California Legislative Session Closes with Climate Victory, but Questions Linger

Ambitious but controversial legislation strengthening California’s climate goals won approval in the final days of the state’s 2016 legislative session, which ended August 31. Senate Bill 32 (SB 32) calls for California to reduce greenhouse gas (GHG) emissions to 40% below 1990 levels by 2030, an aggressive extension of the current target to reduce GHG emissions to 1990 levels by 2020. Governor Jerry Brown lobbied heavily for the bill, and White House officials even placed calls to California lawmakers urging them to support the measure, which passed narrowly in an Assembly vote held August 23.

The new goal brings California in line with the European Union, which is already working to reduce emissions to 40% below 1990 levels by 2030. It also complements the renewable portfolio standard, increased last year, requiring the state to get 50% of its electricity from renewable resources by 2030.

At its core, SB 32 is an extension of Assembly Bill 32 (AB 32), the landmark law signed by Governor Arnold Schwarzenegger in 2006 that established California’s 2020 emissions reduction targets and laid the foundation for a suite of clean energy and climate programs implemented over the last decade, including the state’s cap and trade program. Yet, while SB 32 deepens the climate commitments established under AB 32, it comes at a time when the future of the cap and trade program is increasingly uncertain.

Cap and Trade Under Scrutiny

AB 32 authorized the California Air Resources Board (CARB) to develop regulations and market mechanisms to achieve the state’s GHG reduction targets. The cap and trade program that emerged places a cap on the total volume of emissions that can be released into the atmosphere and requires companies to purchase permits, or emissions allowances, for each metric ton of CO equivalent emitted. The state sells these allowances in auctions and funnels the revenue to other programs geared toward reducing emissions, such as the state’s high-speed rail initiative. The allowances can also be traded in the marketplace. Since its launch in 2012, cap and trade has become a centerpiece of California’s climate policy. However, the program faces challenges surrounding the legality of allowance auctions as well as CARB’s authority to continue operating the program beyond 2020.

The legality of auctions came under assault following a change in the definition of taxes that took effect after AB 32’s enactment. Proposition 26, passed in 2010, expanded the definition of taxes to encompass a variety of payments previously categorized as fees. This is significant because passing a tax in California requires a two-thirds voting majority in each chamber of the state legislature whereas passing a fee requires a simple majority. In November 2012, the California Chamber of Commerce filed a lawsuit alleging that the cap and trade auctions amount to an illegal tax, since the auction process was not approved with two-thirds voting majorities. The lawsuit is still moving through the courts.

Separately, questions have emerged regarding the state’s legal basis for continuing cap and trade beyond 2020. Although language in AB 32 authorizes the use of market-based mechanisms to reduce emissions through 2020, authority to continue implementing those mechanisms beyond 2020 is murkier. In attempt to address this ambiguity, CARB released a draft proposal in early August to continue operating the program beyond 2020. Without legislative support, such an extension would likely face legal challenges.

Given uncertainty over the program’s future, demand for allowances has plunged in recent auctions. Only one-third of available allowances were sold in the latest auction, a poor performance but a marked improvement over the previous auction in which a paltry 10% of allowances sold.

Looking Ahead

With legal and regulatory decisions outstanding, it is unclear whether cap and trade will remain a primary mechanism for pursuing the state’s emissions reductions targets. If the courts decide auctioning allowances under cap and trade constitutes a tax, California would either have to pass legislation supporting the program with a two-thirds vote, halt the program, or continue to implement the program without auctions, distributing allowances at no cost to be traded among market participants. Affirming CARB’s authority to continue implementing cap and trade beyond 2020 will be a separate task.

Although the future of cap and trade is thus unclear, one thing is certain: by passing SB 32, California has once again asserted its role as a leader in clean energy and climate policy, both within the United States and globally. If the state can stay on track to meet its ambitious 2030 targets, it will also help to pave the way for other states and nations to follow.