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Cap-and-Trade Proposal in California Hits Court Setback

A centerpiece of California's precedent-setting climate change law (AB 32) was dealt a blow by a San Francisco Superior Court ruling released last Monday that could require a full-blown environmental impact report (EIR) before the proposed cap-and-trade program for greenhouse gas (GHG) emissions can be implemented. It was set to be effective next year, but could have to wait until at least to 2013.

A ruling by Judge Ernest H. Goldsmith determined that the California Air Resources Board (CARB) failed to take into account public comments on the impact of proposed elements of the cap-and-trade plan before adopted the plan. The state air regulatory panel indicated that it will appeal the court ruling.

"The court did not rule in favor of any of the plaintiffs' arguments against cap-and-trade," CARB's spokesperson Stanley Young told NGI. Allegations of environmental harm from the proposed program have no basis, said Young, noting that the record leading up to the cap-and-trade program was not challenged in the lawsuit, nor was the findings of health impacts analysis that was done as part of the case.

CARB is attempting to clarify the scope of the order since the state does not think the judge's intent was to slow down implementation of other aspects of AB 32, Young said. In any event, he said CARB does not think the ruling means that a "full-blown" EIR will be required. "We are working with the plaintiffs to narrow the scope of the writ and present a joint remedy to the court; if the writ is written more broadly, we will appeal."

Late last year CARB adopted a GHG emissions cap-and-trade program as the cornerstone of a five-year process to implement AB 32. State officials estimated that more than 300 businesses and 600 facilities, including power generators, would be impacted. The legal challenge was filed by six smaller environmental groups alleging that the new program would allow refineries, power plants and other big industrial facilities to avoid cutting their emissions.

According to CARB, claims of environmental harm from a program of tradable GHG emissions allowances are "unfounded." The agency noted that several major environmental groups, including Environmental Defense, Nature Conservancy and the Natural Resources Defense Council, have all embraced the cap-and-trade proposal.

The program centers on setting a "cap," or ceiling, for each compliance period, allowances, banking, offsets and linkage to other GHG emissions trading and offset crediting systems. Critics have argued that the economic consequences would be too great and that without a national program the state's businesses would be put at a competitive disadvantage.

Goldsmith was critical of CARB's analysis of the impact from a carbon fee or tax, noting that the state agency's plan devoted only a couple of paragraphs to alternatives to cap-and-trade.

California's plan calls for an overall 15% reduction in GHG emissions compared to current levels. CARB also put in a gradual transition for large industrial facilities, providing free allowances to all industrial sources of GHG emissions during the initial compliance period of 2012-2014. "Companies that need additional allowances to cover their emissions can purchase them at regular quarterly auctions that CARB intends to conduct, and buy them on the market," a CARB spokesperson said.

As AB 32's lead implementing agency, CARB approved the new regulation, which has been going through an administrative law review to prepare it to be put in effect. CARB Chairman Mary Nichols has called the new program "the capstone of our climate policy."

During an annual financial analysts' conference in New York City Wednesday, Sempra Energy's Executive Vice President Debra Reed said the court decision will set back the implementation date at least a year, and that cap-and-trade, whether delayed or not, should not have much impact on Sempra's two major utilities in the state.

A cap-and-trade program was strongly backed by former Gov. Arnold Schwarzenegger. Newly elected Gov. Jerry Brown's position on it is unclear at this time.

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