State supreme court upholds AB 32, consistent with state-defined property rights

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The California State Supreme Court refused to rehear a state appellate court decision that upheld the validity of the cap and trade program (CATP) established in Assembly Bill 32 (2006). Those challenging the program claimed that (1) the program required firms to acquire allowances to operate and (2) that the auction receipts were budgeted into state programs like other tax revenues. However, the Court’s decision was a victory for those who believe that stronger property rights can lead to an improved environment.

The AB 32 CATP defined the property rights for individual firms and for the public in allowed GHG emissions into the atmosphere.  CARB also allocated allowances for free to these firms and set rates of declining annual emission totals (with some upward adjustments to accommodate interstate and international competitiveness). This is akin to delineating the acreage that a property owner has, and then setting out a rate at which the property owner must dedicate a portion to public use, while still allowing the owner to continue to use that land. The U.S. Supreme Court just upheld the ability of state governments to regulate land use in this manner. The CATP essentially allows an owner to continue to use the land in same manner by acquiring usage rates from other owners who may find it more lucrative to sell their allowances rather than use them. Under AB 32, the state auctions some of those allowances to make for a liquid market, while other allowances are traded bilaterally amongst firms. The bottom line is that CATP established property rights in GHG emissions, just as California established water property rights in 1914.

If the CATP had been declared to be another tax, then any disbursement of government property that generated revenues, e.g., sale of excess office space or forest land, could also be considered a “tax” subject to a two-thirds vote approval by the State Legislature under the state constitution. I doubt that the plaintiffs in this case (led by the Chamber of Commerce) intended that sale of state property would require a two-thirds supermajority vote.

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