California Air Resources Board’s post-2020 cap-and-trade proposal: legal comments

Near Zero’s Danny Cullenward and Michael Wara of Stanford Law School submitted a formal comment letter to the California Air Resources Board (ARB) to raise concerns with respect to ARB’s legal authority to extend the cap-and-trade program after its current expiration at the end of 2020. The letter argues:

We believe that the risk of proceeding with the proposed rule is significant. The lack of clear legal authority to continue cap-and-trade after 2020 will bring a high profile legal challenge from industry opponents. And in contrast to the current challenge to allowance auctions in the cap-and-trade program, we believe that the risks of a defeat for ARB are much greater. Any such litigation, if successful, would do serious damage to California’s leadership on climate policy.

We also believe—based upon discussions with market participants and our observation of recent market activity in secondary spot, futures, and options markets—that the passage of SB 32 has not convinced market participants that ARB has legal authority to implement cap-and-trade after 2020. Market sentiment is an important objective because this proceeding is designed in part to increase interest, and hence demand, at ARB administered allowance auctions from now until 2020. Proceeding with this rulemaking is unlikely to restore market confidence; losing a lawsuit concerning ARB’s authority to proceed with cap-and-trade in the post-2020 period could do much to damage it.

We are also concerned that the timing of this rulemaking appears to have been driven by a need to finalize rules in order to schedule and hold auctions of post-2020 future vintage allowances according to currently established timelines and procedures. While the stable and predictable administration of the market is a valid concern, we urge the board to weigh a minor procedural deviation against the risk of a potentially successful challenge of authority to implement the post-2020 program at all. Meanwhile, the Legislature and Governor’s office have publicly indicated their intention to revisit the question of post-2020 climate policy and carbon pricing in the upcoming 2017 legislative session. Given these commitments, we urge the Board to weigh the serious risks of proceeding with its proposed regulation against the relatively modest costs of waiting for the Legislature to act next year.

In our judgment, the risks are so significant that the Board should withdraw or delay finalizing the proposed regulation until such time as the Legislature provides clear and specific authority to extend the cap-and-trade or utilize another carbon pricing mechanism in the post-2020 period. If the Board opts instead to proceed with the present rulemaking, it should state clearly and forthrightly why it has legal authority to extend the cap-and-trade program beyond 2020 given Cal. Health and Safety Code Section 38652(c) and Proposition 26. To be clear, we want very much to be convinced by the arguments ARB presents on these issues. But we also believe that the interests of the Board and of the State of California are not well served by failure to address them in the ISOR. We respectfully detail our concerns in greater detail below.

Disclaimer: we are writing in our personal capacities only, not on behalf of our employers, affiliates, or any other organizations.