on emissions gradually declines, companies that emit

more than the limit can either reduce their pollution or purchase emission allowances. The state Chamber of

Commerce lodged a suit against the cap-and-trade auction that same month, asserting that A.B. 32, aka the Global

Warming Solutions Act of 2006, did not authorize CARB to impose any fees other than those needed to cover the

administrative costs of the regulatory program. The Pacific Legal Foundation subsequently filed suit in April 2013

on behalf of Merit Oil Co., Morning Star Packing Co. and others, alleging CARB's regulation for the cap-and-trade

auction constituted an improper tax because it was not enacted by two-thirds majorities in both houses of the state

Legislature, as required for new taxes by California's constitution under Propositions 13 and 26. The April complaint

claimed that CARB devised the auction plan as a way to raise billions of dollars in revenue without any instruction

from the Legislature.‖ (See Id). 11

Id. 12

―The charges have some traditional attributes of a tax and some traditional attributes of a regulatory fee but, on

balance, the court finds the charges to be more like a regulatory fee … than a traditional tax,‖ the judge wrote.

KQED News Staff and Wires, Court Rejects Challenge to California‟s Cap-and-Trade System, KQED INC. Nov.

14, 2013. http://ww2.kqed.org/news/2013/11/14/118302/cap-and-trade-California.

6

by the AB 32. Still, despite finding additional authority for upholding AB 32‘s cap and trade

policy, Frawley penned his determination that California‘s cap and trade program does not

constitute a tax.13

Unsurprisingly this decision has done little to placate the concerns of distressed

businesses who allege their ability to compete in the national market has been impaired by

California‘s unique emissions regulations14

. Immediately after the decisions were handed down,

the Pacific Legal Foundation filed for appeal. The Chamber of Commerce, however, did not.

V. The Case Against Cap and Trade’s Constitutionality

The arguments against cap and trade‘s constitutionality exist at two levels, both of which

merit individual analysis. First, opponents raise a set of arguments supporting the conclusion that

AB 32 as drafted and adopted violates the California Constitution. The defendants have argued

that this question is irrelevant because it is not AB 32 that established the carbon permit auctions,

but rather the CARB, acting under its delegation of authority via AB 32. Thus, the second level

of attacks is aimed at whether this delegation of power adequately circumvents the legislative

approval requirement.

a. Cap and Trade is a Tax and is Unconstitutional without 2/3 Approval Pursuant to the

California Constitution

There are three interconnected pieces of California law at play in this matter: Proposition

13, Proposition 218, and Proposition 26, all of which are Amendments to the California State

Constitution.

13

―On balance, the court agrees that the charges are more like traditional regulatory fees than taxes, but it is a close

question.‖ J. Frawley. Joint ruling on submitted matters, Aug. 28, 2013.

14

At the time of enactment, California was the only state in the union with a carbon emissions cap. Assembly Bill 32

Overview, California Air Resources Board (Page last reviewed Aug. 5, 2014).

http://www.arb.ca.gov/cc/ab32/ab32.htm.

7

1. Proposition 13

Passed in 1978 under the name ―People‘s Initiative to Limit Property Taxation,‖

Proposition 13 amended the California Constitution, imposing a new requirement that all tax

increases in the State be approved by a two-thirds majority in both legislative houses. 15

Proposition 13 thus serves as the basic framework for the plaintiffs‘ contention that, if

considered a tax, cap and trade should have only been passed upon approval by a two-thirds

―supermajority.‖

2. Proposition 218

The next legislative element in the plaintiffs‘ case arises out of Proposition 218, passed in

1996, which extended the supermajority vote requirement one step further. Proposition 13

applies to all taxes, but Proposition 218 looks past the labels given to government programs and

instead focuses on their purpose. In the wake of Proposition 13‘s limitation on new taxes, many

voters and political commentators suspected that local governments had simply begun relabeling

revenue generating programs from ―taxes‖ to ―fees‖ in order to bypass the supermajority

approval requirement.16

Voters reacted by expanding the scope of Proposition 13 to eliminate

these perceived loopholes by passing Proposition 218.17

3. Proposition 26

15

Emphasis added. As discussed, supra, this phrase serves the pivotal function of distinguishing cap and trade from

the type of tax that was made unlawful under Proposition 13 of the California Constitution (author‘s note). 16

―Nearly two decades ago, Proposition 13 sharply constrained local governments' ability to raise property taxes, the

mainstay of local government finance. Proposition 13 also specified that any local tax imposed to pay for specific

governmental programs--a "special tax"--must be approved by two-thirds of the voters. Since that time, many local

governments have relied increasingly upon other revenue tools to finance local services, most notably: assessments,

property-related fees, and a variety of small general purpose taxes (such as hotel, business license, and utility user

taxes). It is the use of these local revenue tools that is the focus of Proposition 218.‖ O‘Malley, Marianne; Taylor,

Mac, Understanding Proposition 218, Legislative Analyst‘s Office. Dec. 1996. 17

Id.

8

The final, and most important, piece of the puzzle is Proposition 26, which was passed in

2010. Also known as the ―Supermajority Vote to Pass New Taxes and Fees Act‖ and

alternatively, the ―Stop Hidden Fees Initiative,‖ Proposition 26 greatly expands the scope of

government programs subject to the supermajority requirement, by making all forms of charges

subject to the rule and carving out a short list of well-settled exceptions.18

Although Proposition

26 was passed after AB 32 and carries no binding retroactive effect on the instant matter, it does

wield significant persuasive authority for two reasons. First, it crystallizes the initiatives set forth

in Proposition 13 and seeks to cure some of the defects of this closely related piece of legislation.

Second, Proposition 26 reflects the most current mindset of California taxpayers, thereby

suggesting that to read Proposition 13 as lacking the specificity of Proposition 26 would be to

discount the taxpayers‘ sentiments underlying their votes on the earlier legislation.19

While all three of these pieces of legislation work together to prevent excessive costs

being imposed on the residents of California without supermajority approval, Proposition 13 has

received, by far, the most intense analysis, having been in play the longest and having been the

subject of previous disputes at the California Supreme Court.

The plaintiffs contend that because AB 32 was enacted after the passage of Proposition

13 and concerns an increased cost of doing business in California and results in significant

revenues for the state, its passage by a simple majority vote failed to satisfy the heightened

requirement of the two-thirds vote required for imposing new taxes.

b. A Tax by Any Other Name…

18

Sinclair Paint Co. v. State Bd. of Equalization, 15 Cal. 4th 866, 872-73, 937 P.2d 1350, 1353 (1997). 19

―The Findings and Declarations of Purpose section of Proposition 26 indicates that the purpose of Proposition 26

is to address the ―recent phenomenon whereby … local governments have disguised new taxes as ‗fees‘ in order to

extract even more revenue from California taxpayers without having to abide by [Proposition 13‘s and Proposition

218‘s] constitutional voting requirements.‖ Proposition 26 Implementation Guide. League of California Cities. Apr.

2011.

9

Based on the legal foundation established by the three aforementioned amendments to the

California Constitution, AB 32‘s challengers contend that cap and trade was required, and failed,

to obtain a two-thirds vote in the State Senate, and therefore was passed in violation of the State

Constitution. Still, in order to prevail on this claim, the challengers would need to prove that cap

and trade does in fact constitute a tax in order for the supermajority rules to even apply. The

State has maintained that cap and trade is not a tax, that its purpose is purely to reduce carbon

emissions in the State of California, and that any revenues reaped as a result of its

implementation are strictly incidental. But the Pacific Legal Foundation and the businesses it

represents remain unconvinced; essentially arguing that if it looks like a tax, feels like a tax, and

smells like a tax, it‘s probably a tax.

According to the Center for Climate and Energy Solutions (C2ES), emission permit

trading and taxation are two separate solutions to a singular problem. In an online infographic

titled ―Climate Change 101: Cap and Trade,‖ the Center explains the key functions of

California‘s cap and trade program, the manner in which the carbon emissions cap is enforced,

and the market mechanisms by which permit trading is allowed. In a section titled, ―Tax or

Trade,‖ the Center breaks down the key differences as follows:

“In addition to cap and trade, another type of market mechanism

sometimes discussed as a means of reducing GHG emissions is a

carbon tax, which would require emitters to pay a tax for every ton

of GHGs they emit. The key difference between the two approaches

is that cap and trade provides environmental certainty, since the

quantity of total allowable emissions is set, while a tax provides

price certainty, since the cost of emitting a given amount of GHGs

is set. In response to a tax, many emitters will reduce their

emissions, but others might simply accept the additional cost and

continue to emit. Determining the correct level at which to set a

tax in order to drive any given level of emissions reductions is

difficult. Cap and trade and a tax have to address many of the

same issues. Both cap and trade and a carbon tax use economic

incentives to promote least-cost emission reductions and drive

10

climate-friendly innovation. Both approaches would require

careful monitoring and enforcement, and both must address the

question of how to distribute costs and benefits. For cap and trade

that means figuring out how to distribute and/or auction emission

allowances; under a tax that means figuring out who pays the tax

and what to do with the tax revenue.”20

This article appears to draw the distinction between a carbon tax and a cap and trade

system based on whether or not a specific carbon emissions limit is imposed and increased

carbon costs developed subsequently, versus carbon costs being directly imposed and no specific

cap being set.21

But while there are substantial differences between the two programs, as far as

applying the label of ―tax‖ goes, the contrast is less stark. Both drive up the cost of doing

business in California and both generate significant revenue for the state by penalizing pollution.

So while only one is called a tax, both programs entail the same tax-like measures that AB 32‘s

opponents disfavor.

Additionally, simply rebranding a tax as a regulatory fee has no effect on the

constitutionality of the policy. Cap and trade‘s opponents make this argument in their 2011

lawsuits, claiming, ―This escalation in taxation does not account for the recent phenomenon

whereby the Legislature and local governments have disguised new taxes as ‗fees‘ in order to

extract even more revenue from California taxpayers without having to abide by these

constitutional voting requirements. Fees couched as ‗regulatory‘ but which exceed the reasonable

costs of actual regulation or are simply imposed to raise revenue for a new program and are not

part of any licensing or permitting program are actually taxes and should be subject to the

limitations applicable to the imposition of taxes.‖22

20

Climate Change 101: Cap and Trade, Center for Climate and Energy Solutions.

http://www.c2es.org/docUploads/climate101-captrade.pdf 21

Id. 22

Morningstar, id. [citing Voter information guide, Gen. Elec. (Nov. 2, 2010) text of Prop.26, § 1(c) at p. 114].

11

c. California Cap and Trade‘s Proposed Federal Counterpart, which is Almost Functionally

Identical, Is Widely Considered to be a Tax

In addition to virtually all of its detractors (overwhelmingly Republican-affiliated)23

,

even some of cap and trade‘s biggest supporters have conceded that it is a tax. Granted, most of

the high profile discussion on cap and trade regards a hypothetical, federally instituted regime,

not the cap and trade program as it exists in California pursuant to AB 32. However, the salient

tenets of any cap and trade program, including those at the heart of the instant lawsuits, would

exist as a matter of necessity. Thus, it is worth examining criticisms leveled at proposed federal

cap and trade programs in assessing the perceived constitutionality of California‘s existing

program.

Libertarian think-tank, the Competitive Enterprise Institute, has argued that the bill

(referring to the proposed federal iteration of cap and trade) would essentially be the "largest tax

hike in world history."24

Famed libertarian author, Thomas Friedman, has similarly contended

that ―[a]dvocates of cap-and-trade argue that it is preferable to a simple carbon tax because it

fixes a national cap on carbon emissions and it ‗hides the ball‘ — it doesn‘t use the word ‗tax‘ —

even though it amounts to one. So it can get through Congress. That was true as long as no one

thought cap-and-trade could ever pass, but now that it might under Mr. Obama, opponents are

not playing hide the ball anymore.‖25

AB 32‘s opponents have been quick to point out that even a number of environmentally-

minded democratic politicians have conceded that cap and trade constitutes a tax. For instance,

Senior Congressman John Dingell (D-MI) said during an Energy and Commerce Committee

23

AB 32 passed by a narrow margin of 47 to 32. Of the 47 ―yea‖ votes, only one, Shirley Horton, was a republican. 24

Lewis Jr., Marlo, Cap-and-Trade Schemes are Not Markets, Competitive Enterprise Institute, Sept. 22, 2010. 25

Friedman, Thomas L., Show us the Ball, The New York Times. Apr. 7, 2009.

12

Hearing that ―Nobody, nobody in this country realizes that cap-and-trade is a tax and it‘s a great

big one.‖26

Similarly, Senator Ben Cardin (D-MD) has publicly called cap-and-trade ―the most

significant revenue-generating proposal of our time.‖27

―Politicians in Washington pushing this plan know full well that ‗Cap and Trade‘ is really

an elaborate plan to bring more money into the Federal government -- taking hundreds of billions

of additional dollars out of the weekly paychecks of millions of families in order to create and

fund lavish new unaffordable government programs. (Also, H.R. 2454 would have taken tens of

billions of your tax dollars and put them in the coffers of politicians favored companies who get

special carbon breaks in H.R. 2454.)‖28

While certainly not dispositive of the issue, the bipartisan recognition of cap and trade as

a sort of tax lends credence to the plaintiffs‘ claims.

d. CARB‘s Carbon Permit Program Matches the Dictionary Definition of a Tax

The crux of this argument perhaps rests on the construction of the act and the definition

of the word tax.

The plain dictionary definition of a tax is ―a compulsory contribution to state revenue,

levied by the government on workers' income and business profits or added to the cost of some

goods, services, and transactions.‖29

Although courts are rarely persuaded by non-legal

definitions set forth in dictionaries aimed at the layperson, the plaintiffs contend that legislation

affecting everyday voters should be grounded in common sense.

26

Thrush, Glenn, Dingell: Cap and trade a „great big‟ tax, Politico. Apr. 27, 2009. 27

Montgomery, Lori. Congress Approves Budget, The Washington Post. Apr. 3, 2009. 28

Posey, Bill, U.S. Congressman, Cap & Trade – National Energy Tax, U.S. Congressman Bill Posey. 29

Merriam-Webster Collegiate Dictionary, 10th

Ed., Merriam-Webster Incorporated, 2015.

13

Taken at face value, the sale of carbon permits, appear to fall squarely within this

definition.30

The permits must be purchased by certain businesses in order to carry on business as

usual, remain profitable, and continue employing workers. This added cost, which arises out of

State legislation is certainly levied by the government and is added to the cost of some goods,

services and transactions.

Still, opponents of cap and trade contend that regardless of the Act‘s stated intent, the

fact of the matter remains that cap and trade is a compulsory contribution to state revenue levied

by the government which is added to the cost of goods, services and transactions, and that the

State government should not be allowed to hide behind its self-congratulatory motives of saving

the planet and hiding the fact that billions of dollars of revenue31

have been reaped by the State

since AB 32‘s passage.

e. Cap and Trade is Generating Billions of Dollars of Revenue for the State

The purpose of taxation, generally, is to generate funding for goods and services that

benefit the entire taxed population.32

In the case of cap and trade, the State of California has

generated hundreds of millions of dollars at each carbon auction, with the projected total haul

during the course of AB 32‘s first, seven year regulatory phase-in period reaching into the tens of

30

It should be noted, however, that, as argued below, Proposition 26‘s definition of a tax differs significantly from

the definition found in the standard, household Merriam-Webster dictionary. Specifically, Proposition 26 includes a

critical element of intent, which legally requires that the penalty imposed be for the purpose of generating revenue. 31

―California‘s Cap-and-Trade program could generate an estimated $20 to $60 billion in state revenue through

2020.‖ ―Making Sense of California‘s Cap and Trade System.‖ California Common Sense (see supra). May 4, 2014.

http://cacs.org/research/californias-cap-and-trade-and-what-will-influence-its-future (last visited Dec. 7, 2015). 32

―Throughout history, every organized society had some form of government. In free societies, the goals of

government have been to protect individual freedoms and to promote the well-being of society as a whole. To meet

their expenses, government need income, called "revenue," which it raises through taxes. In our country,

governments levy several different types of taxes on individuals and businesses. The Federal Government relies

mainly on income taxes for its revenue. State governments depend on both income and sales taxes. Most county and

city governments use property taxes to raise their revenue.‖ U.S. Department of the Treasury. Economics of

Taxation. http://www.treasury.gov/ resource-center/faqs/Taxes/Pages/economics.aspx (last visited Dec. 7, 2015).

14

billions.33

Plaintiffs argue that the sheer volume of revenue generated through CARB‘s carbon

permit auctions is evidence of the Act‘s impropriety.

As discussed at various other points herein, Proposition 13 only applies to taxes which

are imposed for the purpose of generating revenue. The State has argued that cap and trade was

established not for the purpose of generating revenue to the State government, but rather that

these revenues are a natural and incidental byproduct of the legislation; not the motivating factor.

Challengers to AB 32‘s constitutionality, however, refute this claim by pointing out just

how much money the State has made and continues to make by selling carbon permits, arguing

that State programs don‘t just incidentally generate tens of billions of dollars.34

f. The State‘s Delegation of Power to CARB Should not Circumvent Voters‘ Rights to be Heard

Finally, AB 32‘s opponents have insisted that the State should be allowed to delegate

such broad discretion to another entity with knowledge of a likelihood that any program

instituted by that entity would impose expenses on voters while generating revenue to the State.

When Judge Frawley of the Sacramento Superior Court struck down plaintiffs‘ initial lawsuits,

he explained that regardless of whether the carbon permit auctions constitute a tax, those

auctions were not specifically included in the text of AB 32. Rather, the act merely delegated

power to CARB to create a carbon market to govern AB 32‘s cap and trade provisions.35

Although damning to the plaintiffs‘ case, this ruling suggests that state and local governments

can easily sidestep Propositions 13 and 26‘s voting requirement by essentially imposing taxes

under a two-step process: Hypothetically, the government could (1) pass, by a simple majority, a

bill containing a general legislative framework which delegates the implementations of the bill‘s

33

Verified Petition for Writ of Mandate and Complaint for Declaratory Relief. Morning Star Packing Company, et

al. v. CARB, et al. 34

Id. 35

Frawley, supra.

15

specific goals to an administrative agency. Then, (2) once the bill has passed, that agency could

impose penalties serving the functional equivalent of taxes without having to clear the

supermajority hurdle.

Although there is no concrete evidence of this tactic being deployed elsewhere, it seems

at least plausible under the Superior Court‘s reasoning. And the fact that the taxation issue was

considered as a secondary issue makes the shaky foundation for the primary ruling all the more

important.

g. The Distinction between Taxes and Fees is Not Well Settled

So far, California courts have tended to give programs purportedly assessing ―regulatory

fees‖ that blur the line of taxation the benefit of the doubt. Numerous cases decided in relatively

close proximity to AB 32‘s passage have embraced similar issues and the resulting decisions

have repeatedly maintained that similar fees assessed for similar purposes escape the voting

requirements of Propositions 13 and 26 and related legislation.36

However, many of these cases

contain lengthy and passionate dissenting opinions.37

Opponents point to the prevalence of such

dissenting opinions as evidence that cap and trade‘s survival is the product of politically

influenced judicial activism and therefore subject to reversal.

Thus, while the judicial trend in similarly situated cases disfavors the challengers‘ views,

the distinction between taxes and fees in the realm of Constitutional analysis remains hotly

contested.

VI. The Case for Cap and Trade’s Constitutionality

36

Sinclair and LACTC, infra, as well as Cabrera v. City of Huntington Park, 159 F.3d 374 (9th Cir. 1998;

Apartment Ass'n of Los Angeles Cty., Inc. v. City of Los Angeles, 24 Cal. 4th 830, 14 P.3d 930 (2001); and Howard

Jarvis Taxpayers Ass'n v. City of La Habra, 25 Cal. 4th 809, 23 P.3d 601 (2001) all resolved similar issues

concerning the application of Proposition 13. 37

Notably, Justice Richardson‘s dissenting opinion in Los Angeles County Transportation Com. V. Richmond,

which exceeds the majority opinion in length and depth of analysis.

16

Having already faced judicial analysis at the Superior Court level, and prevailing against

a battery of constitutional attacks, proponents of California‘s cap and trade regime appear to, at

least at the moment, have the upper hand. However, despite the fact that each of the following

arguments were found persuasive in the lower court,38

there is no guarantee that the higher courts

will arrive at the same conclusion.

a. Regulatory Fees are Not Taxes – Just ask Sinclair

According to Judge Frawley of the California Superior Court, the payments made by

businesses at the carbon auction are more aptly categorized as ―traditional regulatory fees than

taxes‖ similar to hunting permits and mineral extraction licenses.39

Plaintiffs‘ constitutional challenges to CARB‘s revenue-generating carbon permit sales

harken back to a similar, and unsuccessful charge by Sinclair Paint Company against California‘s

State Board of Equalization with regards to fees assessed against paint manufacturers under the

Childhood Lead Poisoning Prevention Act. The facts of that case are as follows:

In 1991, by simple majority vote, the Legislature enacted the Childhood Lead Poisoning

Prevention Act of 1991 (the Act) (Stats.1991, ch. 799, § 3, amended Stats.1995, ch. 415, § 5; see

870 Health & Saf.Code, § 105275 et seq.).1 The Act provided evaluation, screening, and

medically necessary follow-up services for children who were deemed potential victims of lead

poisoning. The Act's program was entirely supported by ―fees‖ assessed on manufacturers or

other persons contributing to environmental lead contamination. (See §§ 105305, 105310.) The

38

Frawley, supra. 39

―In sum, the charges have some traditional attributes of a tax and some traditional attributes of a regulatory fee

but, on balance, the court finds the charges to be more like a regulatory fee/charge than a traditional tax.

Accordingly, the court shall review the charges using the regulatory fee framework.‖ Id.

17

question arose whether these fees were in legal effect ―taxes‖ required to be enacted by a two-

thirds vote of the Legislature. (See Cal. Const., art. XIII A, § 3.)40

The California Supreme Court ruled, ―Contrary to the trial court and Court of Appeal, we

conclude that the Act41

imposed bona fide regulatory fees, not taxes, because the Legislature

imposed the fees to mitigate the actual or anticipated adverse effects of the fee payers'

operations, and under the Act the amount of the fees must bear a reasonable relationship to those

adverse effects. Accordingly, the trial court erred in granting summary judgment to award

plaintiff Sinclair Paint Company (Sinclair) a refund of the fees it paid under the Act.‖ Sinclair

Paint Co. v. State Bd. of Equalization, 15 Cal. 4th 866, 869-70, 937 P.2d 1350, 1351 (1997).

The Sinclair court labored over the distinction of taxes and fees, as well as a third

category of ―special taxes,‖42

which might be labeled ―fees‖ or ―assessments‖ but are the

functional equivalent of taxes and subject to the voting requirements of Propositions 13 and 2643

.

The deliberation undertaken by the State Supreme Court in Sinclair in 1997 demonstrates just

how fine of a line the law draws between taxes and fees.

40

Sinclair Paint Co. v. State Bd. of Equalization, 15 Cal. 4th 866, 869-70, 937 P.2d 1350, 1351 (1997). 41

The ruling in the Sinclair case applies strictly to the Childhood Lead Poisoning Prevention Act of 1991. However,

it is applicable to the instant discussion because it too was passed by a simple majority and imposed a monetary

penalty on certain businesses while generating revenue for the state government, leading some California businesses

to decry the act as an unconstitutional tax – much like the those opposing AB 32. 42

[T]o show a fee is a regulatory fee and not a special tax, the government should prove (1) the estimated costs of

the service or regulatory activity, and (2) the basis for determining the manner in which the costs are apportioned, so

that charges allocated to a payor bear a fair or reasonable relationship to the payors' burdens on or benefits from the

regulatory activity. San Diego Gas & Elec. Co. v. San Diego Cnty. Air Pollution Control Dist., 203 Cal. App. 3d

1132, 1146, 250 Cal. Rptr. 420, 429 (Ct. App. 1988). 43

Article XIII A of the Constitution is the product of Proposition 13, a 1978 initiative aimed at reducing property

taxes. Section 4 of that article provides that ―Cities, Counties and special districts, by a two-thirds vote of the

qualified electors of such district, may impose special taxes on such district ....‖ Although this section appears to be

a grant of power allowing local entities to enact special taxes, it actually has the effect of limiting their enactment

(City and County of San Francisco v. Farrell (1982) 32 Cal.3d 47, 53, 184 Cal.Rptr. 713, 648 P.2d 935). Huntington

Park Redevelopment Agency v. Martin, 38 Cal. 3d 100, 105, 695 P.2d 220, 222 (1985)

18

Are the ―fees‖ section 105310 imposes in legal effect ―taxes

enacted for the purpose of increasing revenues‖ under article XIII

A, section 3, and therefore subject to a two-thirds majority vote?

Although we have found no cases that interpret the language of

section 3, several California appellate decisions have considered

whether various fees are really ―special taxes‖ under article XIII A,

section 4. (See also City and County of San Francisco v. Farrell

(1982) 32 Cal.3d 47, 57, 184 Cal.Rptr. 713, 648 P.2d 935 [―special

taxes‖ are taxes levied for a specific purpose rather than for

general governmental purposes]; Gov.Code, § 50076 [excluding

from the term ―special tax‖ in article XIII A, section 4, ―any fee

which does not exceed the reasonable cost of providing the service

or regulatory activity for which the fee is charged and which is not

levied for general revenue purposes‖].) Because of the close,

―interlocking‖ relationship between the various sections of article

XIII A (see Amador Valley, supra, 22 Cal.3d at p. 231, 149

Cal.Rptr. 239, 583 P.2d 1281), we believe these ―special tax‖ cases

may be helpful, though not conclusive, in deciding the case before

us. The reasons why particular fees are, or are not, ―special taxes‖

under article XIII A, section 4, may apply equally to section 3

cases.2

***

We first consider certain general guidelines used in determining

whether ―taxes‖ are involved in particular situations. The cases

agree that whether impositions are ―taxes‖ or ―fees‖ is a question

of law for the appellate courts to decide on independent review of

the facts. (Bixel Associates v. City of Los Angeles (1989) 216

Cal.App.3d 1208, 1216, 265 Cal.Rptr. 347; California Bldg.

Industry Assn. v. Governing Bd. (1988) 206 Cal.App.3d 212, 234,

253 Cal.Rptr. 497; Russ Bldg. Partnership v. City and County of

San Francisco (1987) 199 Cal.App.3d 1496, 1504, 246 Cal.Rptr.

21.)

***

The cases recognize that ―tax‖ has no fixed meaning, and that the

distinction between taxes and fees is frequently ―blurred,‖ taking

on different meanings in different contexts. (Russ Bldg.

Partnership v. City and County of San Francisco, supra, 199

Cal.App.3d at p. 1504, 246 Cal.Rptr. 21; Terminal Plaza Corp. v.

City and County of San Francisco (1986) 177 Cal.App.3d 892,

905, 223 Cal.Rptr. 379; Mills v. County of Trinity (1980) 108

Cal.App.3d 656, 660, 166 Cal.Rptr. 674; County of Fresno v.

Malmstrom (1979) 94 Cal.App.3d 974, 983–984, 156 Cal.Rptr.

777.) Sinclair, supra, at 937.

19

At the heart of the Sinclair decision is the basic rule that regulatory fees are not taxes if

the revenue they generate is sufficiently tied to regulating the entities paying the fees. Plaintiffs

in Sinclair argued – successfully, at the trial and appellate levels – that fees imposed to generate

revenue to fund a program that provides medical screening and treatment for children exposed to

lead paint, did not directly regulate the paint manufacturers and that the connection between the

collection of the fees and the expenditure of the revenues raised was too tenuous. However, the

California Supreme Court ultimately held otherwise, finding that there was a sufficient nexus

between the purpose of the statute and the expenditures of the government monies raised by its

enforcement.

A nearly identical discussion arises in the matter of cap and trade. The plaintiffs argued in

the first round of lawsuits that the programs being funded by the revenues generated by carbon

permit sales do not serve a sufficiently regulatory function to escape designation as a ―tax.‖44

The California Supreme Court, in Sinclair, applied a fairly liberal definition for

regulatory fees, explaining, ―[c]ontrary to the Court of Appeal, we believe that section 105310

imposes bona fide regulatory fees. It requires manufacturers and other persons whose products

have exposed children to lead contamination to bear a fair share of the cost of mitigating the

adverse health effects their products created in the community. Viewed as a ‗mitigating effects‘

measure, it is comparable in character to similar police power measures imposing fees to defray

the actual or anticipated adverse effects of various business operations.‖ Sinclair, supra, at 1356.

The California government, in defending AB 32, has emphasized the similarities between the

Lead Paint Act and AB 32 and the types of activity they regulate.45

Both acts were motivated by

an intent to increase public health and safety, both increase the cost of doing business for entities

44

Morningstar v. CARB, supra; Chamber of Commerce v. CARB, supra. 45

―Answer By California Air Resources Board, et al., to Amici Curiae.‖ 25 June 2015.

20

whose activities produce potentially harmful chemicals, and both generate revenue which is then

used to enforce their own implementation and regulation. AB 32 further benefits from Sinclair‟s

decision that ―remediation measures‖ need only be tied to the regulated entities in nature, and not

proportion. The plaintiffs attacking the Lead Paint Act in Sinclair, as well as the AB 32

challengers have both argued that today‘s polluters should not bear the burden of correcting

problems created by yesterday‘s polluters. The Sinclair court ruled that it only matters that

―charges allocated to a payor bear a fair or reasonable relationship to the payor's burdens on or

benefits from the regulatory activity‖ and not whether such charges are perfectly proportionate to

the individual payor‘s contribution to the overall problem.46

The question then becomes whether CARB‘s use of cap and trade revenues is tailored

closely enough to promoting the regulation of carbon emitting entities to be afforded analogy to

Sinclair.

b. The Dictionary Definition of ―Tax‖ is Irrelevant to the Discussion

As noted, supra, the broad dictionary definition of ―tax‖ may likely apply to the sale of

carbon emission permits. However, as Sinclair points out, the categorization of a fee as a tax is

not something that can be ―reverse engineered.‖ That is to say, the courts will not look at a

regulation that results in revenue generation and agree that it is a tax. Instead, they must look at

whether the regulation was imposed for the purpose of generating revenue.47

Essentially, where

revenue generation is merely incidental, the regulation cannot be said to constitute a tax. See

further discussion, infra.

One of the challengers‘ fundamental claims is that all taxes imposed in California after

1978 must be approved by a two-thirds supermajority vote in accordance with Proposition 13.

46

Sinclair, supra. 47

Sinclair, supra, at 937.

21

However, this claim is not completely accurate. Proposition 13 imposes the heightened voting

requirement on all taxes as defined in Proposition 13. Thus, it is of critical importance to

determine whether cap and trade actually falls within the category of taxes prescribed by

Proposition 13 (Proposition 26 reflects the same language),‖ which states ―From and after the

effective date of this article, any changes in State taxes enacted for the purpose of increasing

revenues collected pursuant thereto whether by increased rates or changes in methods of

computation must be imposed by an Act passed by not less than two-thirds of all members…of

the legislature.‖48

The key portion of Proposition 13 is the phrase ―enacted for the purpose of

increasing revenues.‖ According to the defendants, AB 32 was enacted for the purpose of

reducing carbon emissions, not for the purpose raising revenues.49

Further, although cap and

trade has proved extremely lucrative, these revenues have been purely incidental and not the

driving force behind the policy. Defendants further highlight the gap between the purpose of the

policy and the money it has generated by limiting the expenditure of that money on expenses

related to the general purpose of establishing and enforcing ―global warming solutions‖ – such as

AB 32‘s textual name would suggest. ―As stated in United Business, if regulation is the primary

purpose of the fee measure, the mere fact that the measure also generates revenue does not make

the imposition a tax. (United Business, supra, 91 Cal.App.3d at p. 165, 154 Cal.Rptr. 263; see

also Mills v. County of Trinity, supra, 108 Cal.App.3d at p. 660, 166 Cal.Rptr. 674 [rejecting

broad definition of ‗tax‘ as including all fees and charges that exact money for public

purposes].)‖ Sinclair, supra, at 880.

c. Revenue Generation is Incidental to, not the Purpose of, Regulation

48

Morningstar, supra. 49

Id.

22

Although the Superior Court found the issue of whether CARB‘s permit auctions should

be considered a type of tax to be a deciding factor in the outcome of the case, CARB urges that

―the issue is not whether the auction and reserve sales are ‗fees‘ under Sinclair Paint. Under the

language of section 3 of Proposition 13, the issue is whether the auction and reserve sales are

‗taxes‘ that were ‗enacted for the purpose of increasing revenues.‘‖50

By citing to the specific

language of Proposition 13, CARB argues that even if the auctions constitute a tax, that is not

enough to run afoul of the State Constitution. Rather, the challengers must prove an additional

element of intent: the intent to generate revenue. CARB claims that such cannot be proven

because the purpose of establishing a carbon market is not motivated by revenue creation, but

rather by a desire to limit the amount of greenhouse gases emitted by businesses in the State and

to encourage development of sustainable and more efficient energy production and use.51

d. Carbon Permit Auctions do not Contradict the Legislative Intent of Proposition 13

The sister argument to the above claim that revenue generation through cap and trade is

merely incidental to the primary goal of curtailing emissions, rests on the legislative intent of

Proposition 13. While AB 32‘s challengers argue that Proposition 13 requires that all taxes be

passed by a two-thirds senate vote, the reasons for enacting Proposition 13 were more nuanced.

According to CARB, ―Section 3 of Proposition 13 was intended to restrict the state from

attempting to make up for lost property tax revenues by increasing other taxes or creating new

ones.‖ In the case of cap and trade, the apparent intent behind establishing a restricted carbon

market was not to ―make up for lost property tax revenues.‖ Rather, the purpose was to confront

50

Answer by California Air Resources Board to Amici Curiae, COC v. CARB, Cal.App.3 Dist. at 16 (2015). 51

Id.

23

global warming. After all, AB 32‘s textual name is ―The Global Warming Solutions Act of

2006.‖52

e. AB 32 Does Not Specifically Recognize the Sales of Carbon Permits

Supporting its claim that cap and trade was not enacted for the purpose of raising

government revenues, the state has pointed to the fact that AB 32 does not specifically create the

carbon permit auctions, set the price of the permits, or otherwise prescript the manner and extent

of revenue generation. These are all tasks delegated to CARB. Thus, since AB 32 does not create

the money-making mechanism, it should not be found to have been passed with the intention of

making money.53

In his decision upholding the constitutionality of California cap and trade, Judge Frawley

relied heavily on the fact that AB 32 gives broad discretion to the CARB to impose limitations

on pollution and construct incentives for businesses to improve efficiency, but does not directly

levy any financial burden on California businesses.54

f. Auction Prices are Set by Market Forces, Not the Government

In the typical tax scenario, the population subject to the taxation is broken into specific

brackets, with members of the various brackets paying to the state, some predetermined

percentage in addition to the base cost of a specific set of goods or services. These percentages

are both static and dictated by the government. Not so with the prices of carbon permits sold

under CARB‘s auctions. Instead, the price of said permits is subject to fluctuation, like any other

52

Center for Climate and Energy Solutions (C2ES), supra. 53

Id. 54

―The first objection was relatively easy to dismiss. AB32, the 2006 law that began California‘s efforts to limit

greenhouse gas (GHG) emissions to 1990 levels by 2020, give ARB ―wide discretion to design a system of

emissions reductions,‖ according to Cara Horowitz, a lawyer and the Executive Director of UCLA‘s Emmett Center

on Climate Change and the Environment.‖ Goldstein, Allie. Cap-and-Trade Is Not A Tax, California Court Says,

Ecosystems Marketplace, 18 November 2013.

24

commodity traded on the free market. Judge Frawley relied in part on this fact in his

determination that CARB‘s permit auctions were sufficiently distinguishable from a tax.

g. No Meaningful Remedy is Realistically Available at this Point

Though not specifically cited by Judge Frawley, another reason for the survival of cap

and trade is the timing of the challenges. The law officially went into effect in 2006, and carbon

permit auctions have been held semi-annually since. As time continues to pass and the web of

permit purchases and trades becomes more and more tangled, the less likelihood there is that a

court ruling in favor of the challengers can adequately right the alleged wrongs.

The passage of time also continues to disprove many of the nightmare scenarios the

challengers have predicted to result from the increased burden on commercial enterprise in

California. Plaintiffs argued in their original complaint that ―The regulation creates a quarterly

auction program requiring many California employers to bid significant amounts of money for

the privilege of continuing to emit carbon dioxide – or be faced with closing their doors in

California, laying off their employees, and moving their business to other states.‖55

CARB and

its supporters argue that California‘s businesses have been fully capable of complying with the

new rules and have not only maintained commercial viability, but have succeeded in innovating

and developing more sustainable and more efficient manners of operation, allowing these

businesses to remain profitable while at the same time becoming leaders in tomorrow‘s energy

market.56

VII. Judicial Analysis

55

Hadzi-Antich, Theodore, Cap and trade auction is an unconstitutional tax, Pacific Legal Foundation, 2014. 56

―Critics such as the California Chamber of Commerce and the Pacific Legal Foundation—which are suing the

state to block the program—say it increases the cost of doing business, though no measurable estimate

exists. Severin Borenstein, co-director at the Energy Institute at the University of California, Berkeley's Haas School

of Business, says costs so far have been marginal, as most allowances were given away and remain relatively

inexpensive.‖ Lazo, Alejandro, How Cap-and-Trade is Working in California, The Wall Street Journal, Sept. 28,

2014.

25

a. How Should the Language of AB 32 be Construed?

The rules of construction are a funny thing. Complete elimination of ambiguities amongst

the English language is a daunting task which is certainly not made easier by trying to appease a

diverse field of legislators on the road to congressional approval. Many a law has been undone

merely by virtue of what Chief Justice John Roberts has referred to as ―inartful drafting.‖57

For

instance the Affordable Care Act almost suffered a fatal blow because a portion of its massive

text referred to the United States Government in general as ―the State‖ which opponents of the

law argued could be interpreted as one of the fifty states.58

Arguably the keystone case for statutory construction in California is Yamaha v. Board of

Education, which determined that the definitions provided by the government administration

overseeing the enactment and enforcement of the law in question may be given deference.

―Courts must, in short, independently judge the text of the statute, taking into account and

respecting the agency's interpretation of its meaning, of course, whether embodied in a formal

rule or less formal representation. Where the meaning and legal effect of a statute is the issue, an

agency's interpretation is one among several tools available to the court. Depending on the

context, it may be helpful, enlightening, even convincing. It may sometimes be of little worth.

Considered alone and apart from the context and circumstances that produce them, agency

interpretations are not binding or necessarily even authoritative.‖ Yamaha Corp. of Am. v. State

Bd. of Equalization, 19 Cal. 4th 1, 7, 960 P.2d 1031, 1033 (1998) (referencing Traverso v.

People ex rel. Dept. of Transportation (1996) 46 Cal. App. 4th 1197, 1206 [54 Cal. Rptr. 2d

434].).

57

―And rigorous application of that canon does not seem a particularly useful guide to a fair construction of the

Affordable Care Act, which contains more than a few examples of inartful drafting.‖ King v. Burwell, 135 S. Ct.

2480, 2483, 192 L. Ed. 2d 483 (2015) 58

Id. at 2494 (footnote 4).

26

The inquiry then turns on whether the California Air Resources Board – the agency

governing the enforcement of the carbon permit auctions in accordance with the state‘s cap and

trade program – has offered an interpretation of the permit auctions, and whether such an

interpretation has merit, given the circumstances.

Under the ―Definitions‖ section of AB 32, codified as California Health and Safety Code

§ 38505, the Act describes the permit auctions as follows: ―(k) ―Market-based compliance

mechanism‖ means either of the following: (1) A system of market-based declining annual

aggregate emissions limitations for sources or categories of sources that emit greenhouse gases.

(2) Greenhouse gas emissions exchanges, banking, credits, and other transactions, governed by

rules and protocols established by the state board, that result in the same greenhouse gas

emission reduction, over the same time period, as direct compliance with a greenhouse gas

emission limit or emission reduction measure adopted by the state board pursuant to this

division.‖59

Given the overall tone of AB 32 as an initiative to confront anthropogenic global warning

and the definitions of the cap and trade portion of the act, which reflect an apparent focus on

environmental protection rather than revenue generation, CARB‘s interpretation of the permit

auctions as a regulatory fee rather than a tax certainly has merit. This conclusion largely

discredits allegations by cap and trade‘s opponents that the policy is intended to syphon more

money out of the pockets of tax payers, and, in doing so, tips the scales in favor of the

defendants.

b. The Effect of Proposition 13

59

Cal. Health & Safety Code § 38505 [Definitions] (West)

27

As noted earlier, CARB contends that Proposition 13 only restricts the passage of taxes

which are imposed for the explicit purpose of generating revenue, not regulatory measures which

incidentally result in revenue generation.

The Sinclair and LACTC cases decided in the California Supreme Court in the years

leading up to AB 32‘s enactment lend support to CARB‘s arguments that the intent behind a fee

or penalty should be a primary inquiry in assessing its compliance with Proposition 13.60

Still, the stated purpose of a particular regulation should never be given absolute

deference. Statements in the legislative history of Proposition 218,61

also known as the ―right to

vote‖ rule, are indicative of the concern that regulations asserting one purpose may actually seek

to achieve another altogether, relying on semantic loopholes to sidestep procedural impediments.

To address these concerns, Yamaha proposes a ―totality of the circumstances‖ approach to

determine the merits of an agency‘s purpose.62

As resolved in section VII(a) above, the totality

of the circumstances likely supports a finding that CARB‘s stated purpose for the permit auctions

is legitimate and not motivated by revenue generation. Thus, while CARB‘s definition may not

given absolute deference, it is given sufficient weight to, combined with the apparent intent of

AB 32 overall, pass muster. As such, a reasonable court would not conclude that cap and trade‘s

permit auction is merely passing off a tax as a regulatory fee in an effort to sidestep

constitutional limitations on taxation.

c. The Effect of Proposition 26

60

Sinclair Paint Co. v. State Bd. of Equalization, 15 Cal. 4th 866, 872-73, 937 P.2d 1350, 1353 (1997); Los Angeles

Cnty. Transp. Com. v. Richmond, 31 Cal. 3d 197, 643 P.2d 941 (1982)

61

Author‘s note: Proposition 218 is not discussed at length on account of being almost entirely subsumed and

replaced by proposition 26. 62

Yamaha Corp. of Am. v. State Bd. of Equalization, 19 Cal. 4th 1, 7, 960 P.2d 1031, 1033 (1998)

28

While Proposition 13 is easily overcome based on its text, CARB will likely face more of

a fight over plaintiffs‘ attacks under Proposition 26. That is, however, only if the plaintiffs are

able to somehow bundle the more refined language of Proposition 26 into the intent and purpose

of its predecessors. The reason for this is that Proposition passed in 2010, four years after AB 32

went into effect. Lacking retroactive effect, Proposition 26 carries no actual binding authority.

However, being that Proposition 26 was intended to simply tighten up Proposition 13‘s loose

ends and carry out its intended purpose, it is worth examining plaintiffs arguments based on the

most recent effort to curtail the imposition of hidden fees on California‘s taxpayers.

In order for a government action to escape the supermajority requirement of Proposition

26, it must fall within one of the enumerated exceptions.63

Of the available exceptions, the one

arguably most favorable to CARB reads as follows: ―A charge imposed for the reasonable

regulatory costs to a local government for issuing licenses and permits, performing

investigations, inspections, and audits, enforcing agricultural marketing orders, and the

administrative enforcement and adjudication thereof.‖ Judge Frawley reasoned that revenues

generated under AB 32 have been reallocated in a manner that is sufficiently related to the

funding and enforcement of AB 32 so as to be availed of this exception to Proposition 26, but his

basis for doing so is largely cursory. Rather than elaborate on the salient qualities of hunting

permits and carbon permits, Frawley‘s explanation in his ruling simply states, ―If the

atmosphere‘s capacity to assimilate GHGs is viewed as a limited public resource, selling

emissions allowances can be analogized to selling a right to use a public resource, similar to a

hunting/fishing license, a mineral extraction permit, or a wireless electromagnetic spectrum

license.‖ But Frawley‘s reasoning omits to even acknowledge one of the plaintiffs‘ more

63

1. Charges for a Specific Benefit or Privilege; 2. Charges for a Specific Government Service of Product; 3. True

Regulatory Charges; 4. User Charges; 5. Fines and Penalties.

29

compelling arguments. In its complaint, Pacific Legal Foundation admits that certain licensing

and permitting fees are exempt from Proposition 26, but only because the cost imposed on

businesses and individuals in those other scenarios is equivalent to the cost of enforcing such

programs.64

By contrast, the costs of polluting go far beyond merely funding the operations of

CARB‘s carbon market. Therefore, according to the plaintiffs, only those fees which are strictly

necessary to fund AB 32‘s specified functions may find refuge under Proposition 26‘s ―True

Regulatory Charges‖ exemption, while all excess penalties, which essentially go into an AB 32

slush fund, should be considered illegal taxes.65

Notwithstanding Judge Frawley‘s disinclination for specifically addressing these

arguments, the ultimate decision is most likely well-founded. The language of Proposition 26 is

sufficiently ambiguous as to the extent to which charges imposed must be tethered to the

regulatory costs for government agencies, stating only that ―Charges imposed for reasonable

regulatory costs are charges that fund the administrative cost related to issuing licenses and

permits, performing investigations, inspections, audits, and enforcing agricultural orders.‖ For a

piece of legislation as expansive as AB 32, one would be hard-pressed to make the argument that

charges imposed via carbon permits are not, in some way, being used to ―fund the administrative

cost‖ of AB 32.

Based on this analysis and the ease with which the trial court dismissed plaintiffs‘

arguments in this regard, it seems that, unfortunately for the plaintiffs, Proposition 26 has fallen

victim to the dreaded fate of ―the exception swallowing the rule.‖ The enumerated exemptions

are simply too many and too broad to supply the basis for any actual misfeasance on CARB‘s

part. Compounded with the obvious fact that Proposition 26 was enacted after AB 32 and carries

64

Morningstar v. Carb, supra. 65

Id.

30

no retroactive authority, the lower court‘s ruling on this issue is certain to withstand appellate

review.

d. Common Sense Approach

The importance of common sense also should not be ignored. While the stated purpose of

cap and trade may be to confront global warming, it is hard to overlook the fact that it has been a

major boon to the State budget. It is also difficult to blindly accept that the State‘s returns are

simply a happy accident. The financial gains to be realized under a cap and trade regime were

arguably foreseeable and likely appealing. According to projections from the California

Legislative Analyst‘s Office at the inception of the carbon permit auctions, the state is expected

to reap an average of $1 billion to $3 billion per year throughout the life of the current scoping

plan, which lasts until 2020.66

From a common-sense perspective, it would seem that the State knew businesses would

end up paying significant amounts of money to continue carrying on and that those payments

would yield substantial revenues to the government. However, a careful review of the AB 32‘s

legislative history yields no indication that revenue generation played any role in the bill‘s

journey to the governor‘s desk.67

Still, the sheer volume of the money flowing into the state since

AB 32‘s passage has invited speculation on the matter.

While such speculation could potentially lead a layperson to a common-sense conclusion

that a penalty on certain businesses capable of raising so much state revenue must certainly be a

66

―The California Legislative Analyst's Office estimates that these auctions will yield anywhere from $1 billion to

$3 billion a year for the state, possibly rising as high as $14 billion a year in 2015. This is significant, considering

that in 2012, the state's budget deficit is approximately $9 billion.‖ Ballotpedia. California's AB 32, the „Global

Warming Solutions Act of 2006,‘ 2013. 67

ENVIRONMENTAL PROTECTION—AIR POLLUTION—GREENHOUSE GASES, 2006 Cal. Legis. Serv.

Ch. 488 (A.B. 32) (WEST)

31

tax, it will no doubt fail to persuade the third district court of appeal or any higher court that

might hear the claim.

e. Justiciability and Practicality Considerations

Finally, the judiciary must look not only at the merits of the case, but also whether a

judicially mandated remedy is even available in this case. Even where the facts and the law may

point to one conclusion, the timing of the claims and the ability of the courts to address them

could possibly yield a contrary, and conclusory, decision.

Cap and trade has now been in effect for almost a decade, and has largely been viewed as

a success.68

Even if the higher courts ultimately side with the plaintiffs, what remedy could

adequately redress the alleged injury? Would the state be required to refund the price of the

permits? Would the refund price account for inflation during the years between the purchase and

the refund? What about consequential damages? Would businesses be able to collect for profits

they might have generated with the extra cash flow that carbon permit purchases impeded?69

These questions pose as much of a practical concern as a legal one. Considering how long cap

and trade has endured and the positive impact it has yielded for the environment, it is

understandable that judges would be reluctant to unravel decade-old legislation based on flimsy

precedent and a series of arguments largely based on superficial syntax.

The plaintiffs in the Morningstar case conclude their complaint by requesting a judicial

declaration that the carbon permit auctions are illegal and for a writ of mandate suspending all

future auctions.70

This proposed remedy itself provides little relief to the plaintiffs, but rather

68

Lazo, supra. 69

Lawsuits brought by business owners in the gulf area following the BP Horizon oil spill demonstrate how

complicated and attenuated damages calculations can be when addressing lost business opportunities after the fact

(see Light, Alfred, The Deepwater Horizon Oil Spill Trust and the Gulf Coast Claims Facility: The Superfund Myth

and the Law of Unintended Consequences, 5 Golden Gate University Environmental Law Journal, 5, 2011). 70

Morningstar, supra, at page 21, line 1.

32

signals a wave of impending litigation fueled by the desired declaration of the auctions‘

unconstitutionality. From the perspective of the judiciary, the grant of such a declaration would

seem tantamount to inviting a flood of plaintiffs seeking incalculable damages, while

simultaneously crippling California‘s climate change initiatives, and possibly setting a dangerous

precedent for future applications of Propositions 13 and 26.

VIII. Conclusion

Sacramento Superior Court Judge, Timothy Frawley, was correct to note that this issue

poses a close question. Logically, the penalty imposed on polluting business by AB 32 seems

like a tax, regardless of how it is framed. And the fact that AB 32 is one degree of separation

from the actual imposition of the penalty could arguably be a disingenuous attempt to circumvent

Propositions 13 and 26. That said, precedent clearly supports the preservation of the Act. The

California Supreme Court has established a body of law that certainly favors cap and trade‘s

defenders, with Sinclair providing a strong case for upholding the Act based on a highly

analogous factual basis. First, precedent generally disfavors overturning legislation. Second,

under a Yamaha analysis, deference should be afforded to the stated intent behind CARB‘s

permit auctions. In this case, the text of AB 32 frames the carbon permits as the means of

funding the other environmentally-minded initiatives of the Act, and not the generation of state

revenue, which would mean that neither Proposition 13 nor Proposition 26 was actually offended

by the passage of AB 32 by a simple majority.71

Third, there has been no clear injury to be

redressed as there has been no measurable job loss or market disruption attributable to cap and

trade. Rather, California‘s impressive carbon emissions reductions since AB 32‘s enactment

71

―Legislation - Concurrence Vote Passed (House) (47-32) - Aug. 31, 2006.‖ VoteSmart.com: AB 32 - Greenhouse

Gases Emission Limits - Key Vote (2006).

33

have been widely viewed as an unqualified success.72

Fourth, and finally, even if the alleged

violations were clear and the injury apparent, the courts would likely struggle to craft an

appropriate remedy and would instead invite an onslaught of new lawsuits surrounding the

calculation and payment of damages. Although concerns of convenience alone carry no

substantive weight in judicial analysis, where other legitimate grounds exist for a particular

outcome, matters of practicality could understandably dissuade a skeptical jurist from laboring to

accommodate less-than-perfectly founded challenges.

Considering the totality of the facts, application of the law, and matters of procedure and

practicality, California‘s cap and trade program under AB 32 is sure to survive the pending

challenges and any further appeals that may follow.

72 Lazo, supra.

a

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