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Our Children's Earth Foundation v. California Air Resources Board

California Court of Appeals, First District, Fourth Division

February 23, 2015

OUR CHILDREN’S EARTH FOUNDATION, Petitioner and Appellant,
CALIFORNIA AIR RESOURCES BOARD, Respondent, CLIMATE ACTION RESERVE et al., Interveners and Respondents.

San Francisco City and County Superior Court No. CGC-12-519554 Hon. Ernest H. Goldsmith Judge

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[Copyrighted Material Omitted]

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George E. Hays, Michael A. Costa and Naomi K. Melver for Petitioner and Appellant.

Kamala D. Harris Attorney General, Gavin G. McCabe and Jonathan Wiener Deputy Attorneys General , for Respondent.

Gibson, Dunn & Crutcher, Patrick W. Dennis, Krista L. Hernandez, Beth A. Coombs, Annie Deng and Sheldon Evans for Intervener and Respondent Climate Action Reserve Larissa M. Koehler Timothy J. O’Connor Erica Morehouse Martin Donahue & Goldberg and Sean H. Donahue for Intervener and Respondent Environmental Defense Fund

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Latham & Watkins, Robert A. Wyman, Michael G. Romey and Aron Potash for Interveners and Respondents Southern California Edison Company, PG&E Corporation, San Diego Gas & Electric Company, Southern California Gas Company, CE2 Carbon Capital, LLC, NRG Energy, Inc., World Oil Corp., International Emissions Trading Association, Carbon Offset Providers Coalition, and Verified Carbon Standards Association

Jones Day, Thomas M. Donnelly and Daniel L. Corbett for The Nature Conservancy as Amicus Curiae.





The State Air Resources Board (the Board) is charged with implementing the California Global Warming Solutions Act of 2006. (Health & Saf. Code, § 38500 et seq. the 2006 Act.)[1] The Board’s mandate includes adopting rules and regulations to achieve the maximum “technologically feasible and cost effective” reductions in the emission of greenhouse gas (sometimes “GHG”) from sources or categories of sources subject to regulation under the terms of the 2006 Act. (§ 38560.)

In this case, appellant challenges the Board’s regulations implementing a market-based compliance mechanism for achieving reductions in GHG emissions, which is referred to by the parties as the “Cap-and-Trade” program. Pursuant to a petition for writ of mandate, appellant alleged that one component of this program which affords offset credits for voluntary reductions in GHG emissions violates the 2006 Act by failing to ensure that these credited reductions are “in addition to” any GHG emission reduction that is otherwise required by law or that would otherwise occur. (§ 38562, subd. (d) (section 38562(d)).) The trial court rejected this claim and denied the petition. Appellant contends on appeal, as it did in the trial court, that the Board exceeded its power under the 2006 Act by implementing regulations that violate this “additionality” requirement. We affirm.

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THE 2006 ACT

The 2006 Act is supported by legislative findings that global warming poses a “serious threat” to the “economic well-being, public health, natural resources, and the environment of California, ” and that global warming will have “detrimental effects on some of California’s largest industries.” (§ 38501, subds. (a), (b).) The Legislature also found that California has long been a leader with respect to energy conservation and environmental protection, and that programs established under the 2006 Act would “continue this tradition of environmental leadership by placing California at the forefront of national and international efforts to reduce emissions of greenhouse gases.” (§ 38501, subd. (c).)

The 2006 Act designates the Board as “the state agency charged with monitoring and regulating sources of emissions of greenhouse gases that cause global warming in order to reduce emissions of greenhouse gases.” (§ 38510.) In making this designation, the Legislature codified its intention that the Board “design emissions reduction measures to meet the statewide emissions limits for greenhouse gases... in a manner that minimizes costs and maximizes benefits for California’s economy, improves and modernizes California’s energy infrastructure and maintains electric system reliability, maximizes additional environmental and economic co-benefits for California, and complements the state’s efforts to improve air quality.” (§ 38501, subd. (h).)

The 2006 Act subjects the Board to several directives. Among other things, the Board is required to: (1) adopt regulations for statewide reporting and monitoring of GHG emissions (§ 38530); (2) establish a statewide GHG emissions limit to be achieved by 2020 that is equivalent to the 1990 state GHG emissions level (§ 38550); (3) adopt rules and regulations to “achieve the maximum technologically feasible and cost-effective greenhouse gas emission reductions... subject to the criteria and schedules” set forth in the Act (§ 38560); and (4) adopt and implement a list of discrete early action GHG emission reduction measures (§ 38560.5).

The present case pertains to the legislative directive that the Board adopt rules and regulations to “achieve the maximum technologically feasible and cost-effective greenhouse gas emission reductions ...."(§ 38560.) To comply with that directive, the Board was required to “adopt greenhouse gas emission limits and emission reduction measures by regulation... in furtherance of achieving the statewide greenhouse gas emissions limit, to become operative beginning on January 1, 2012.” (§ 38562, subd. (a).)

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In crafting these regulations, the Board was required to follow nine statutory guidelines, “to the extent feasible and in furtherance of achieving the statewide greenhouse gas emissions limit.” (§ 38562, subd. (b).) These guidelines directed the Board to attempt to minimize costs, maximize the total benefits to California, encourage early action to reduce GHG emissions, avoid disproportionate impact on low-income communities, award appropriate credit for early voluntary reductions, complement existing federal and state standards, consider cost-effectiveness, consider overall societal benefits, minimize administrative burdens of implementation and compliance, minimize leakage (id., subd. (b)(1)-(8), and “consider the significance of the contribution of each source or category of sources to statewide emissions of greenhouse gases” (id., subd. (b)(9)).

The Legislature expressly authorized the Board to adopt regulations which establish market-based compliance mechanisms “in furtherance of achieving the statewide [GHG] emissions limit.” (§ 38562, subd. (b); see § 38570, subd. (a) [the Board “may include in the regulations adopted pursuant to Section 38562 the use of market-based compliance mechanisms to comply with the regulations”].) The act defines a market-based compliance mechanism as “either of the following: (1) A system of market-based declining annual aggregate emissions limitations for sources or categories of sources that emit greenhouse gases. [¶] (2) Greenhouse gas emissions exchanges, banking, credits, and other transactions, governed by rules and protocols established by the state board, that result in the same greenhouse gas emission reduction, over the same time period, as direct compliance with a greenhouse gas emission limit or emission reduction measure adopted by the state board pursuant to this division.” (§ 38505, subd. (k).)

The Act requires that every Board regulation adopting GHG emission limits and emission measures “shall ensure” that the GHG “emission reductions achieved are real, permanent, quantifiable, verifiable, and enforceable by the state board.” (§ 38562, subd. (d)(1).) Regulations adopting market-based compliance mechanisms are subject to a further requirement that the “reduction is in addition to any greenhouse gas emission reduction otherwise required by law or regulation, and any other greenhouse gas emission reduction that otherwise would occur.” (§ 38562, subd. (d)(2) (section 38562(d)(2)).) This section 38562(d)(2) “additionality” requirement is the subject of this appeal.

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A. The Cap-and-Trade Program

In January 2012, the Board implemented the “California Cap on Greenhouse Gas Emissions and Market-Based Compliance Mechanisms” pursuant to its authority under the 2006 Act. (See Cal. Code Regs., tit. 17, §§ 95801-96022 (17 Cal. Code Regs.).)[2] The purpose of this “Cap-and-Trade” program regulation is “to reduce emissions of greenhouse gases” from sources covered by the program “by applying an aggregate greenhouse gas allowance budget on covered entities and providing a trading mechanism for compliance instruments.” (17 Cal. Code Regs., § 95801.) Entities covered by the program are from a broad spectrum of industries, including electricity, natural gas and fuel suppliers, each of whom has previously reported GHG emissions that exceed a threshold established by the Board for that industry. (Id. at §§ 95811 95812.)[3]

The program imposes a “cap” on the aggregate GHG emissions these covered entities may emit during the annual compliance period. (17 Cal. Code Regs., §§ 95801, 95802, subd. (a)(53).) The Board enforces the cap, which is lowered over time, by issuing a limited number of compliance instruments referred to as “allowances, ” the total value of which is equal to the amount of the cap. (Id., § 95820.) Each allowance represents a limited authorization to emit up to one metric ton of carbon dioxide equivalent of greenhouse gases (CO2e), subject to stated restrictions. (Ibid.) Covered entities demonstrate compliance with the program by the timely surrender of allowances which correspond to that entity’s compliance obligation during the relevant compliance period which is calculated pursuant to a formula set forth in the program regulation. (Id., §§ 95854 95856.) Subject to restrictions and limitations,

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allowances are tradable, which means that individual participants can buy, bank or sell allowances which are used by the covered entitites to satisfy their compliance obligations. (Id., §§ 95920 95923, 95856.)

A covered entity can also use offsets to meet a percentage of its compliance obligation under the program. (17 Cal. Code Regs., § 95820, subd. (b); see generally id., §§ 95970-95990.) An offset is a voluntary GHG emissions reduction from a source that is not directly covered by the Cap-and-Trade program which is used by a covered entity to comply with the program’s GHG emissions cap. The Board included offsets in the Cap-and-Trade program in order to provide “compliance flexibility” and to “support the development of innovative projects and technologies from sources otuside [sic] capped sectors that can play a key role in reducing emissions both inside and outside California.” Each covered entity may use offset credits to satisfy up to eight percent of its compliance obligation. (Id., § 95854.)

The Board established extensive requirements for projects to qualify as offset credits under the Cap-and-Trade program.[4] (17 Cal. Code Regs., § 95970 et seq.) Notably, the program incorporates the requirements for market-based mechanisms set forth in section 38562(d) of the 2006 Act; an offset must be “real, additional, quantifiable, permanent, verifiable, and enforceable.” (17 Cal. Code Regs., § 95970, subd. (a)(1); see id., subd. (b).) To implement the additionality requirement of the Cap-and-Trade program, the Board adopted the following definitions:

“ ‘Additional’ means, in the context of offset credits, greenhouse gas emission reductions or removals that exceed any greenhouse gas reduction or removals otherwise required by law, regulation or legally binding mandate, and that exceed any greenhouse gas reductions or removals that would otherwise occur in a conservative business-as-usual scenerio.” (17 Cal. Code Regs., § 95802, subd. (a)(4).)

“ ‘Conservative’ means, in the context of offsets, utilizing project baseline assumptions, emission factors, and methodologies that are more likely than not to understate net GHG reductions or GHG removal enhancements for an offset project to address uncertainties affecting the calculation or measurement of GHG reductions or GHG removal enhancements.” (17 Cal. Code Regs., § 95802, subd. (a)(77).)

“ ‘Business-as-Usual Scenario’ means the set of conditions reasonably expected to occur within the offset ...

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