On February 23, 2015, the California Court of Appeal affirmed a trial court decision upholding regulations adopted by the California Air Resources Board (“CARB”) under the California Global Warming Solutions Act of 2006 (“the Act”) implementing CARB’s “Cap-and-Trade” program for reducing greenhouse gas (“GHG”) emissions. The Court rejected challenges to the regulations brought by the environmental organization Our Children’s Earth Foundation (“OCEF”), which argued that the regulations improperly allowed GHG emission offset credits for emission reductions that would otherwise occur, and deferred to CARB’s exercise of its statutory authority.
Our Children’s Earth Foundation v. California Air Resources Board (Feb. 25, 2015, 1st DCA Case No. A138830).
The Act requires that CARB regulations adopting market-based compliance mechanisms, such as the Cap-and-Trade program, ensure that a GHG “reduction is in addition to any greenhouse gas emission reduction otherwise required by law or regulation, and any other greenhouse gas emission reduction that otherwise would occur.” Cal. Health & Safety Code § 38562(d)(2) (emphasis added). OCEF argued that CARB violated this “additionality” requirement by failing to ensure that GHG reductions credited under the Cap-and-Trade program are in addition to any GHG emission reduction that is otherwise required or that would otherwise occur.
The Cap-and-Trade program imposes a “cap” on the aggregate GHG emissions that covered entities may emit during an annual compliance period. CARB enforces the cap, which is lowered over time, by issuing a limited number of compliance instruments referred to as “allowances,” the total value of which is equal to the cap. A covered entity can also use offsets to meet a percentage of its compliance obligation. An offset is a voluntary GHG emission reduction from a source that is not directly covered by the program which is used by a covered entity to comply with the GHG emission cap.
One of the eligibility requirements imposed by the regulations is that a qualifying offset credit must result from the use of an adopted “compliance offset protocol.” The function of an offset protocol is to establish procedures and requirements to qualify and quantify GHG destruction, ongoing GHG reduction, or GHG removal enhancements achieved by an offset protocol. The regulations also include a procedure for early action projects to qualify for offset credits.
OCEF sought to invalidate CARB’s compliance offset protocols and early action offset credit program for allegedly violating the Act’s additionality requirement. OCEF argued that the compliance offset protocols are defective because they are based on a performance standard that: (1) includes activities which would otherwise occur; and (2) incorporates a “profitability” factor which improperly assumes that a project activity satisfies the additionality requirement if it would be profitable only with the financial incentive of the offset payment. OCEF challenged the early action offset credit provision because it allegedly allows offsets to be generated from entire classes of projects even though projects within those classes are already being undertaken and would be undertaken without the incentive provided by the offset payments.
The Court found that the fundamental problem with OCEF’s position was that it refused to account for the fact that it is virtually impossible to know with certainty what GHG emission reduction otherwise would have occurred in most cases, and that the practical effect of accepting OCEF’s unworkable statutory interpretation would be to preclude CARB from implementing many, if not all, market-based compliance mechanisms. The Court held that CARB did not exceed its power, but rather, in exercising the authority delegated to it by the Legislature, established rules and protocols that give sufficient meaning to the concept of additionality so that this requirement is capable of enforcement.
Having determined that CARB reasonably interpreted its legislative mandate, the Court declined OCEF’s request to independently evaluate the effectiveness of specific measures incorporated into several of the compliance offset protocols. Noting that CARB engaged in an extensive regulatory process and finding that the voluminous administrative record substantially supported the many policy decisions that CARB had to make in formulating the challenged regulations, the Court held that OCEF had failed to demonstrate that any action CARB took was arbitrary or capricious.
In rejecting OCEF’s argument, the Court’s decision provides businesses participating in California’s Cap-and-Trade program with certainty regarding the validity of GHG offset credits and CARB’s compliance offset protocols.
The Court of Appeal’s decision is available here.
--Marc Zeppetello
For more information, contact Marc Zeppetello at maz@bcltlaw.com or (415) 228-5496.
