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California Chamber of Commerce v. State Air Resources Board

California Court of Appeals, Third District, Sacramento

April 6, 2017

CALIFORNIA CHAMBER OF COMMERCE et al., Plaintiffs and Appellants,
v.
STATE AIR RESOURCES BOARD et al., Defendants and Respondents. NATIONAL ASSOCIATION OF MANUFACTURERS, Intervener and Appellant ENVIRONMENTAL DEFENSE FUND et al.; Interveners and Respondents. MORNING STAR PACKING COMPANY et al., Plaintiffs and Appellants,
v.
STATE AIR RESOURCES BOARD et al., Defendants and Respondents; ENVIRONMENTAL DEFENSE FUND et al.; Interveners and Respondents.

         APPEAL from a judgment of the Superior Court of Sacramento County, Nos. 34-2012-80001313-CU-WM-GDS, 34-2013-80001464-CU-WM-GDS Timothy M. Frawley, Judge. Affirmed.

          Nielsen Merksamer Parrinello Gross & Leoni, James R. Parrinello, Steven A. Merksamer, Kurt R. Oneto, Christopher E. Skinnell and Eric J. Miethke for Plaintiffs and Appellants California Chamber of Commerce and Larry Dicke.

          Sidley Austin, Sean A. Commons, Roger R. Martella, Jr., Paul J. Zidlicky and Eric D. McArthur for Plaintiff and Appellant The National Association of Manufacturers.

          Pacific Legal Foundation, James S. Burling, Theodore Hadzi-Antich, Harold E. Johnson and Anthony L. François for Plaintiffs and Appellants Morning Star Packing Company, Dalton Trucking, Inc., California Construction Trucking Association, Merit Oil Company, Ron Cinquini Farming, Construction Industry Air Quality Coalition, Robinson Enterprises, Inc., Loggers Association of Northern California, Inc., Norman R. “Skip” Brown, Joanne Browne, Robert McClernon and the National Tax Limitation Committee.

          National Federation of Independent Business Small Business Legal Center and Luke A. Walke; Benbrook Law Group, Bradley A. Benbrook and Stephen M. Duvernay for National Federation of Independent Business Small Business Legal Center, Owner-Operated Independent Drivers Association, Inc., and Associated California Loggers, as Amici Curiae on behalf of Plaintiffs and Appellants.

          Pillsbury Winthrop Shaw Pittman, Kevin M. Fong, Jeffrey M. Vesely and Richards E. Nielsen for California Taxpayers Association, as Amicus Curiae on behalf of Appellants.

          Alston & Bird, Maureen F. Gorsen and Damien M. Schiff for California Manufacturers and Technology Association, as Amicus Curiae on behalf of Appellants.

          Kamala D. Harris and Xavier Becerra, Attorneys General, Robert W. Byrne, Senior Assistant Attorney General, Gavin G. McCabe, Molly K. Mosley, Deputy Attorney General, David A. Zonana, Robert E. Asperger, M. Elaine Meckenstock, and Bryant B. Cannon, Deputy Attorneys General, for Defendants and Respondents California Air Resources Board; Mary Nichols, in her official capacity as Chair of the California Air Resources Board; John Balmes, M.D., Sandra Berg, John Gioia, Hector De La Torre, John Eisenhut, Judy Mitchell, Barbara Riordan, Ron Roberts, Phil Serna, Alexander Sherriffs, M.D., and Daniel Sperling, in their official capacities as members of the California Air Resources Board; and Richard W. Corey, in his official Capacity as Executive Officer of the California Air Resources Board.

          Shute, Mihaly & Weinberger, Matthew D. Zinn and Catherine Malina for Interveners and Respondents Environmental Defense Fund and Natural Resources Defense Council.

          Environmental Defense Fund, Erica Morehouse Martin and Timothy J. O'Connor; Donahue & Goldberg and Sean H. Donahue for Intervener and Respondent Environmental Defense Fund.

          Natural Resources Defense Council, David Pettit and Alexander L. Jackson for Intervener and Respondent Natural Resources Defense Council.

          UC Berkeley School of Law and Eric Biber for Dr. Dallas Burtraw and 16 other economics and public policy scholars, as Amici Curiae on behalf of Respondents.

          Frank G. Wells Environmental Law Clinic, UCLA School of Law and Cara A. Horowitz for The Nature Conservancy, as Amicus Curiae on behalf of Respondents.

          Beveridge & Diamond and Nicholas W. van Aelstyn for International Emissions Trading Association, as Amicus Curiae on behalf of Respondents.

          Duarte, J.

         These two consolidated cases involve the California Global Warming Solutions Act of 2006 (the Act) (Health & Saf. Code, § 38500 et seq.; Stats. 2006, ch. 488; § 1, p. 3419, enacting Assem. Bill No. 32 (2005-2006 Reg. Sess.), popularly known as “AB 32”).[1] The Act was passed by a simple majority vote of both legislative houses. Its general purpose is to reduce greenhouse gas (GHG) emissions to protect the environment.

         Plaintiffs and allied amici curiae do not quarrel with the Act or its goals, but attack one part of the implementing regulations adopted by the State Air Resources Board (Board). (§ 39003.) The Board created a “cap-and-trade” program that includes the auction sale of some--but not all--GHG emissions allowances. Covered entities--generally large emitters of GHGs--must either surrender sufficient compliance instruments (emissions allowances or offset credits) to cover the amount of pollutants they discharge, or face monetary penalties or other negative consequences. (See § 38580; Cal. Code Regs., tit. 17, §§ 96012-96014.) The Board distributes some emissions allowances for free, but sells others at quarterly auctions. A covered entity that cannot reduce its emissions below the amount authorized by its free allowances and any offset credits it has obtained must purchase more allowances at the Board's quarterly auctions, or on a secondary market where allowances are sold or traded without Board control.

         As in the trial court, on appeal plaintiffs assert (1) the auction sales exceed the Legislature's delegation of authority to the Board to design a market-based emissions reduction system, and (2) the revenue generated by the auction sales amounts to a tax that violates the two-thirds supermajority vote requirement of Proposition 13. (Cal. Const., art. XIII A, § 3.) The trial court rejected these two claims in a thorough written decision.

         As for the first question, we hold that the Legislature gave broad discretion to the Board to design a distribution system, and a system including the auction of some allowances did not exceed the scope of legislative delegation. Further, the Legislature later ratified the auction system by specifying how to use the proceeds derived therefrom.

         As for the second question, although our reasoning differs from that of the trial court, we agree that the auction sales do not equate to a tax. As we shall explain, the hallmarks of a tax are: 1) that it is compulsory; and 2) that the payor receives nothing of particular value for payment of the tax, that is, the payor receives nothing of specific value for the tax itself. Contrary to plaintiffs' view, the purchase of allowances is a voluntary decision driven by business judgments as to whether it is more beneficial to the company to make the purchase than to reduce emissions. Reducing emissions reduces air pollution, and no entity has a vested right to pollute. Further, once purchased, either from the Board or the secondary market, the allowances are valuable, tradable commodities, conferring on the holder the privilege to pollute. Indeed, speculators have bought allowances seeking to profit from their sale, and as one party puts it, taxes do not attract volunteers. These twin aspects of the auction system, voluntary participation and purchase of a specific thing of value, preclude a finding that the auction system has the hallmarks of a tax.

         The bulk of the briefing in the trial court and on appeal discusses the test to determine whether a purported regulatory fee is instead a tax subject to Proposition 13. The key authority is Sinclair Paint Co. v. State Bd. of Equalization (1997) 15 Cal.4th 866 (Sinclair Paint) and its progeny. However, as we explain in more detail, post, the Sinclair Paint test is not applicable herein, because the auction system is unlike other governmental charges that may raise the “tax or fee” question resolved thereby. The system is the voluntary purchase of a valuable commodity and not a tax under any test.

         Accordingly, we shall affirm the judgments denying the petitions in these consolidated cases.

         BACKGROUND

         In 2006 the Legislature passed and Governor Schwarzenegger signed the Act, which requires that covered entities reduce GHG emissions to 1990 levels by the year 2020. The Act did not pass by a two-thirds vote of each legislative house.

         A decision by another appellate court summarized the Act as follows:

         “The [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 [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....' (§ 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 [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).” (Our Children's Earth Foundation v. State Air Resources Bd. (2015) 234 Cal.App.4th 870, 874 (Our Children's Earth).)

         The Board promulgated regulations that created a cap-and-trade system which included an auction component. (Cal. Code Regs., tit. 17, § 95801 et seq.; see Association of Irritated Residents v. State Air Resources Bd. (2012) 206 Cal.App.4th 1487, 1498, fn. 6 (Residents) [describing how a cap-and-trade system works generally].) Its purpose “is to reduce emissions of [GHG] associated with entities identified in this article through the establishment, administration, and enforcement of the California Greenhouse Gas Cap-and-Trade Program by applying an aggregate [GHG] allowance budget on covered entities and providing a trading mechanism for compliance instruments.” (Cal. Code Regs., tit. 17, § 95801.) Covered entities must reduce their emissions below a threshold point, or obtain offset credits or emissions allowances, either from the Board or the open market. The Board distributes some allowances for free, retains some in a price containment reserve to buffer against unexpectedly high auction prices, and auctions the rest periodically. After each compliance period, an entity must surrender unused allowances. But as the trial court found, allowances are tradable, which “creates a market for carbon allowances.”[2] Covered entities include manufacturing, production, and utility operations that emit threshold amounts of GHGs. (See Cal. Code Regs., tit. 17, §§ 95811-95812.)

         The regulatory system has been summarized briefly as follows:

         “[Effective] 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 [].) 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.' (Cal. Code Regs., tit. 17, § 95801.) Entities covered... 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....

         “The program imposes a ‘cap' on the aggregate GHG emissions these covered entities may emit during the annual compliance period. (Cal. Code Regs., tit. 17, §§ 95801, 95802, subd. (a)(53).) The Board enforces the cap, which is lowered over time, by issuing a limited number of... ‘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, allowances are tradable, which means that individual participants can buy, bank or sell allowances which are used by the covered entities 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. [Citations.] An offset is a voluntary... 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.” (Our Children's Earth, supra, 234 Cal.App.4th at pp. 876-877.)

         “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 ‘[c]onsider 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 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).)” (Our Children's Earth, supra, 234 Cal.App.4th at p. 875.)

         Over time, the number of allowances (the “cap”) will decrease--to reduce the total GHG emissions--which in theory should increase the value of remaining allowances. The auctions are expected to generate a great deal of money over the life of the program. By 2020, the Board plans to auction about half of the total allowances. The Board, citing materials in its unopposed request for judicial notice, asserts (without dispute by any party) that as of January 1, 2015, about 500 million allowances have been distributed for free, about 75 million have been auctioned, and that the price containment reserve has not been tapped.[3]

         At auction, there is a single round of sealed bidding, and winning bidders pay the “settlement” or “clearing” price, that is, the lowest price that will clear all allowances in that tranche. (See Cal. Code Regs., tit. 17, § 95911, subds. (a), (e).) Thus, some bidders will pay less than they were willing to pay. First by regulation and now by statute, the proceeds are kept in a fund to further the Act's purposes.[4] (Id., § 95870, subd. (b)(3); see Gov. Code, § 16428.8.)

         In 2012 the Legislature passed four bills specifying how auction proceeds would be used to effectuate the Act, and diverting $500 million to the General Fund for related purposes. None passed by a two-thirds vote of each house.[5]

         The first suit was then filed by the California Chamber of Commerce and taxpayer Larry Dicke (jointly, CalChamber) against the Board, its members, and its executive officer, seeking to invalidate the auctions. The Environmental Defense Fund and Natural Resources Defense Council (jointly, EDF) intervened on behalf of the Board, and NAM intervened against the Board. In a second suit, Morning Star Packing Company (Morning Star) and other entities sued the same defendants, attacking the same regulations on essentially the same grounds.[6]

         The trial court deemed the two cases to be related, heard a joint oral argument, and issued a joint written decision rejecting the petitions.

         Plaintiffs timely appealed in each case, and we accepted a stipulation by the parties to consolidate the appeals.[7]

         DISCUSSION

         I

         Legislative Delegation

         The first question resolved by the trial court was whether the Legislature vested the Board with discretion to create a distribution system that included an auction. We agree with the trial court that the Legislature conferred on the Board extremely broad discretion to craft a distribution system, and the fact the Legislature did not explicitly refer to an auction of allowances does not mean such an auction falls outside the scope of the delegation. Moreover, by later specifying how the proceeds of the auctions would be used, the Legislature effectively ratified the auction system created by the Board.

         A. Standard of Review

         We have set out the general standard for determining the validity of administrative regulations in a prior case as follows:

         “ ‘Government Code section 11342.2 provides the general standard of review for determining the validity of administrative regulations. That section states that “[w]henever by the express or implied terms of any statute a state agency has authority to adopt regulations to implement, interpret, make specific or otherwise carry out the provisions of the statute, no regulation adopted is valid or effective unless [1] consistent and not in conflict with the statute and [2] reasonably necessary to effectuate the purpose of the statute.”

         “ ‘Under the first prong of this standard, the judiciary independently reviews the administrative regulation for consistency with controlling law.... In short, the question is whether the regulation is within the scope of the authority conferred; if it is not, it is void. This is a question particularly suited for the judiciary as the final arbiter of the law, and does not invade the technical expertise of the agency.'

         “ ‘By contrast, the second prong of this standard, reasonable necessity, generally does implicate the agency's expertise; therefore, it receives a much more deferential standard of review. The question is whether the agency's action was arbitrary, capricious, or without reasonable or rational basis.' ” (Morning Star Co. v. Board of Equalization (2011) 201 Cal.App.4th 737, 744-745 (Morning Star).)

         In reviewing the regulations in this case, “We keep in mind that ‘the burden is on the party challenging a regulation to show its invalidity.' ” (California School Bds. Assn. v. State Bd. of Education (2010) 191 Cal.App.4th 530, 544 (California School Bds.); see Association of California Ins. Companies v. Jones (2017) 2 Cal.5th 376, 389 (Jones).)

         B. The Act is Broad Enough to Encompass an Emissions Allowance Auction

         The Board contends authorization to “[d]esign the regulations, including distribution of emissions allowances where appropriate, ” as well as authority to “adopt... a system of market-based declining annual aggregate emission limits, ” subject to specified criteria, vested it with authority to sell some allowances at auction. (§ 38562, subds. (b)(1)-(9), (c), 7 (d)-(f).) For the Board to prevail, we need only find that the auction regulations are “ ‘consistent and not in conflict with' ” the organic statute (Morning Star, supra, 201 Cal.App.4th at p. 747); they are.

         Plaintiffs emphasize that any implied administrative powers must be “ ‘essential to the declared objects and purposes of the enabling act--not simply convenient, but indispensable. Any reasonable doubt concerning the existence of the power is to be resolved against the agency.' ” (Addison v. Department of Motor Vehicles (1977) 69 Cal.App.3d 486, 498, quoting former 2 Cal.Jur.3d, Administrative Law, § 39, pp. 257-258 [now 2 Cal.Jur.3d (2015) Administrative Law, § 175, pp. 222-223].) But here, there is an explicit delegation to the Board to design a method to distribute allowances. When an agency exercises discretion explicitly conferred on it, it is presumed to act within legislative intent. An “agency is not limited to the exact provisions of a statute in adopting regulations to enforce its mandate. ‘[The] absence of any specific [statutory] provisions regarding the regulation of [an issue] does not mean that such a regulation exceeds statutory authority....' [Citations.] [An agency] is authorized to ‘ “fill up the details” ' of the statutory scheme.” (Ford Dealers Assn. v. Department of Motor Vehicles (1982) 32 Cal.3d 347, 362; see California School Bds., supra, 191 Cal.App.4th at p. 544.)

         NFIB contends an auction is not “reasonably necessary” to the Act's purposes and, somewhat similarly, CMTA argues the Board did not properly balance the relevant statutory factors. The Board aptly replies that such “argument conflates two distinct parts of the analysis of quasi-legislative rulemaking: the question of ‘authority'-which the court reviews independently, giving weight to the agency's construction-and the question of ‘reasonable necessity'-which the court reviews with great deference to the agency.” (See also Jones, supra, 2 Cal.5th at pp. 396-397.) It was rational for the Board to include an auction component in the regulations, given the broad statutory delegation. We may not “superimpose [our] own policy judgment upon the agency in the absence of an arbitrary and capricious decision.” (Pitts v. Perluss (1962) 58 Cal.2d 824, 832; see Western States Petroleum Assn. v. State Dept. of Health Services (2002) 99 Cal.App.4th 999, 1007 [“the existence and weight to be accorded the facts and policy considerations that support the regulation” fall within agency's bailiwick]; see also Jones at p. 390.)[8]

         Plaintiffs launch a number of challenges to the conclusion that the legislature gave the Board sufficient discretion to adopt an auction component if it adopted a cap-and-trade program. The trial court summarized plaintiffs' arguments as follows:

         “Petitioners do not dispute that the cap-and-trade program requires emission allowances to be distributed in some manner. However, Petitioners argue that the text, structure, and legislative history of AB 32 show that the Legislature did not intend to authorize the sale of allowances. According to Petitioners, [the Board's] discretion is limited to choosing a method for distributing the allowances free of charge (or at least in a ‘revenue-neutral' manner). Petitioners raise the following arguments in support of their position: (1) the statute does not explicitly authorize [the Board] to auction allowances; (2) the legislative history includes no discussion of the term ‘auction;' (3) at the time of AB 32's enactment, most cap-and-trade program allowances were distributed for free; (4) construing AB 32 as authorizing the sale of allowances renders the administrative fee provision of the Act ([§] 38597) surplusage; (5) the chief sponsor of AB 32 (ostensibly) assured his colleagues on the floor of the Legislature, just before the vote, that the only funds to be generated under AB 32 were those generated by the administrative fee provision; (6) there is no guidance in AB 32 as to how to spend any auction revenues; and (7) the Legislature failed to enact a bill in 2009 that would have expressly authorized [the Board] to auction the allowances.”

         Because the briefing on appeal largely replicates these seven points, for convenience we will discuss them in the order assigned by the trial court. We then address an eighth point briefed on appeal, regarding the doctrine of constitutional doubt.

         1. No Explicit Authorization

         Contrary to the view posited by plaintiffs, there was no requirement that the Legislature explicitly authorize or even discuss emissions auctions in the Act in order for the Board to adopt regulations calling for such auctions.

         The Act is a mere 12 pages long (see Stats. 2006, ch. 488, § 1, pp. 3419-3431), and it broadly sets forth its goals. The Legislature obviously intended the program to be a creature of the Board, either in deference to the Board's expertise, or out of pragmatic necessity to secure passage, or for both reasons. From the generality of the Act, it is clear that the Board “ ‘has been granted considerable discretion to determine what is necessary to accomplish' ” (Residents, supra, 206 Cal.App.4th at p. 1495; see Jones, supra, 2 Cal.5th at pp. 390-391) the Legislature's goals. As another court observed, the breadth of legislative delegation was generous in this case:

         “The Board is directed to ‘consult with all state agencies with jurisdiction over sources of greenhouse gases' and to receive public input, to ‘consider all relevant information pertaining to greenhouse gas emissions reduction programs' in other jurisdictions, to ‘evaluate the total potential costs and total potential economic and noneconomic benefits of the plan... to California's economy, environment, and public health, using the best available economic models, emission estimation techniques, and other scientific methods' and, ultimately, to ‘identify and make recommendations on direct emission reduction measures, alternative compliance mechanism[s], market-based compliance mechanisms, and potential monetary and nonmonetary incentives for sources and categories of sources that the [Board] finds are necessary and desirable to facilitate the achievement of the maximum feasible and cost-effective reductions of greenhouse gas emissions by 2020.' These directives are exceptionally broad and open-ended. They leave virtually all decisions to the discretion of the Board, from determining the nature of a scoping plan, to determining the best available research techniques, to determining incentives for emissions reduction that are ‘necessary and desirable, ' to weighing economic, environmental and public health benefits, to determining what is most ‘feasible and cost-effective.' ” (Residents, supra, 206 Cal.App.4th at p. 1495, citations omitted, first italics in orig., second italics added; see Our Children's Earth, supra, 234 Cal.App.4th at p. 888.)

         In particular, “In adopting regulations..., to the extent feasible and in furtherance of achieving the statewide greenhouse gas emissions limit, the state board shall do all of the following: [¶] (1) Design the regulations, including distribution of emissions allowances where appropriate, in a manner that is equitable, seeks to minimize costs and maximize the total benefits to California, and encourages early action to reduce greenhouse gas emissions.” (§ 38562, subd. (b), italics added.)[9]

         The statute allowing the Board to design regulations that include “distribution of emissions allowances” (§ 38562, subd. (b)) gave the Board great flexibility. Plaintiffs' assertions that this statute does not permit an auction system are unconvincing.[10]

         The petitions do not dispute that the Act permitted the Board to adopt a cap-and-trade system, as opposed to, for example, a more traditional regulatory enforcement system sometimes referred to as a “command-and-control” system. But once such a system was chosen, the Board had to decide who would capture the value of distributed allowances, the covered entities or the state. As the trial court explained, “Allowances can be allocated free of charge, sold by the regulating authority through an auction or direct sale, or allocated by some combination of these methods. If covered entities receive the allowances free of charge, they capture the value associated with the allowances. If allowances are sold or auctioned, the government captures the value created by the cap. Whatever the allocation, whoever receives the initial allocation of allowances will receive a ‘windfall' equal to the value created by the constraint.”[11] (Fn. omitted.)

         The Legislature presumably knew that if the Board chose a cap-and-trade system, some entity would capture the constraint value, but did not specify the recipient. As Burtraw points out, the idea of auctioning some or all cap-and-trade allowances long had been debated by scholars. (See McAllister, The Overallocation Problem in Cap-And-Trade: Moving toward Stringency (2009) 34 Colum. J. Envtl. L. 395, 441-442; Stavins, A Meaningful U.S. Cap-And-Trade System to Address Climate Change (2008) 32 Harv. Envtl. L. Rev. 293, 395; Ackerman & Stewart, Reforming Environmental Law (1985) 37 Stan. L. Rev. 1333, 1343.)

         Further, as the trial court observed, “Petitioners admit that at least two well-known cap-and-trade programs preceding the adoption of AB 32 [the federal 1990 Clean Air Act and the European Union's Emission Trading System] authorized allowances to be sold or auctioned. [Citation.] Similarly, the U.S. EPA's 2003 guide [Tools of the Trade: A Guide to Designing and Operating a Cap and Trade Program for Pollution Control] states that the first major step... is to decide whether allowances will be allocated at no cost or” auctioned. The Act requires the Board to “consider all relevant information pertaining to [GHG] emissions reduction programs in other states, localities, and nations, including the northeastern states of the United States, Canada, and the European Union.” (§ 38561, subd. (c).)[12] Tellingly, the trial court also found as follows:

         “In... March of 2006, five months before AB 32 was enacted, the State of California's Climate Action Team submitted a report to the Governor and the Legislature noting that in a ‘market-based program' for reducing GHG emissions, ‘[e]mission allowances can be auctioned (i.e., sold) or given away.' [Citations.] It is therefore reasonable to assume that the Legislature understood the phrase ‘distribution of emissions allowances' to potentially encompass both giving away allowances and selling them via an auction or direct sale. It follows that, having broadly delegated the choice of distribution methods to [the Board], if the Legislature had meant to exclude the sale of allowances, it would have said so.” (Italics added.)

         We agree. The Act itself references the Climate Action Team. (See § 38501, subd. (i).) The team's report--provided to the Legislature before the Act was passed--explains that “[w]hen allowances are given to entities covered by the cap, those entities receive something of value: the emission allowances. When the allowances are auctioned, the government collects a portion of the value of the allowances in the amounts paid in the auction.” It also explains a hybrid approach, where some allowances are sold and some are auctioned, the model ultimately adopted by the Board. Thus, the Legislature knew that an auction was a possible component of a cap-and-trade program. If the Legislature had wanted to direct who would receive the constraint value if the Board chose a cap-and-trade system, it was free to do so, but did not. Thus, it seems clear that the Legislature meant for the Board to decide whether to create a cap-and-trade system including an auction for some emissions allowances.[13]

         2. Lack of Discussion in the Legislative Record

         Plaintiffs assert that the power to create a program generating billions of dollars in revenue would not have been delegated to an agency without explicit discussion, and no such discussion appears in the legislative record. (See In re Christian S. (1994) 7 Cal.4th 768, 782 [“We are not persuaded the Legislature would have silently, or at best obscurely, decided so important and controversial a public policy matter”]; Ailanto Properties, Inc. v. City of Half Moon Bay (2006) 142 Cal.App.4th 572, 589 [“The Legislature ‘does not, one might say, hide elephants in mouseholes' ”]; FDA v. Brown & Williamson Tobacco Corp. (2000) 529 U.S. 120, 160 [146 L.Ed.2d 121, 151] [“we are confident that Congress could not have intended to delegate a decision of such economic and political significance to an agency in so cryptic a fashion”].) Plaintiffs' point is that the statutory authority to create a “distribution” system could not encompass a multi-billion dollar administratively created program. NAM adds that the dearth of explicit discussion “is particularly stark because” of the Legislature's unique role in collecting and distributing state revenue. (See In re Attorney Discipline System (1998) 19 Cal.4th 582, 595 [“ ‘the power to collect and appropriate the revenue of the State is one peculiarly within the discretion of the Legislature' ”].)

         We disagree that the lack of discussion of an auction means the Legislature precludedits adoption by the Board. First, “[t]he depth of the debate is the domain of the Legislature.” (In re Christian S., supra, 7 Cal.4th at p. 782.) Legislative silence on an issue, or failure to anticipate all ramifications of a bill, does not change the scope of the statutory language. As stated in the context of interpretation of a purportedly ambiguous statute, “ ‘ “[T]hat a statute can be applied in situations not expressly anticipated... does not demonstrate ambiguity. It demonstrates breadth.” ' ” (Estate of Earley (2009) 173 Cal.App.4th 369, 376.) As we have discussed (see Part I.B.1., ante), the Act is worded broadly enough so as to encompass an administratively created auction, which was foreseeable based on material available to the Legislature.

         Second, the Act reflects the Legislature's desire for a massive, historic, and immediate change in behavior regarding GHG emissions. The Legislature could have spent many years considering, analyzing, and dictating the best way to achieve its ambitious goals. But that delay itself would have impeded the goals. Instead, the Legislature chose to pass a flexible bill, with the understanding that the Board, as the agency with expertise in air quality matters, was better equipped to study the problem and design a program to effectuate those goals. (See Jones, supra, 2 Cal.5th at p. 390.) Viewed in this light, the lack of explicit legislative discussion of one sub-component of one possible emissions reduction system (that is, adoption of a cap-and-trade program rather than a command-and-control program) is of no moment.

         3. Structure of Other Cap-and-Trade Programs

         Plaintiffs contend that other cap-and-trade programs distribute all allowances for free, or are revenue-neutral, or arose with explicit legislative authorization for auctions. We accept these asserted facts as true.

         But the fact that other methods of distribution were possible is not compelling, or even noteworthy. As the trial court pointed out, our Legislature did not mandate a cap-and-trade program, therefore it had no need to detail the minutiae of such a program. While the Legislature knew how other jurisdictions tackled GHG emissions problems, it was not compelled to follow in lock-step. Neither was the Board.

         4. Administrative Fee Provision

         Although the parties discuss at length an administrative fee provision in the Act, we find that provision irrelevant to the legislative delegation question.

         The provision, section 38597, allows the Board to adopt “a schedule of fees to be paid by the sources of [GHG] emissions regulated pursuant to this division, consistent with Section 57001. The revenues collected... shall be deposited into the Air Pollution Control Fund and are available upon appropriation, by the Legislature, for purposes of carrying out this division.” (Stats. 2006, ch. 488, § 1, p. 3430.) The cross-referenced statute, which applies to many fees, encourages “efficient and cost-effective operation of the programs” requiring such fees, and requires “that the amount of each fee is not more than is reasonably necessary to fund the efficient operation of the activities or programs for which the fee is assessed.” (§ 57001, subd. (a).)

         Plaintiffs contend that the existence of this fee provision precluded the Board from generating any other revenue under the Act by any other mechanism. We disagree.

         Section 38597 is a pedestrian measure to pay for the costs of implementing the Act. (See Cal. Code Regs., tit. 17, §§ 95200-95207.) This fee has no bearing on the delegation question. As the trial court put it: “It only proves the Legislature intended to ensure [the Board] could collect fees to pay for the administrative costs directly incurred in carrying out the provisions of [the Act].”

         We do not see this as an appropriate usage of the adage expressio unius est exclusio alterius, as contended by some plaintiffs (see People ex rel. Cranston v. Bonelli (1971) 15 Cal.App.3d 129, 135 [“legislative enumeration of certain exceptions by necessary implication excludes all other exceptions”]), because the administrative fee does not speak in any way to the legislative delegation question, and because it is not an exception to a general statutory rule.

         5. Floor Debate and Related Statements

         Plaintiffs attempt to bolster their contention regarding the administrative fee provision just discussed by referencing floor statements made by the author of the Act, former Assembly Speaker Fabian Nuñez.[14] Speaker Nuñez assured legislators who expressed qualms about “an open checkbook” for the Board, and “an SUV tax” and the like, that “this bill” authorized only administrative fees to cover program costs. Plaintiffs read much into the Speaker's usage of the words “this bill” and construe it to mean that the Speaker was promising that no part of the Act would have any other fiscal impact regardless of how it was implemented. But the Speaker was referring to a market system in carbon credits before he made his assurance about program costs. Further--as explained in a February 9, 2012 Legislative Analyst report contained in the joint appendix--a carbon tax would not function like a cap-and-trade program with an auction component, and this report outlined alternatives the Legislature could choose if it disagreed with the Board's rulemaking decisions.[15] The Legislature did not disagree.

         The enrolled bill report prepared by the Board states: “Fee Authority. AB 32 grants [the Board] the authority to adopt a schedule of fees to be paid by regulated GHG emission sources for program administration. Republicans feel that the fee authority language provides [the Board] with carte blanche authority to collect fees on anything including imposing a tax on sport utility vehicles (SUV). To clear confusion, Speaker Nuñez added a letter to the file to clarify that the fee is limited to [the Board's] direct implementation costs only.” The referenced letter by Speaker Nuñez referred only to the administrative fee provision, section 38597.

         A later portion of the enrolled bill report, discussing expected fiscal impact, states in part: “While [the Board] has the authority to adopt a schedule of fees to be paid by regulated GHG emitters, two matters need to be resolved before this authority can be exercised. First, the Governor made a policy commitment not to impose additional costs on industry beyond their own costs of compliance. Second, collection mechanisms need to be created (i.e. through mandatory reporting regulations which [come] in 2008). Similarly, regulatory development activity needs to get off the ground before the universe of regulated facilities and the appropriate schedule of fees can be determined.” But when this passage was drafted, it was not known whether or not the Board would create a cap-and-trade program at all, therefore the omission to discuss the then-hypothetical impact of auctioning allowances is understandable. Nor does the Governor's purported policy commitment change the Act.

         CalChamber refers to the Governor's proposed signing statement, prepared by the Board. It provides in part: “I want to join the Speaker in assuring that any fees that may be collected from sources of global warming emissions will only be used to support the essential and direct program costs associated with the bill.” This, too, appears to be reference to the administrative fee provision.[16]

         None of these statements individually, nor all of them in combination, speak to the Board's ability to adopt an auction component within its cap-and-trade program.

         Further, as we explain in Part II, post, the auction sales are not “fees, ” they are the purchase price of a valuable commodity, an emissions allowance, therefore discussion of limiting fees in the legislative record is unpersuasive.

         6. Lack of Guidance for Disposing of Auction Proceeds

         In 2012 the Legislature passed four bills that specified how the auction proceeds would be used to effectuate the Act (see fn. 5, ante). In echo of their earlier argument, plaintiffs observe that the Act itself did not address the disposition of auction revenue. But there was no need for the Act to address the disposition of auction proceeds, because it was then unknown whether the Board would create a cap-and-trade program, rather than what the record calls a “command-and-control” program, that would have mandated emissions reductions by regulatory order. (See Alliance of Small Emitters/Metals Industry v. South Coast Air Quality Management Dist. (1997) 60 Cal.App.4th 55, 57-59 & fn. 1 [describing an early “command and control” program converted to a market-based cap-and-trade program, and making reference to the theoretical use of an auction system, although that program did not use an auction].)[17]

         As we have said, that a bill has unknown or unanticipated consequences does not mean those consequences, when manifested, must be deemed to conflict with or exceed the scope of the legislation. (See Estate of Earley, supra, 173 Cal.App.4th at p. 376.)

         7. Unenacted 2009 Bill

         Morning Star points to the failure of Senate Bill No. 31, which would have explicitly authorized auctions, as evidence of legislative intent. (See Sen. Bill No. 31 (2009-2010 Reg. Sess.) § 2, as amended Jan. 25, 2010.) We have explained that “[t]he unpassed bills of later legislative sessions evoke conflicting inferences. Some legislators might propose them to replace an existing prohibition; others to clarify an existing permission. A third group of legislators might oppose them to preserve an existing prohibition, and a fourth because there was no need to clarify an existing permission. The light shed by such unadopted proposals is too dim to pierce statutory obscurities. As evidences of legislative intent they have little value.” (Sacramento Newspaper Guild v. Sacramento Board of Supervisors (1968) 263 Cal.App.2d 41, 58; cited with approval by Dyna-Med, Inc. v. Fair Employment & Housing Com. (1987) 43 Cal.3d 1379, 1396.)

         The limited circumstances under which an unenacted bill is relevant, such as where the Legislature has studied an issue or court ruling and thereafter declines to change the law or adopt a new proposal (see, e.g., Western Land Office, Inc. v. Cervantes (1985) 175 Cal.App.3d 724, 741; Seibert v. Sears, Roebuck & Co. (1975) 45 Cal.App.3d 1, 17-19), or passes a bill without a specific provision contained in a prior version of the bill (see, e.g., People v. Hunt (1999) 74 Cal.App.4th 939, 947-948), are not present here. Instead, as in the general run of cases, it may be said only that “the failure of the Legislature to enact the proposed bill, in one form or another, is some evidence that the Legislature does not consider it necessary or proper or expedient to enact such legislation.” (Sterling v. City of Oakland (1962) 208 Cal.App.2d 1, 6.)

         Thus, we find that the proposed but unenacted 2009 bill does not assist plaintiffs.[18]

         8. Constitutional Doubt

         On appeal, plaintiffs raise an eighth point, namely, the “constitutional doubt” canon of construction. They argue that because there are doubts about whether the auction is constitutional--either because of the unlawful delegation claim or because of the tax argument (see Part II, post)--we should interpret the Act to preclude the auction. Our Supreme Court has described the application of the constitutional doubt canon as follows:

         “ ‘ “If a statute is susceptible of two constructions, one of which will render it constitutional and the other unconstitutional in whole or in part, or raise serious and doubtful constitutional questions, the court will adopt the construction which, without doing violence to the reasonable meaning of the language used, will render it valid in its entirety, or free from doubt as to its constitutionality, even though the other construction is equally reasonable. [Citations.] The basis of this rule is the presumption that the Legislature intended, not to violate the Constitution, but to enact a valid statute within the scope of its constitutional powers.” ' ” (Harrott v. County of Kings (2001) 25 Cal.4th 1138, 1153.)

         But the canon has a narrow application, as we have recently reemphasized:

         “The constitutional doubt canon applies if and only if the statute is ‘realistically susceptible of two interpretations and the interpretation to be rejected must raise grave and doubtful constitutional questions.' [Citation.] It ‘is a tool for choosing between competing plausible interpretations of a statutory text, resting on the reasonable presumption that Congress [or, mutatis mutandis, the Legislature] did not intend the alternative which raises serious constitutional doubts.' ” (Siskiyou Farm Bureau Federation v. Department of Fish & Wildlife (2015) 237 Cal.App.4th 411, 445 (Siskiyou).)

         Under this standard, we find no basis to apply the interpretive canon herein, either as to the delegation question or the Proposition 13 question (see Part II, post). We have not been offered alternative, plausible, statutory interpretations from which to choose.[19]

         9. Conclusion as to Legislative Delegation

         For all of the above reasons, we agree with the trial court that plaintiffs have not carried their burden (see California School Bds., supra, 191 Cal.App.4th at p. 544) to show the auction portion of the regulations exceeds the scope of legislative delegation.

         C. The 2012 Legislation

         The four bills passed in 2012 (see fn. 5, ante) show that whatever the collective intention of the 2006 Legislature, the 2012 Legislature affirmatively ratified the Board's auction system.

         1. Legislative Ratification

         We have held that “whatever the Legislature has power to authorize to be done it has power to ratify and confirm when done irregularly or not in the mode previously described.” (Rock Creek W. Dist. v. County of Calaveras (1955) 133 Cal.App.2d 141, 146; see Southern Cal. Gas Co. v. Public Utilities Com. (1985) 38 Cal.3d 64, 67 [regulations authorized by subsequent legislation; “even if the Legislature cannot ‘confirm' that such authority always existed... it may furnish the missing authority nunc pro tunc”].) Contrary to CalChamber's view, applying the ratification doctrine is not the same as using the acts of a later Legislature to illuminate a prior Legislature's intent. (See Peralta Community College Dist. v. Fair Employment & Housing Com. (1990) 52 Cal.3d 40, 52 [“The declaration of a later Legislature is of little weight in determining the relevant intent of the Legislature that enacted the law”].) It instead treats later acts as curative of purported defects in prior acts.[20]

         Thus, even were we to find that the Act did not authorize the regulations adopted by the Board, the Legislature surely ratified them in 2012 by directing how the money is spent. (See Professional Engineers in California Government v. Schwarzenegger (2010) 50 Cal.4th 989, 1000 [although the Governor, at the time he acted, lacked legislative authority to furlough state employees, “the Legislature's 2009 enactment of the revisions to the 2008 Budget Act operated to ratify the use of the two-day-a-month furlough program”]; see, also e.g., Morning Star, supra, 201 Cal.App.4th at p. 748 [“there is strong evidence the Legislature knows full well” about a regulatory interpretation “and the Legislature is fine with that interpretation. This is strong evidence” the regulation does not conflict with statutory law].) The legislative will to ratify the Board's auction system by passage of the 2012 statutes is clear, and we need not discuss it further.

         2. Proposition 26

         Morning Star--but not the other plaintiffs--contends that any reliance on the 2012 statutes to ratify the auction component of the regulations would be invalid under Proposition 26. We disagree.

         Proposition 26 was passed by the People, in the exercise of their reserved initiative powers, in response to the perceived efforts of state and local governments to bypass the spirit of Proposition 13 and related measures, in particular by couching exactions as regulatory fees exempt from a supermajority vote. (See Schmeer v. County of Los Angeles (2013) 213 Cal.App.4th 1310, 1317-1326 (Schmeer); Voter Information Guide, Gen. Elect. (Nov. 2, 2010) text of proposed laws, Prop. 26, § 1, p. 114.)

         In part, Proposition 26 amended our constitution so that “Any change in state statute which results in any taxpayer paying a higher tax” is subject to the requirement that the change be passed by a two-thirds vote of each legislative house. (Cal. Const., art. XIII A, § 3, subd. (a).) Proposition 26 defines a tax as “any levy, charge, or exaction of any kind imposed by the State” with exceptions. (Cal. Const., art. XIII A, § 3, subd. (b).) In defending against a Proposition 26 challenge, “The State bears the burden of proving by a preponderance of the evidence that a levy, charge or other exaction is not a tax, that the amount is no more than necessary to cover the reasonable costs of the governmental activity, and that the manner in which those costs are allocated to a payor bear a fair or reasonable relationship to the payor's burdens on, or benefits received from, the governmental activity.” (Cal. Const., art. XIII A, § 3, subd. (d).)

         However, Proposition 26, passed in 2010, is not generally retrospective in operation. (See Brooktrails Township Community Services Dist. v. Board of Supervisors of Mendocino County (2013) 218 Cal.App.4th 195, 205-207.) Thus, it cannot affect the Act itself, passed in 2006, and no party--not even Morning Star--contends otherwise.

         The arguable relevance is the language broadening the definition of a tax and changing the burden of proof. Morning Star contends that Proposition 26 bars the use of the 2012 legislation to ratify the auction regulations, because the Board has not proven the auction charges are not taxes as defined by Proposition 26.

         But the 2012 legislation did not change the cost of allowances, whether purchased at auction or on the secondary market; it specified how the proceeds of auctions sales would be handled. Thus, no “state statute” was changed in any way that could possibly increase “any... charge... of any kind imposed by the State” as provided by Proposition 26. (See Western States Petroleum Assn. v. Board of Equalization (2013) 57 Cal.4th 401, 423-424 [regulation changing method of assessing certain property that resulted in a higher bill for some taxpayers was not a “state statute” within the meaning of Proposition 13]; Southern California Edison Co. v. Public Utilities Com. (2014) 227 Cal.App.4th 172, 198 [“Proposition 26 plainly defines a tax as a ‘change in state statute which results in... a higher tax' [citation], not [an agency's] decision” that resulted in a fee].)

         Accordingly, Proposition 26 interposes no bar to using the 2012 statutes to evince a legislative ratification of the auction regulations adopted by the Board.[21] We thus must turn to the question of whether Proposition 13 poses an obstacle to the auction component of the Board's cap-and-trade program.

         II

         Whether the Auctions Sales Violate Proposition 13

         The second question presented to the trial court by the plaintiffs was whether the auction system is a tax subject to Proposition 13. The trial court found this to be a close question in part because of the novelty of “the charges at issue, ” but ruled the system was more like a regulatory fee than a tax, applying principles derived from ...


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