Environmental Law ReSource : Environmental Lawyer & Attorney : Reed Smith Law Firm : Climate Change, Sustainability

First Challenge: The Scoping Plan Was Not Compliant with AB 32

The Petitioners who challenged the Scoping Plan did so under two broad challenges: that CARB’s adoption of the Scoping Plan violated AB 32 and CEQA. While the precise arguments advanced under these two challenges differ, they all contain the same basic allegation – that CARB treated the Scoping Plan “as a post hoc rationalization for [CARB’s] already chosen policy approaches.”

With respect to AB 32 compliance, the Petitioners argued that: (1) the Scoping Plan failed to achieve “the maximum technologically feasible and cost-effective reductions in GHG emissions;” (2) CARB failed to adequately justify its selection of the market-based cap-and-trade system as the primary GHG reduction vehicle over other direct regulation methods; (3) CARB’s analysis of the costs and benefits of the cap-and-trade system falls short of AB 32’s mandate to use the “best available economic models, emission estimation techniques, and other scientific methods;” and (4) CARB failed to assess the performance of cap-and-trade systems already used in other jurisdictions outside California, another AB 32 requirement. However, the Court did not find these arguments persuasive, in large part due to the wide latitude afforded to administrative agencies by the arbitrary and capricious standard, which applies when agencies exercise quasi-legislative authority.

Second Challenge: The Scoping Plan Violated CEQA

A different outcome resulted from Petitioners’ CEQA challenges, to which the less stringent abuse of discretion standard applies. CEQA requires that government agencies consider the environmental impacts of their actions, and potential alternatives to those actions, before approving projects and policies that could adversely affect the environment. Although the Court deemed CARB’s impacts analysis sufficient, it found defects in CARB’s analysis of potential alternatives to the cap-and-trade system.

Specifically, the Court found that CARB’s selection of the cap-and-trade system was not supported by facts and analysis in the administrative record, such that the agency’s “analytic route . . . traveled from evidence to action” was identified. Instead, according to the Court, CARB’s actions were supported almost entirely by bare conclusions justifying selection of the cap-and-trade system, and informative analysis of alternatives such as a carbon tax was “absent.” Consequently, CARB failed to explain to the public its reasoning for choosing the cap-and-trade system instead of the other potential GHG reduction alternatives.

The Court rejected CARB’s argument that detailed analysis of alternatives will be provided later in the rulemaking process when project-level measures are considered, such as the construction of biofuel production facilities. As explained in the Ruling, such an approach would create a fait accompli – allowing the adoption of the cap-and-trade system without adequate alternatives analysis, and providing for analysis of specific projects only after the cap-and-trade system is in place would “render consideration of alternatives a nullity.” The Court also noted that “data from existing programs, studies, and reports” existed and should have been analyzed as part of CARB’s consideration of alternatives to a cap-and-trade system. The absence of substantial evidence in the record to support the agency’s action constituted an abuse of its discretion.

Additionally, the Court ruled that CARB had approved and commenced implementation of the Scoping Plan’s proposed GHG reduction measures at a January 2009 workshop, even though it had not yet reviewed and responded to public comments it had received at that time. Doing so violated one of CEQA’s goals – to provide the public with information allowing for a reasonable choice of alternatives – and constituted a separate abuse of discretion.

The Court’s Decision: Before Scoping Plan Can Move Forward, CARB Must Comply with CEQA

In sum, due to CARB’s adoption of the Scoping Plan in the absence of substantial evidence in the record to support that action, and its failure to assess public comments raising significant environmental issues prior to adopting the Scoping Plan, the Court ruled that CARB failed to proceed in the manner prescribed by law and abused its discretion.

The Court’s writ of mandate orders CARB to set aside its certification of the environmental review document assessing the Scoping Plan, and enjoins any further implementation of the Scoping Plan’s GHG reduction measures until CARB has complied with CEQA and the agency’s own certified regulatory program adopted pursuant to CEQA. Specifically, CARB must now properly analyze potential alternatives to the cap-and-trade system and publish that analysis for the public, and must also consider and respond to all public comments on the Scoping Plan. Once CARB has complied with these conditions, the Court will allow implementation of the Scoping Plan to proceed.

Challenges for the Regulated Community

While the Ruling may only have a temporary impact on the long-term implementation of the Scoping Plan and the cap-and-trade system it aims to create, the Ruling could have a significant impact on the regulated community. In particular, those entities required to participate in the first round of the cap-and-trade system, which is scheduled to take effect in January 2012, must take certain actions to participate in that system. These actions are costly, both in terms of employee time and hard costs, and may also be disruptive to business operations. In light of the now uncertain status of Scoping Plan implementation, the decision whether to commence these actions is less clear and more difficult to justify, particularly in the current economic climate.

However, given that the Ruling poses only a temporary delay and not a complete invalidation of the Scoping Plan, CARB is likely to satisfy the Ruling’s additional requirements and thus, the question is more likely when, not if, the Scoping Plan and the cap-and-trade system take effect. As such, the regulated community may take some comfort in the fact that any resources expended now will be required at some point in the future, perhaps just not as early as the current January 2012 timetable.
 

California’s Global Warming Solutions Act of 2006, also known as AB 32, mandates that California reduce GHG emissions to 1990 levels by 2020. In December 2008, CARB issued a Scoping Plan that outlines California’s strategies for meeting this mandate. Establishing a California cap-and-trade program is a prominent component of the Scoping Plan. Cap-and-trade refers to a system in which production of pollutants is capped, producers receive allowances that give them the right to pollute up to specified amounts, and a market is created for trading allowances among producers. For more background on AB 32, the Scoping Plan, and cap-and-trade programs, please review our earlier postings.

California’s cap-and-trade program will include a stringent declining emissions cap, meaning the amount of emissions allowed will be reduced for each subsequent compliance period. The proposed regulations outline three three-year compliance periods (2012 to 2014, 2015 to 2017, and 2018 and 2020). But CARB is considering shortening the compliance period to one year. 

Sectors subject to the cap-and-trade program include large stationary sources of GHG emissions, electricity deliverers, and fuel deliverers that emit at or above a 25,000 metric ton of carbon dioxide equivalent (MTCO₂e) threshold. In the Scoping Plan, CARB outlined a staggered approach for phasing regulated sectors into the program. Under the staggered approach, certain sectors would be covered by the program starting in the first compliance period (e.g. 2012 to 2014) with additional sectors becoming covered in subsequent periods. The proposed regulations retain the staggered approach, with 600 of California’s largest GHG-emitting stationary sources subject to the program starting January 1, 2012. But CARB has indicated that it is considering abandoning this approach and making all regulated sectors subject to the program starting January 1, 2012.

Once covered by the cap-and-trade program, an entity will hold emission allowances that it can (1) surrender to cover its emissions, (2) bank for future use, (3) trade to another entity, or (4) retire. The preliminary draft outlines the process for each of the options. But the biggest issue left open is how emission allowances will be allocated in the first instance. Options include free allocation, auction, or a mix of the two. CARB has formed a 17-member Economic and Allocation Advisory Committee (EAAC) to advise CARB on allocation and implementation issues. EAAC is expected to issue a report regarding allocation strategies in January 2010 and the recommendations in this report will be addressed in the revised draft regulations to be issued in Spring 2010.

Additional issues addressed by the preliminary draft include offsets and linkage to other trading programs. Offsets are tradable credits that represent GHG emission reductions in areas or sectors outside the scope of the cap-and-trade program. The preliminary draft proposes that covered entities be allowed to use offsets to cover up to four percent of their emissions. Thus, instead of surrendering emission credits to cover those emissions, the entity would use offsets. Emission reductions achieved by offsets must be real, permanent, verifiable, enforceable, and quantifiable. Further, the reduction must be additional to what is required by law or regulation or would otherwise have occurred.

The preliminary draft also outlines how California’s program could be linked with regional or national cap-and-trade programs. Outside of California and the Northeast, however, little is happening with regards to cap-and-trade programs. National cap-and-trade regulations are currently stalled in Congress. Thus, rather than linkage, the issue is really one of preemption. There is concern that a later-enacted national program could conflict with California’s program or that express preemption of California’s program could hamper California’s ability to meet its AB 32 mandate. Aside from a standard severability provision, preemption is not discussed in the preliminary draft but it will remain an issue in the national debate.

The full text of the preliminary draft regulations can be found here. For additional information, including specific applicability questions, please contact the Reed Smith lawyer with whom you regularly work.