California Court of Appeal Rules in Favour of Emission Allowance Auctions
The Court of Appeal of the State of California (Third Appellate District) has ruled in favour of the State of California and its cap and trade program and specifically the validity of the sale of emission allowances by way of auction. The ruling finds that allowance auctions are not prohibited taxes. It is likely to enhance confidence in the state's cap and trade system and the linked or soon-to-be-linked Québec and Ontario systems. DeMarco Allan LLP congratulates California and the International Emissions Trading Association (IETA) on their victory and successful support for the market-based regulation of greenhouse gases.
The Court of Appeal's April 6, 2017 decision upholds an earlier ruling and rejects the California Chamber of Commerce's position alleging that the auction of emission allowances constitutes an unconstitutional tax. The court found that "[t]he purchase of allowances is a voluntary decision driven by business judgements as to whether it is more beneficial to the company to make the purchase than to reduce emissions." This ruling may also be very relevant to any challenge to Canadian provincial cap and trade systems on the ground that they are an unconstitutional tax. California's carbon market linked with Québec’s market in 2014 and is expected to link with Ontario’s market in 2018.
Special thanks to Jonathan McGillivray for his assistance in preparing this bulletin.