PLF appeals cap and trade auction ruling to California Supreme Court

Yesterday, on behalf of our clients in Morning Star Packing Company v. California Air Resources Board, we filed our Petition for Review in the California Supreme Court, asking the state high court to review and reverse the court of appeal’s decision that the billions of dollars that companies like Morning Star Packing Co must pay the state, for permits the state requires in order to remain in business, are not illegal taxes under Proposition 13.

What is at stake in this case? Under California’s greenhouse gas law (in effect, a fuel rationing program), large users or distributors of natural gas and other fuels must get permits (called Allowances) from the California Air Resources Board to use or sell the fuel. The Board limits the number of Allowances available, and allows companies who need them to trade the Allowances with each other. But instead of simply issuing them to the companies that need them, the Board keeps about half of them and then auctions them, for billions of dollars, to the highest bidders. The state legislature then spends the billions on a nearly unlimited variety of general governmental programs unrelated to Morning Star, including spending 25% of the revenue on the infamous high speed train to nowhere.

PLF argues that this auction is an illegal tax, but the court of appeal disagreed. We think the California Supreme Court needs to sort the case out, for multiple reasons.

First, the majority of the lower court decided not to apply the state supreme court’s Sinclair Paint test for whether regulatory charges are valid fees or illegal taxes. This is significant because, as PLF has argued throughout and as the dissent below agreed, the Board “cannot possibly fit the auction program within Sinclair Paint‘s formulation of a regulatory fee.”

Next, the majority¬†ruled that Morning Star’s auction payments are not taxes because Morning Star could go without the Allowances (despite having to close its doors), and therefore pays for them voluntarily. This is a remarkable conclusion because a Morning Star economist submitted a declaration in the case, which the court of appeal accepted as true, explaining the impossibility of continuing in business in California without buying Allowances at the Board’s auctions. But as the majority put it:

A number of requirements for businesses, whether taxes, safety regulations, minimum wage statutes, or command-and-control pollution control regulations, might cause a particular business to become unprofitable. This unfortunate reality does not translate into a compelled purchase of auction credits.

In other words, you may very well have to chose between paying the government and closing your business, but that doesn’t mean that the government forced you to the choice.

Next, the majority went on to conclude that the Allowances are property which the state may require Morning Star to pay for through the auction. This is another remarkable conclusion, since the regulation at issue specifically states that the Allowances are not property. To get around this problem, the majority asserts that some things can be property as between private parties, but not as to the government. This would be news to the authors of the Fifth Amendment, which protects private property from taking without just compensation. “Property” that the government need not treat as property is not property.

Finally, the majority ruled that the way the state spends the billions it is collecting through the auctions is immaterial to whether the auction is an illegal tax. Again, the majority provided little explanation of this conclusion, resting it on its equally unsupported holding that Sinclair Paint does not apply to this particular environmental permit charge, even though it applies to environmental permit charges generally.

The dissent parted ways with the majority on all three points, stating that the court should have held that the Allowance auction is an illegal tax. We hope that the state supreme court will take the case, and that it will ultimately agree with the dissent below: the Allowance auction violates Proposition 13.