On July 25, 2017, California Governor Jerry Brown signed legislation extending the state’s cap-and-trade program through 2030. The signing ceremony for Assembly Bill (AB) 398 included former California Governor Arnold Schwarzenegger, who signed the first state statute authorizing cap-and-trade in 2006, AB 32. The ceremony cemented the deal that Governor Brown struck with California lawmakers, passing AB 398 with bi-partisan support and a two-thirds majority of the Legislature. In contrast to the passage of Senate Bill 32 in 2016, which extended California’s greenhouse gas reduction (GHG) targets through 2030 with the enactment of one simple sentence into statute, AB 398 stretched for pages. AB 398 provided many details to be incorporated into the cap-and-trade regulation by the California Air Resources Board (ARB), the agency in charge of implementing cap-and-trade, and laid out requirements to mitigate the impacts of GHG regulation on regulated industry and increase in-state benefits.
Among the more note-worthy provisions of AB 398 were (1) a price ceiling on cap-and-trade allowances, (2) limitations on the use of offsets, particularly from out-of-state projects, and (3) a continuation of previous allowance allocations to vulnerable industries. ARB will also report to the Legislature by the end of 2025 on statutory changes needed to reduce leakage, including a potential border carbon adjustment. Outside of the cap-and-trade regulation itself, the bill provides support to regulated entities with relief from sales and use taxes and prohibits local air districts from enacting additional GHG emissions reduction requirements.
In crafting the AB 398 deal, proponents of the bill wisely secured the votes necessary to pass the bill with a two-thirds majority and avoid the question whether cap-and-trade auctions post-2020 would be an unlawful tax under Proposition 26. The most recent cap-and-trade litigation in California Chamber of Commerce v. ARB and Morning Star Packing Co. v. ARB avoided this question, given that the original statute authorizing cap-and-trade, AB 32, was passed before Proposition 26 was voted in. Proponents also secured support from sources as disparate as the California Chamber of Commerce, California Manufacturers and Technology Association, Natural Resources Defense Council, and Environmental Defense Fund. Nevertheless, I would not rule out further judicial tangles on the implementation of AB 398 with amendments to the cap-and-trade regulation. Continue Reading