California Supreme Court upholds cap-and-trade system

FILE -- In this Aug. 4, 2013, file photo, an oil field pump jack operates near Lost Hills, Calif. California's cap-and-trade law, which puts a cap and a price on carbon emissions, expires in 2020. Gov. Jerry Brown say he's still hopeful it will be extended, after he failed to convince lawmakers to extend it in tandem with the just-passed state budget. (AP Photo/Rich Pedroncelli, File) less FILE -- In this Aug. 4, 2013, file photo, an oil field pump jack operates near Lost Hills, Calif. California's cap-and-trade law, which puts a cap and a price on carbon emissions, expires in 2020. Gov. Jerry ... more Photo: Rich Pedroncelli, Associated Press Photo: Rich Pedroncelli, Associated Press Image 1 of / 1 Caption Close California Supreme Court upholds cap-and-trade system 1 / 1 Back to Gallery

California’s cap-and-trade law, which requires companies to buy permits to emit climate-changing greenhouse gases into the air, survived a legal challenge Wednesday when the state Supreme Court turned down an appeal by business groups.

The state Chamber of Commerce and allied groups argued that the fees authorized by the 2006 law were actually taxes that required approval by two-thirds of the Legislature. A state appeals court disagreed in April — ruling that businesses were merely required to pay for “the right to continue polluting” — and its ruling became final Wednesday when the state’s high court denied review of the case.

The vote was 6-0, with Chief Justice Tani Cantil-Sakauye stepping aside from the case for undisclosed reasons.

The court’s action gave the first-in-the-nation program a legal respite but did not resolve its political future. Gov. Jerry Brown has tried to muster a two-thirds legislative majority to assure cap-and-trade’s continuation beyond 2020 but has encountered resistance from some business-friendly Democrats. Reports that he has been negotiating with oil industry representatives have prompted concern among environmentalists, some of whom consider cap-and-trade’s allowances overly generous.

The governor has also spoken of taking the issue to the voters in a ballot measure, which would also generate well-financed opposition.

“With this Supreme Court victory, now it’s up to us to take action extending California’s cap-and-trade system on a more permanent basis,” Brown said Wednesday.

Erica Morehouse, a lawyer for the Environmental Defense Fund, said the court action “confirms the strong foundation California has built for its climate policies, and hopefully the governor and the Legislature will build on that foundation.”

The state Chamber of Commerce, which led the legal challenge, did not respond to requests for comment.

Under cap-and-trade, the state sets an annual limit on greenhouse gas emissions, allowing fewer emissions each year. Businesses must obtain a permit, called an allowance, for each ton of heat-trapping gases they emit.

While the state hands out some allowances for free — to utility companies, and to some California industrial firms threatened by out-of-state competition — it sells others in quarterly auctions, generating billions of dollars in state revenue. Companies can also buy and sell allowances among themselves.

Nine other states have adopted a similar system, which is solely limited to power plants. Quebec has linked its cap-and-trade program with California’s, and another Canadian province, Ontario, plans to follow suit next year. Proposals for a nationwide cap-and-trade program fell short in Congress during President Barack Obama’s administration, and have not been revived under President Trump, who has called human-caused climate change a hoax.

Wednesday’s court action was especially timely, said Alex Jackson, a lawyer with the Natural Resources Defense Council, with “the federal government seemingly doing everything they can to abdicate their responsibility” to protect the planet.

The state Chamber of Commerce and its allies filed suit four years ago, relying on Proposition 13, the 1978 tax-cut initiative that required a two-thirds legislative vote for all future tax increases.

In an April 6 ruling in the state’s favor, the Third District Court of Appeal in Sacramento said the state auction system lacked the compulsory features of a tax, because businesses have a choice of either buying an allowance or cutting their emissions.

“It is not accurate to liken the auction system to payment for the privilege to stay in business in California,” Justice Elena Duarte said in the 2-1 appellate court opinion. “It is a payment for the privilege to pollute the air in California.”

Duarte also noted that financial companies voluntarily take part in the auction market, buying and selling allowances to make a profit.

In his dissent, Justice Harry Hull argued that for companies that rely on greenhouse gas-emitting fuels — for example, a tomato processor that was a plaintiff in the case — the fees are costs that they “must bear if they wish to continue doing business in California,” and thus are mandatory rather than voluntary.

Because a polluter’s payments to fund programs that reduce pollution are not considered taxes, the 2006 law directs cap-and-trade revenues to activities designed to limit emissions — alternative fuels, recycling, and the high-speed rail project championed by Brown. But Hull noted that 20 percent of the revenue is currently directed to low-cost housing, on the rationale that it would be located near workplaces and mass transit.

By that reasoning, Hull said, ”auction funds can be used to address nearly any human activity without being considered a tax that generates general revenue.”

Duarte, addressing that issue, said the selection of programs that would help reduce emissions was a “legislative question” rather than one for the courts.

The case is California Chamber of Commerce vs. State Air Resources Board, S241948.

San Francisco Chronicle

staff writer David R. Baker contributed to this report.

Bob Egelko is a San Francisco Chronicle staff writer. Email: begelko@sfchronicle.com

Twitter: @egelko