Renewable + Law : Renewable Energy Lawyer & Attorneys : Stoel Rives Law Firm : Climate Change, Emissions, Carbon Markets, Wind, Solar, Biofuels : Western United States

From Allison C. Smith and Lee N. Smith:

Last week was busy for the California Cap-and-Trade Program, adopted by the California Air Resources Board (CARB) last December under A.B. 32. First, last Tuesday, CARB Chairman Mary Nichols announced at a Senate hearing that the first scheduled Cap-and-Trade allowance auction, scheduled for August 2012, will be a “practice” auction rather than a “real” auction for the purchase of actual allowances. Reportedly, the delay is to allow industry to gain an understanding of how actual, future auctions will work. The first “real” auction is still scheduled for November 1, 2012.

On Wednesday, March 28, two environmental groups, the Citizens Climate Lobby and Our Children's Earth Foundation filed suit in San Francisco Superior Court challenging the use of greenhouse gas emission offsets by entities regulated under Cap-and-Trade to meet their Cap-and-Trade compliance obligations. Although the suit will not necessarily delay implementation of Cap-and-Trade and the offset program, if the lawsuit ultimately invalidates the offset protocols and eliminates the use of offsets to meet Cap-and-Trade obligations, the cost of compliance for industry could be substantially increased. Plaintiffs are alleging that the offset program, with its four adopted offset protocols, are reductions that would have occurred in the normal course of business, and are therefore not "additional” greenhouse gas reductions and threaten the overarching integrity of the Cap-and-Trade Program. The plaintiffs request a repeal of the four offset protocols approved in December 2011 and a prohibition on using offsets in place of greenhouse gas allowances to meet Cap-and-Trade obligations.

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On June 20, 2011, the U.S. Supreme Court issued an opinion on American Electric Power Co., Inc., et al. v. Connecticut, et al. 

This case is significant because it dismissed a lawsuit in which several states and environmental groups sought court orders requiring large electrical utilities (alleged to be “the five largest emitters of carbon dioxide in the United States”) to reduce their greenhouse gas emissions because the emissions were alleged to be a public nuisance.  Plaintiffs alleged that the emissions violated federal common law (nuisance) or state tort law.  The plaintiffs were thereby requesting a court decree setting a cap for C02 emissions to be reduced annually.

The Supreme Court in a fairly short opinion touched upon a number of significant issues. The Court first dealt with the issue of jurisdiction and then with the issue of whether there is a federal common law cause of action of nuisance.  The Court split on the issue of whether the plaintiffs had Article III standing, i.e., whether there was sufficient specific injury to the plaintiffs such that the Article III Claims and Controversies requirement would be met, allowing the plaintiffs to avail themselves of the jurisdiction of the federal court system. Half of the Court believes that there was no standing, the other believes (assuming the prior cases are an indication) that some of the plaintiffs (the states) had sufficient standing that the case could be brought. This issue was addressed in the Massachusetts v. EPA case in which the Court held that greenhouse gases were regulated under the Clean Air Act. In that case the state of Massachusetts was found to have had sufficient standing to allow the case to be heard. 

The Court held that the federal common law nuisance which had been recognized in several interstate environmental cases was displaced by the statute even absent the setting of emission standards (EPA’s CO₂ regulations are due in May 2012.)  The Court also indicated that the agency should be allowed to act first, before the judiciary, as the expert agency is better equipped to do the job then the judiciary who typically lack the economic technological resources to cope with these issues. Plaintiffs’ proposal to have federal judges determine these emission limits in the first instance could not be reconciled with the statute. 

Finally, the Court did not reach the issue of the viability of the state nuisance claims because they had been dropped by the lower courts when they held that the federal common law governed over state law.  Because there was no briefing on the state law preemption issue, the issue was left for consideration on remand. The Court did indicate that the issue of whether there was preemption of the federal common law by federal legislation, as in this case, did not require “the same sort of evidence of a clear and manifest (congressional) purpose” required for preemption of state law. (Citing City Milwaukee II 451 U.S. at 304, 317 (1981)).

This decision, while sending the case back to the lower courts, raises several unresolved issues. Will the courts continue to allow plaintiffs, particularly non-states such as the industry groups in the Massachusetts case, and the environmental groups in this case, Article III standing where there is an argument that no specific injuries have been pled? Will the courts find that state common law claims are also pre-empted by the federal Clean Air Act? Will this theory of agency primacy be applied at other levels? What happens if the EPA or Congress decides not to issue greenhouse gas regulations?   We’ll be continuing to monitor the case as it works its way back through the lower courts—stay tuned for updates.

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On Friday, May 20, 2011, Judge Goldsmith of San Francisco Supreme Court issued a final order  (PDF) with respect to a lawsuit challenging the environmental review of the Cap and Trade regulations created under California’s AB 32 Greenhouse Gas statute and the associated Scoping Plan. In its order, the Court enjoined the Cap and Trade portion of the Scoping Plan.

This revised final order is narrower than the draft order previously circulated in March.  The order applies only to the Board Regulation O8-47  and Executive Order G-09-001 (approving the climate change scoping plan) as they relate to Cap and Trade; and the Cap and Trade regulations themselves Regulation 10-42.  The Executive order enjoins the California Air Resources Board (CARB) from:

“[e]ngaging in any cap and trade-related Project activity that could result in an adverse change to the physical environment until ARB has comes into complete compliance with ARB’s obligations  under its certified regulatory program and CEQA, consistent with the Court’s Order.  This includes any further rulemaking and implementation of cap and trade especially but not limited to any action in furtherance of California Cap and Trade Program Resolution  10-42.”

Keep in mind, this lawsuit was filed challenging a CEQA type document which is procedural in nature.  Thus, once CARB revises the environmental document in the manner required by the court and it is determined to be sufficient at the time the writ is returned, the project may go forward.  Additionally, in the interim, those portions of AB 32 that are not related to Cap and Trade, such as mandatory reporting, are still in effect pursuant to the Implementation Schedule.

In the interim, it will be interesting to see whether various interests will attempt to make changes to the Cap and Trade program.  The Sierra Club has already come out in favor of changes related to emissions levels and environmental justice issues. 

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