Appeals court upholds California's anti-greenhouse gas program

FILE PHOTO: A vehicle has its emissions tested at a smog testing facility in Oceanside, California, U.S. on September 29, 2015. REUTERS/Mike Blake/File Photo

SACRAMENTO, Calif. (Reuters) - A state appeals court on Thursday ruled California’s high profile market system for reducing greenhouse gas emissions does not amount to an illegal tax, a decision that could lift a pall over the so-called cap-and-trade program’s marketplace for buying and selling pollution allowances.

The California Chamber of Commerce and others had filed a pair of lawsuits challenging the anti-pollution program, which requires large producers of greenhouse gases to either lower their emissions or purchase pollution rights from the state or others.

The system is called cap-and-trade because it puts a cap on the amount of emissions for the state but allow polluters to purchase or trade pollution allowances.

The state’s Air Resources Board, a defendant in the lawsuits, prevailed in district court in Sacramento in 2013. The Chamber of Commerce and the other plaintiffs appealed, arguing that air quality regulators exceeded the power granted to them by the state legislature and then-governor Arnold Schwarzenegger, a Republican, when they set up strict rules for reducing emissions and buying and selling greenhouse gas emission allowances.

They also alleged that fees connected with the purchase of pollution allowances amounted to a tax. Because California’s landmark Proposition 13 tax reform law prohibits the legislature from passing new taxes without a two-thirds majority, the Chamber of Commerce and its fellow plaintiffs argued that the system of fees and pollution credits was illegal.

In its ruling on Thursday, the state’s Third Appellate District Court in Sacramento rejected both arguments. Voting two-to-one in favor of the state, the three-judge panel said the legislature clearly intended for the Air Resources Board to set up the system, proving its support by following up in later legislation with details on how it should be run.

The fees and costs associated with the system were not taxes, in part because companies and investors purchase and trade the pollution allowances voluntarily, while taxes are not voluntary. Taxes also do not offer benefits to payors, the court said, while purchasers and sellers of the allowances do benefit.

Revenue from the program funds clean energy programs, especially in poorer communities, and helps finance the state’s ambitious high speed rail project.

The ongoing case had cast a shadow over the state’s emissions trading market, which has at times suffered a lack of participation due to uncertainty over its future.

Reporting by Sharon Bernstein; Editing by David Gregorio