Green Travails
California’s Broken Carbon Market Survives Court Challenge

California has a cap-and-trade carbon market. It may have the distinction of being the world’s worst, and last week, a state appeals court sided with the state and said that the scheme is not an illegal tax. Reuters reports:

[The California Chamber of Commerce] 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 [those] 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.

We’ll leave the debate over the legality of the system to the courts, but it’s worth taking a step back at this point and assessing where this cap-and-trade system currently is. When last we checked in on it, a little more than a month ago, we learned that just 16.5 percent of emissions allowances on offer at a quarterly auction were actually sold. That’s horrendous, but it’s also right in line with what we’ve come to expect of this policy disaster—last summer, one of those quarterly auctions brought in just 2 percent of the revenue it was expected to generate.

The lawsuit settled in appellate court this week was one of the reasons why sales were so poor. After all, who would want to spend money on a program that might evaporate due to an impending legal decision? Now that that question is more or less settled, all eyes will return to the meat and bones of this carbon trading scheme. Things don’t look much better after that shift in attention, though. The scheme suffers from the same problem that plagues any regional carbon market: finding that Goldilocks price that’s not too high to chase away businesses but not too low to be inconsequential is a devilishly difficult task. Thus far, the Golden State hasn’t shown any indication that it’s up to meeting that challenge.

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