California's Cap and Trade Auction Proceeds: Taxes, Fees, or Something Else? - May 2012 - Berkeley Law
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
California’s Cap‐and‐Trade
Auction Proceeds:
Taxes, Fees, or Something Else?
May 2012
Deborah Lambe and Daniel FarberAbout Berkeley Law’s Center for Law, Energy & the Environment This report is a product of UC Berkeley School of Law’s Center for Law, Energy & the Environment (CLEE). The Center develops policy solutions to the most pressing environmental and energy issues at the state, local, and national levels. Authors Daniel Farber is the Sho Sato Professor of Law at Berkeley Law; Faculty Co‐Director of the Center for Law, Energy & the Environment; and Chair of the Energy and Resources Group at the University of California, Berkeley. Deborah Lambe is a Senior Policy Associate at the Center for Law, Energy & the Environment at Berkeley Law. Acknowledgements The authors are grateful to Next 10 for its generous sponsorship of this paper. The authors are also grateful to numerous reviewers for invaluable support and advice.
Table of Contents
I. Introduction and Summary……………………………………………………………………………...……….……1
II. Background: Legal Authorities and Recent Reports………………………………………..….………….3
A. AB 32: California’s Global Warming Solutions Act…………………………………………….…………….3
B. Proposition 13 (California Constitution Article XIII A) …………………..……………………….………. 4
C. Proposition 26………………………………………………………….…………………………………………….……….5
D. Sinclair Paint in Brief……………………………………………………………………………………………………….7
E. Recent Reports on Spending the Auction Proceeds…………………………………………………………7
III. Legal Analysis…………………………………………………………………………..……….……………………………9
A. AB 32 Will Likely Be Subject to Prop 13, not Prop 26 .......................................................... 9
B. Prop 13 and the Auction Proceeds ...................................................................................... 9
1. The “Purpose of Increasing Revenue” Requirement.......................................................... 9
2. Assessments, Development Fees, and Regulatory Fees……………………………….….……………13
3. A New Exception? ............................................................................................................. 15
IV. The Proposition 26 Regime…………………………………………………………….…………………………….17
V. General Restrictions on State Spending……………………………………………………………………….19
VI. Analysis of Spending Options Under Different Legal Schemes……………………..……………..20
VII. Conclusion…………………………………………………………………………………………………………….….…..24
Appendix A: Spending Proposals Risk Chart…………………………………………………...…………….…….….25
Appendix B: Excerpts from AB 32…………………………………………………………………………………..….……28
Endnotes…………………………………………………………………………………………………………………………….…..29Berkeley Law – Center for Law, Energy & the Environment
most critical limit on the state. In our view,
there are three credible arguments that
I. Introduction and Summary auctions are not a “tax” under Proposition 13:
(1) the primary purpose of CARB and AB 32 is
In 2006, California enacted the Global Warming not fiscal thus Proposition 13 does not apply, (2)
Solutions Act, known as AB 32 (Pavley).1 Under the allowances constitute a governmental
that legislation, the state must reduce privilege like a development fee rather than a
greenhouse gas emissions to their 1990 level by “tax,” and (3) the proceeds are spent in such a
the year 2020.2 AB 32 provided the California fashion so as to render them a valid “regulatory
Air Resources Board (CARB) with the authority fee” under the Sinclair Paint regime.8 If AB 32’s
to use a market‐based compliance mechanism cap‐and‐trade program is challenged in court as
as part of its efforts to reduce greenhouse gas imposing an illegal tax, the legal questions will
emissions.3 As a result, CARB developed a cap‐ be ones of first impression, and a court’s
and‐trade program, under which allowances to behavior is difficult if not impossible to predict.
emit greenhouse gases will be sold at auction.4 As a result, the most conservative approach
This paper examines the legal viability of a would be to use the auction proceeds
range of potential uses of the auction proceeds consistent with the Sinclair Paint regime
generated by AB 32’s market‐based mechanism. because that would maximize the number of
The paper first considers the different legal different arguments in support of the
frameworks under which courts may consider proposition that the auction proceeds are not a
whether the auction proceeds are a regulatory “tax” under Proposition 13.
fee, some other fee, an unlawful tax or
something else. Then, the paper looks at 18 Spending Proposals. Under Sinclair Paint, the
different spending proposals, and considers least risky spending proposals are those that
potential legal risks associated with the would advance AB 32’s goals, and in particular,
spending proposals under the different legal AB 32’s primary goal: the reduction and
frameworks. mitigation of greenhouse gas (GHG) emissions.
Somewhat more risky (but still relatively low
Legal Framework. California’s Legislative risk) are costly spending proposals for projects
Analyst recently concluded, based on a that advance the goals of AB 32, but also
Legislative Counsel opinion, that for the auction advance other, unrelated goals. Although
proceeds to be considered a “regulatory fee” courts generally do not require that the most
(and not an invalid “tax”) the proceeds would cost‐effective mitigation measures be adopted,
likely need to be spent on programs that reduce if the cost‐effectiveness of a mitigation measure
or mitigate greenhouse gas emissions.5 UCLA is very low, there is a possibility that a court
recently released a report agreeing that this may conclude that the auction proceeds are
would be the least risky approach to revenue being used in lieu of general funds. The timing
expenditures.6 In general, we agree with other of the emissions reductions is likely to be
observers about the rankings of key activities in treated similarly. The emissions cap remains in
terms of their level of risk. However, in terms place after 2020, so spending proposals that
of the absolute level of risk, we identify some reduce emissions after that date would further
significant arguments for upholding even the the purpose of AB 32. At some point, however,
options with a higher level of risk, such as use of if the emission reductions are projected to
the proceeds in the general fund. We view occur far into the future, a court may conclude
Proposition 137 (as approved in 1978, not as that the auction proceeds are being used in lieu
amended by Proposition 26 in 2010) as the of general funds. Spending proposals that fund
California’s Cap‐and‐Trade Auction Proceeds: Taxes, Fees, or Something Else? Page 1Berkeley Law – Center for Law, Energy & the Environment projects that could reduce General Fund expenditures would be somewhat more risky, particularly if the record suggests that the primary purpose of the expenditures was to reduce such expenditures rather than to reduce GHG emissions. Under Sinclair Paint, spending proposals that provide a rebate to taxpayers would not advance the purpose of AB 32, and thus would entail substantial risk. Use of the auction proceeds for rebates would support an argument that AB 32 was not enacted “for the purpose of raising revenues,” however, which would support a claim that Proposition 13 does not apply to the auction revenues. Since this is a novel argument, we conclude that rebates would be associated with a high level of risk. California’s Cap‐and‐Trade Auction Proceeds: Taxes, Fees, or Something Else? Page 2
Berkeley Law – Center for Law, Energy & the Environment
II. Background: Legal proceeds for several reasons, including the fact
that this section is explicitly limited to only
Authorities and Recent Reports those revenues “collected pursuant to this
Section.” Thus, this section of the Health &
There are a number of different legal Safety Code is unlikely to be found to apply to
authorities that may prove important to a the auction proceeds, which are authorized by a
court’s review of the AB 32 auction proceeds: different section.11
the statute itself, Proposition 13, approved by
the voters in 1978, and Proposition 26, Other Constraints Other sections of AB 32
approved by the voters in 2010.9 There are also describe the goals and aims of the program, and
two recent reports on this subject, one direct CARB to structure the program to achieve
prepared by UCLA, the second by the Legislative those goals. In describing the overall legislative
Analyst. Each of these is briefly described intent, AB 32 directs CARB to design emissions
below. reductions measures, “in a manner that
minimizes costs and maximizes benefits for
A. AB 32: California’s Global California’s economy, improves and modernizes
Warming Solutions Act California’s energy infrastructure and maintains
electric system reliability, maximizes additional
The language of AB 32 itself imposes constraints environmental and economic co‐benefits for
on spending auction revenues, both directly, by California, and complements the state’s efforts
requiring certain spending, and indirectly, by to improve air quality.12 Another section
directing CARB to achieve certain aims requires CARB to ensure that programs under
its jurisdiction, “where applicable and to the
Direct Constraints. AB 32 includes a section extent feasible, direct public and private
that allows CARB to adopt “a schedule of fees,” investment toward the most disadvantaged
and requires that the “revenues collected communities in California and provide an
pursuant to this section” be spent “for the opportunity for small businesses, schools,
purposes of carrying out this division.” The affordable housing associations, and other
relevant section, California Health & Safety community institutions to participate in and
Code §38597 (unless otherwise indicated, all benefit from statewide efforts to reduce
references are to the California Health and greenhouse gas emissions.”13
Safety Code) states in full:
Other sections specifically address the market‐
The state board may adopt by regulation, based compliance mechanism. CARB is directed
after a public workshop, a schedule of fees to, “[d]esign the [market‐based] regulations . . .
to be paid by the sources of greenhouse gas in a manner that is equitable, seeks to minimize
emissions regulated pursuant to this costs and maximize the total benefits to
division, consistent with Section 57001. The California, and encourages early action to
revenues collected pursuant to this section, reduce greenhouse gas emissions. . . . [to]
shall be deposited into the Air Pollution [c]onsider overall societal benefits, including
Control Fund and are available upon reductions in other air pollutants, diversification
appropriation, by the Legislature, for the of energy sources, and other benefits to the
purposes of carrying out this division.10 economy, environment, and public health. . . .
[and to] [m]inimize leakage.”14 CARB is also
The UCLA report concludes that this section is directed to “[c]onsider. . . localized impacts in
unlikely to be found to apply to the auction communities that are already adversely
California’s Cap‐and‐Trade Auction Proceeds: Taxes, Fees, or Something Else? Page 3Berkeley Law – Center for Law, Energy & the Environment
impacted by air pollution,” to “[d]esign any taxes.” Finally, Sections 5 and 6 concerned the
market‐based compliance mechanism to Proposition’s effective date and severability,
prevent any increase in the emissions of toxic respectively. 17
air contaminants or criteria air pollutants,” and
to “[m]aximize additional environmental and The full text of Section 3 of Proposition 13, the
economic benefits for California, as provision relevant to the AB 32 auction
appropriate.”15 proceeds, states:
B. Proposition 13 (California From and after the effective date of this
Constitution Article XIII A) article, any changes in State taxes enacted
for the purpose of increasing revenues
In 1978, California voters approved Proposition collected pursuant thereto whether by
13, an initiative constitutional amendment that increased rates or changes in methods of
limited taxes. The California Supreme Court computation must be imposed by an Act
described the four major elements of passed by not less than two‐thirds of all
Proposition 13 as: members elected to each of the two houses
of the Legislature, except that no new ad
[A] real property tax rate limitation (§1), a valorem taxes on real property, or sales or
real property assessment limitation (§2), a transaction taxes on the sales of real
restriction on state taxes (§3), and a property may be imposed.18
restriction on local taxes (§4). . . . Since the
total real property tax is a function of both Section 4, which courts look to in interpreting
rate and assessment, section 1 and 2 unite Section 3, states in part:
to assure that both variables in the property
tax equation are subject to control. Cities, Counties and special districts, by a
Moreover, since any tax savings resulting two‐thirds vote of the qualified electors of
from the operation of sections 1 and 2 such district, may impose special taxes on
could be withdrawn or depleted by such district . . . .19
additional or increased state or local levies
of other than property taxes, sections 3 and Courts follow certain rule when interpreting
4 combine to place restrictions upon the ballot measures. When the language included
imposition of such taxes.”16 in a ballot measure is “uncertain,” “the ballot
summary and arguments and analysis
More specifically, Section 1 limited the property presented to the electorate . . . may be helpful
tax rate to one percent of the value of the in determining the probable meaning . . . .”20 In
property. Section 2 limited the rate at which the California Voters Pamphlet for the 1978
the value of the property could be increased or election, project proponents, project
decreased to no more than two percent per opponents, and the Legislative Analyst all focus
year. Section 3 required a two‐thirds vote of primarily on the property tax limitations rather
the legislature for “…any changes in State taxes than on the state and local government tax
enacted for the purpose of increasing revenues. limitations. The Legislative Analyst, however,
. . .” Section 4 authorized local governments to noted “[t]his initiative would require a two‐
impose “special taxes” provided they were thirds vote by the Legislature to increase state
approved “. . .by a two‐thirds vote of the taxes. . . .”21 All contributors to the California
qualified electors,” but does not include Voters Pamphlet were silent on the issue of
language about the “purpose” of the “special what constitutes a “tax” for purposes of Section
California’s Cap‐and‐Trade Auction Proceeds: Taxes, Fees, or Something Else? Page 4Berkeley Law – Center for Law, Energy & the Environment
3, although the Legislative Analyst described the state property, except charges governed by
“special taxes” authorized by Section 4 as Section 1655 of Article XI.
“unspecified.”22 (5) A fine, penalty, or other monetary charge
imposed by the judicial branch of government or
the State, as a result of a violation of law.
C. Proposition 26
(c) Any tax adopted after January 1, 2010, but
Proposition 26, approved by the voters in 2010, prior to the effective date of this act, that was
modified Proposition 13 in several important not adopted in compliance with the
ways. The modifications are shown below, with requirements of this section is void 12 months
deletions shown using strikeout, and additions after the effective date of this act unless the tax
shown in italics: is reenacted by the Legislature and signed into
law by the Governor in compliance with the
(a)From and after the effective date of this article, requirements of this section.
any changes in state taxes enacted for the purpose
of increasing revenues collected pursuant thereto (d) The State bears the burden of proving by a
Any change in state statute which results in any preponderance of the evidence that a levy,
taxpayer paying a higher tax whether by increased charge, or other exaction is not a tax, that the
rates or changes in methods of computation must be amount is no more than necessary to cover the
imposed by an Act act passed by not less than two‐ reasonable costs of the governmental activity,
thirds of all members elected to each of the two and that the manner in which those costs are
houses of the Legislature, except that no new ad allocated to a payor base bear a fair or
valorem taxes on real property, or sales or reasonable relationship to the payor’s burdens
transaction taxes on the sales of real property may on, or benefits received from, the governmental
be imposed. activity.
(b) As used in this section, “tax” means any levy, Proposition 26 modified Proposition 13 in at
charge, or exaction of any kind imposed by the State, least two important ways. First, Proposition 26
except the following: expanded the two‐thirds vote requirement
from “changes in state taxes enacted for the
(1) A charge imposed for a specific benefit conferred purpose of increasing revenues” to “[a]ny
or privilege granted directly to the payor that is
change in state statute which result in any
not provided to those not charged, and which
does not exceed the reasonable costs to the
taxpayer paying a higher tax.” Thus, under
State of conferring the benefit or granting the Proposition 26, the purpose of the statute is not
privilege to the payor. relevant, just the impact. The analysis by the
(2) A charge imposed for a specific government Legislative Analyst in the Voter Guide for this
service or product provided directly to the payor provision stated:
that is not provided to those not charged, and
which does not exceed the reasonable costs to Current Requirement. The State
the State of providing the service or product to Constitution currently specifies that laws
the payor. enacted ‘for the purpose of increasing
(3) A charge imposed for the reasonable regulatory
revenues’ must be approved by two‐thirds
costs to the State incident to issuing licenses and
permits, performing investigations, inspections,
of each house of the Legislature. Under
and audits, enforcing agricultural marketing current practice, a law that increases the
orders, and the administrative enforcement and amount of taxes charged to some taxpayers
adjudication thereof. but offers an equal (or larger) reduction in
(4) A charge imposed for entrance to or use of state taxes for other taxpayers has been viewed
property, for the purchase, rental, or lease of as not increasing revenue. As such, it can
California’s Cap‐and‐Trade Auction Proceeds: Taxes, Fees, or Something Else? Page 5Berkeley Law – Center for Law, Energy & the Environment
be approved by a majority vote of the permitting program are actually taxes and
Legislature. should be subject to the limitations
applicable to the imposition of taxes.24
New Approval Requirement. The measure
specifies that state laws that result in any The proponents’ ballot arguments in the Voter’s
taxpayer paying a higher tax must be Guide, however, do not appear to
approved by two‐thirds of each house of unambiguously support this interpretation. It
the Legislature.23 states:
This analysis acknowledges that Proposition 13 Proposition 26 . . . PROTECTS LEGITIMATE
was aimed at statutes enacted “for the purpose FEES SUCH AS THOSE TO CLEAN UP
of increasing revenues,” and not some other ENVIRONMENTAL OR OCEAN DAMAGE. . .
purpose. Proposition 26 removed the purpose .Prop. 26 protects legitimate fees and
requirement. WON’T ELIMINATE OR PHASE OUT ANY OF
CALIFORNIA’S ENVIRONMENTAL OR
Second, Proposition 26 expanded what is CONSUMER PROTECTION LAWS . . . .
considered to be a “tax.” The term “tax” was ‘Proposition 26 doesn’t change or
not defined in Proposition 13. In cases undermine a single law protecting our air,
addressing the question of whether a particular ocean, waterways or forests – it simply
levy was a tax, courts developed certain stops the runaway fees politicians pass to
categories of charges that were not considered fund ineffective programs.’ – Ryan
“taxes,” namely regulatory fees, special Broddrick, former Director, Department of
assessments, and development fees, each of Fish and Game.25
which is described in more detail below. There
was nothing in the language of Proposition 13 The Legislative Analyst’s summary in the Voter’s
that would have prevented a court from further Guide states,
expanding those categories or from recognizing
new categories of charges not considered Generally, the types of fees and charges
“taxes.” By contrast, Proposition 26 calls any that would become taxes under the
“levy, charge, or exaction of any kind” a tax measure are ones that government imposes
unless it falls within one of the five specified to address health, environmental, or other
exceptions quoted above. societal or economic concerns.26
The findings and declarations of Proposition 26 Taken together, the text of the proposition
suggest that it was aimed at the “regulatory appears to be in conflict with the supporters’
fee” exception to Proposition 13. The relevant ballot argument, resulting in some ambiguity
provision states, about the application of Proposition 26 to
environmental laws that existed at the time,
[T]he Legislature and local governments such as AB 32.
have disguised new taxes as ‘fees’ in order
to extract even more revenue from D. Sinclair Paint in Brief
California taxpayers . . . . Fees couched as
‘regulatory’ but which exceed the Of the three types of charges not considered to
reasonable costs of actual regulations or are be taxes, one – regulatory fees – is most often
simply imposed to raise revenue for a new viewed as applicable to AB 32’s auction
program and are not part of any licensing of proceeds. The leading case interpreting what
California’s Cap‐and‐Trade Auction Proceeds: Taxes, Fees, or Something Else? Page 6Berkeley Law – Center for Law, Energy & the Environment
charges are “regulatory fees” under Proposition not affect the state’s Proposition 98 funding
13 is Sinclair Paint. That case concerned the obligation for K‐12 school and community
Childhood Lead Poisoning Prevention Act, which college.
provided evaluation, screening and medical
follow‐up services to children at risk of lead As the auction revenues are deemed to be
poisoning. The program was entirely supported mitigation fee revenues, we are further
by fees imposed on former and current advised that their use would be subject to
manufacturers of lead or products containing the so‐called Sinclair nexus test, a concept
lead, based on the manufacturers “market‐ which is derived from the Sinclair Paint
share” responsibility for the contamination. court case referenced above. This test
The court found the program to constitute a requires that a clear nexus must exist
“regulatory fee” and not a tax because, (1) between an activity for which a mitigation
there was a causal connection between the fee is used and the adverse effects related
product regulated and its adverse effects, (2) to the activity on which that fee is levied.
the money raised was limited to the reasonable Therefore, in order for their use to be valid
cost of mitigating the adverse effects, and (3) as mitigation fees, revenues from the cap‐
there was a reasonable relationship between and‐trade auctions must be used only to
the allocation of costs among payors and the mitigate GHG emissions or the harms
burdens imposed by the payor. caused by GHG emissions.27
E. Recent Reports on Spending the The UCLA report describes the cap‐and‐trade
program and auctions as “novel” and as having
Auction Proceeds “characteristics that make them unlike either a
traditional tax or a traditional regulatory‐fee
Two recent reports have looked at potential
mechanism.” The report nonetheless concludes
uses of the cap‐and‐trade auction revenues.
that in order to minimize the legal
The first report, prepared by California’s
vulnerabilities of the cap‐and‐trade program, “.
Legislative Analyst’s Office (LAO), cites to an
. . the state should consider allocation decisions
opinion of the Legislative Counsel when
as if it may be required to justify those decisions
summarizing the applicable law. The LAO
under the Sinclair regime.”28 The Sinclair “test”
report describes the law addressing the use of
is described as having the following four
auction proceeds as follows:
components, the first three of which are not
affected by decisions about allocation:
Based on an opinion that we received from
Legislative Counsel, the revenues generated
The nexus requirement: there is a causal
from ARB’s cap‐and‐trade auctions would
connection or nexus between the
constitute “mitigation fee” revenues.
product regulated and its adverse
Because AB 32 was enacted by a majority
effects.
vote of the Legislature prior to the voter
The reasonable cost requirement: the
approval of Proposition 26 – and well
amount of money raised is limited to
before its specified retroactive date of
the “amounts necessary to carry out
January 1, 2010 – we are told that the
the regulation’s purpose.”
provisions of Proposition 26 would not
The fair allocation requirement: there is
apply. Also, because the proceeds from the
a “fair or reasonable” relationship
auctions are fee revenues and not the
between the allocation of costs among
proceeds of taxes, we are also advised that
the state’s receipt of these monies would
California’s Cap‐and‐Trade Auction Proceeds: Taxes, Fees, or Something Else? Page 7Berkeley Law – Center for Law, Energy & the Environment
payors and the benefits received or the
burdens imposed by the payor.
The no unrelated spending requirement:
the fees may not be used for “unrelated
revenue purposes.29
The second and fourth components are mirror
images of each other, as noted by UCLA. In
looking at the Sinclair test, combined with AB
32’s stated goals, the report sets forth four
criteria to judge “the relative risks of
expenditure proposals, with ‘yes’ answers
yielding less risk.” The four criteria are:
Will the project permanently, verifiably
reduce greenhouse gas emissions?
Will the project advance other explicit
AB 32 goals?
Has the state built a strong record
showing how the revenue will achieve
the purposes of AB 32?
Does the project avoid direct allocation
of money for revenue purposes
unrelated to AB 32?30
UCLA then applies its test to seven sample
spending proposals.
California’s Cap‐and‐Trade Auction Proceeds: Taxes, Fees, or Something Else? Page 8Berkeley Law – Center for Law, Energy & the Environment
instruments or allowances could be found to be
III. Legal Analysis development fees or special assessments, since
they are akin to those types of fees. Third, the
proceeds may be considered “regulatory fees” if
A. AB 32 Will Likely Be Subject to the auction proceeds are used to mitigate GHG
emissions or the harms caused by GHG emission
Prop 13, not Prop 26 consistent with the criteria set forth in Sinclair
Paint, the leading California Supreme Court case
Both the LAO and the UCLA reports concluded in this area.
that Proposition 26 is unlikely to apply to
revenues generated by AB 32’s market‐based 1. The “Purpose of Increasing
compliance mechanism. This is because AB 32, Revenue” Requirement
including the provision authorizing a market‐
based compliance mechanism, was enacted The provision of Proposition 13 relevant here,
prior to voter approval of Proposition26, and Section 3, applies only to fees “enacted for the
prior to Proposition26’s specified effective date purpose of increasing revenues.”
of January 1, 2010. In addition, as discussed Consequently, if the cap‐and‐trade auction
above, the description of Proposition 26 drafted program was enacted for some other purpose
by supporters and contained in the ballot (and there is evidence that it was) then the
package states that Proposition 26 will not auction proceeds should not be viewed as a tax.
apply to any existing environmental statutes. There are a number of reasons to believe that
Opponents of AB 32 may argue that the cap‐ the AB 32 market‐based mechanism was not
and‐trade regulations were adopted after the adopted for the purpose of raising revenues.
effective date of Proposition 26, thereby These reasons are discussed below, and include
making the cap‐and‐trade program subject to the language of the statute itself, CARB’s
Proposition 26. The requirements of purview and the AB 32 planning process, the
Proposition 26, however, are expressly limited fact that emitters can take steps to avoid
to changes in “state statute,” not changes in participating in the auctions, evidence that
state regulations. market‐based mechanisms have other benefits,
and the many benefits to auctioning allowances
B. Prop 13 and the Auction Proceeds rather than giving them away. Despite this
evidence, this is a novel argument and as a
Proposition 13 requires all taxes to be passed by result it is difficult to predict how it would fare
a two‐thirds majority of each of the two houses in court.
of the Legislative. Since AB 32 was not passed
by a two‐thirds vote of the Legislature, the cap‐ This section first briefly describes some of the
and‐trade program may be at risk if the auction many aspects that lead policy makers to prefer
proceeds are found to constitute a “tax.”31 We market‐based approaches to conventional
believe there are at least three plausible command‐and‐control approaches. Then, the
arguments that the auction revenues are not purpose of the AB 32’s cap‐and‐trade program
“taxes” subject to Proposition 13, each of which is reviewed in light of the statutory language.
is described in more detail below. First, unlike The purpose of CARB in approving the auctions
other fees, the cap‐and‐trade program was not is then discussed, followed by a discussion of
“enacted for the purpose of increasing how covered entities can take steps minimize or
revenues,” and is thus not subject to eliminate their participation in the auctions.
Proposition 13. Second, the compliance Finally, this section discusses why courts, in
California’s Cap‐and‐Trade Auction Proceeds: Taxes, Fees, or Something Else? Page 9Berkeley Law – Center for Law, Energy & the Environment
considering whether an exaction is a fee or a Even if market‐based mechanisms are the most
tax, have not typically focused on the “purpose efficient way to allocate allowances, if the
of increasing revenues” language. Consistent statute is not for the purpose of generating
with this view, the Sinclair Paint Court stated, “. revenues, why not just give the auction
. . if regulation is the primary purpose, the mere allowances away? There are a number of
fact that revenue is also obtained does not reasons why an auction is preferable to the free
make the imposition a tax.”32 distribution of allowances. An auction is the
most socially and economically efficient way to
Cap‐and‐Trade Compared to Conventional allocate allowances to the entities that value
Command‐and‐Control Measures them most highly because auctions are
administratively transparent and efficient, and
Market‐based mechanisms such as AB 32’s cap‐ result in allowances being allocated to those
and‐trade program are used principally because that value them most (the highest bidders).35
they achieve the desired emissions reduction These and more reasons for preferring auctions
goal at the lowest possible cost, not because are discussed very briefly below, and include
they may raise revenue. Under a cap‐and‐trade price discovery, transparency, the treatment of
program, the producers and consumers of new entrants, efficiency, and the avoidance of
energy choose for themselves the most cost‐ windfall profits.
effective mix of emissions reductions and
allowance purchases.33 Since emitters have the Price Discovery. Auctions create a clear price
best information about their business processes signal – one that does not exist if the
and practices, they are much better placed to compliance instruments are the subject of
make these decisions than are government private exchanges. For that reason, the price
regulators. If it is cheaper for a regulated entity signal sent by an auction provides information
to reduce emissions than it is to purchase that facilitates the smooth functioning of the
allowances, the regulated entity will likely market.36
reduce emissions. Indeed, regulated entities
could choose to switch fuels, increase energy Transparency. Auctions are transparent, and
efficiency, or implement other means of GHG there are two ways in which transparency is
reductions instead of participating in the cap‐ important. First, with an auction, the
and‐trade program. If the regulated entities assignment of allowance value is transparent.
choose not to do this, it is because it is cheaper By contrast, giving away allocations can obscure
for them to meet the pollution control the true recipients of the value, and the
requirements using the allowances. The ability magnitude of the value being distributed.37
to trade under AB 32’s cap‐and‐trade program Second, this transparency helps expose
further enhances the ability of emitters to take hoarding behavior. Hoarding occurs when an
advantage of the least costly means of meeting entity obtains compliance instruments that it
their compliance requirements.34 Thus the cost does not need for its own emissions. There are
of compliance is less for a market‐based a number of reasons why entities may hoard
approach than with a command‐and‐control allowance, among them speculation, market
approach, which is the reason market‐based manipulation (the purchasing of allowances to
approaches are used. raise their price, and then selling them), and
raising rivals’ costs.38 Exposure through the use
The Reasons Allowances are Auctioned of an auction helps minimize this behavior.
California’s Cap‐and‐Trade Auction Proceeds: Taxes, Fees, or Something Else? Page 10Berkeley Law – Center for Law, Energy & the Environment
Simple and Fair Treatment of New Entrants. that pertains to the market‐based mechanism is
Market mechanisms that rely in free allowances silent on the issue of revenues. Except for the
need to include in the allocation scheme a provision of AB 32 that imposes fees to fund
process to address sources entering and exiting implementation of the program, revenues are
the market.39 Allocation formulas involve not discussed nor mandated by the statute.
controversial issues relating to equity between The statute does not require the State Board to
emitters and to grandfathering. The use of an include a market‐based approach, stating that
auction avoids these issues, and allows new the state board “may include. . . the use of
emitters to face the same cost as existing market‐based compliance mechanisms. . . .”45 If
competitors. Legislators intended to use an auction to raise
revenues, AB 32 would likely have required
Most Efficient Method of Allocation. An auction market‐based mechanisms, and would have
is the method that best allocates allowances to included a requirement that emission
those who value them most. There are several allowances be sold or auctioned. Instead, the
reasons for this. First, by relying on businesses market‐based mechanism is optional, and there
to determine for themselves the worth of the is no requirement that the allowances be sold
allowances, auctions “. . . extract and use or used to generate revenues. Indeed, the plan
information unavailable to the government.”40 adopted by CARB initially allocates a majority of
Second, if allowances are distributed freely, the allowances free of cost to emitters (e.g.,
there is no guarantee a market will efficiently investor‐owned utilities are initially provided
reallocate them because of friction, and resale allowances at no charge).46 Throughout AB 32
does not resolve all inefficiencies.41 Auctions there is language about the purpose of the
reduce transaction costs because rather than statute, but there is no language suggesting the
buyers and sellers trying to find one other, they purpose of a market‐based compliance
can buy and sell allowances on a centralized mechanism is to raise revenues. As the
market, which reduces transaction costs.42 California Supreme Court has stated, “if
regulation is the primary purpose, the mere fact
Avoidance of Windfall Profits. The free that revenue is also obtained does not make the
allocation of compliance instruments would imposition a tax.”47
result in windfall profits for existing regulated
entities, at the expense of consumers and new The only language in the section authorizing
entrants.43 Auctions treat new entrants fairly market‐based compliance mechanisms that
since they compete on the same playing field as could be said to touch on anything even
older firms, which is not the case if allowances remotely related to this topic requires the State
are given away. When allowances are given Board, in designing a market‐based program, to
away, existing companies, and inefficient “[m]aximize additional environmental and
companies (those who have not taken action to economic benefits for California, as
reduce emissions) are rewarded, while new appropriate.”48 In order to read this provision
companies, and companies that took early as a requirement that revenues be generated,
action to reduce emissions are penalized.44 the term “maximize economic benefits for
California” would need to be equated with
Statutory Language and the Design of the “raising revenues.” It would strain the plain
Program. Both the statutory language and the language of the statute to read this provision as
design of the cap‐and‐trade program suggest calling for revenues instead of calling for the
that the AB 32 was not enacted for the purpose State Board to consider economic concerns,
of increasing revenues. The portion of AB 32 such as leakage or the impact of regulations on
California’s Cap‐and‐Trade Auction Proceeds: Taxes, Fees, or Something Else? Page 11Berkeley Law – Center for Law, Energy & the Environment
jobs, in the event a market‐based mechanism is the fee at issue in Sinclair Paint was imposed on
used. The fact that such considerations need manufacturers “formerly and/or presently
only be made, “as appropriate” further engaged in the stream of commerce of lead or
supports this point. products containing lead” and was based on the
manufacturer’s “past and present responsibility
CARB and the AB 32 Planning Process. The for environmental lead contaminations, or its
identity of the decision maker and the decision‐ ‘market share’ responsibility for this
making process are also relevant in considering contamination.”51 Ceasing production might
the purpose of the statute. CARB is not part of reduce a manufacturer’s payment, but it would
the state’s fiscal apparatus, and its mission does not eliminate the payment. Moreover,
not include raising revenue for the state. manufacturers could not purchase offsets or
Moreover, the lengthy planning process and allowances from others. Thus, there was no
attendant documentation confirm that CARB’s way the manufacturers in Sinclair Paint could
concerns were environmental and economic avoid paying the fee, the primary purpose of
impacts, not state revenue. In the Scoping Plan, which was to fund a mitigation program.
CARB acknowledges that “emission allowances
represent a significant economic value whether Why Courts Have Not Focused on the “Purpose”
they are freely allocated or sold through Requirement in Proposition 13. The statute at
auction,” but goes on to note, issue in Sinclair Paint was enacted for the
purpose of raising revenue to fund a mitigation
[A] broad set of factors must be considered program. In Sinclair Paint, the California
in evaluating the potential timing of a Supreme Court asked whether the “fees” at
transition to a full auction including issue were, “in legal effect ‘taxes enacted for
competitiveness, potential for emissions the purpose of increasing revenues’ . . . and
leakage, the effect on the regulated vs. therefore subject to a two‐thirds majority vote.
unregulated industrial sectors, the overall . . .”52 Since the Sinclair Paint court “. . . found
impact on consumers, and the strategic use no cases that interpret the language of section
of auction revenues.49 3 [of Proposition 13],” the Court looked at
California cases that considered whether
We were unable to locate any language in the various fees were “special taxes” governed by
planning documents that would support a claim Section 4. In those cases, courts analyzed
that CARB included a market‐based approach certain statutes enacted for the purpose of
“for the purpose of increasing revenues.” raising revenue, but nonetheless found them to
be fees because they fell into one of three
Emitters Can Avoid Participating in the categories of exactions that were not
Auctions. “Most taxes are compulsory rather considered taxes, namely regulatory fees,
than imposed in response to a voluntary development fees, and special assessments.
decision . . . to seek . . . governmental . . . The Sinclair Paint Court described the “special
privileges.”50 In contrast, the AB 32 auction is tax” cases as “. . . helpful, though not
not mandatory. Entities could choose to reduce conclusive” because “[t]he reasons why
or eliminate their greenhouse gas emissions particular fees are, or are not, ‘special taxes’
instead of participating in the auction. under article XIII A, section 4, may apply equally
Alternatively, subject to CARB restrictions, to section 3 cases.”53 Section 4, unlike Section
emitters could obtain offsets or could purchase 3, however, does not limit the two‐thirds vote
allowances from other emitters rather than requirement to taxes “enacted for the purpose
purchasing allowances by auction. By contrast, of increasing revenues,” thus the “special tax”
California’s Cap‐and‐Trade Auction Proceeds: Taxes, Fees, or Something Else? Page 12Berkeley Law – Center for Law, Energy & the Environment
cases do not weigh in on that precise language. Special Assessments. Special assessments “…on
The Section 4 cases do look at the purpose of property or similar business charges, in
the exaction by considering whether it is aimed amounts reasonably reflecting the value of the
at generating general revenue but use that as a benefits conferred by improvements, are not
proxy for the purpose of the statute. ‘special taxes’ under Article XIII A, section 4.”57
Examples include “assessments on businesses
In sum, there are many reasons to believe that for downtown promotion,” “facilities benefit
AB 32’s market‐based compliance mechanism assessments,” “special assessment on real
was not enacted for the purpose of increasing property,” and “special assessments for
revenues. Provided “. . . regulation is the construction of streets.”58 These examples
primary purpose of the fee measure, the mere share a common trait, which is that the
fact that the measure also generates revenue assessments are used to fund some type of
does not make the imposition a tax.”54 Relying improvement – be it infrastructure or
solely on this approach, however, is potentially downtown beautification. Since GHG emissions
risky as no courts have looked at this precise are not tied to a particular property, and since
question. emissions reduction more closely resemble a
mitigation fee than an improvement, the
2. Assessments, Development Fees, auction proceeds are unlikely to be found to fall
and Regulatory Fees within this category.
Courts have held that under certain Development Fees. Development fees “. . .
circumstances statutes enacted in part for the exacted in return for building permits or other
purpose of increasing revenues are fees, not governmental privileges are not special taxes if
taxes. As described by the Sinclair Paint Court, the amount of the fees bears a reasonable
there are three general categories of fees or relation to the development’s probable costs to
assessments: (1) special assessments, based on the community and benefits to the
the value of benefits conferred on property; (2) developer.”59 Examples include “school
development fees, exacted in return for permits facilities fees,” “fire hydrant fees,” “transit
or other government privileges; and (3) impact fees,” “new facilities water hookup
regulatory fees, imposed under the police fees,” “fees as preconditions for building
power.”55 The Court went on to note that the permits,” “fees for processing subdivision,
three categories may overlap in a particular zoning and land use applications.”60 Put
case, which may be the case here.56 Spending differently, development fees “compensate the
the auction proceeds in such a way so as to state for governmental privileges granted to
allow them to be characterized as falling into those manufacturers.”61 Traditionally, such fees
one of these exceptions would be the safest are “imposed on development projects in order
way to move forward since then there would to finance public improvements or programs
multiple argument that the super‐majority that bear a ‘reasonable relationship’ to the
requirement does not apply – the cap‐and‐ development at issue.”62
trade program was not enacted for the
purposing of increasing revenue, and even if it The auction proceeds are similar in some ways
was enacted for the purpose of raising revenue, to development fees. An emitter that
the auction proceeds constitute a fee not a tax. purchases an allowance will have obtained a
Following is a discussion of each of the three governmental privilege that benefits the
exceptions. emitter – the right to emit a certain quantity of
greenhouse gas emissions. And, the fee will
California’s Cap‐and‐Trade Auction Proceeds: Taxes, Fees, or Something Else? Page 13Berkeley Law – Center for Law, Energy & the Environment
bear a reasonable relation to the benefit The Sinclair Paint court stated, however, that
provided to the purchaser since an auction will distinguishing between a tax and a fee can be
be used to determine the price. If the difficult.
purchaser did not think the value of the
allowance was greater than the bid, the The cases recognize that ‘tax’ has not fixed
purchase would not have been made. Put meaning, and that the distinction between
differently, if it was less costly for an emitter to taxes and fees is frequently ‘blurred,’ taking
reduce emissions than it was to purchase the on different meanings in different contexts.
allowances at auction, the emitter would In general, taxes are imposed for revenue
reduce emissions. Moreover, the price for the purposes, rather than in return for a specific
allowances will be the lowest price bid by a benefit conferred or privilege granted.
successful bidder, so all purchasers except for Most taxes are compulsory rather than
those bidding at that exact price will be paying imposed in response to a voluntary decision
less than they bid. This suggests that for most to develop or to seek other government
bidders the value of the allowances is more benefits or privileges. But compulsory fees
than what they ultimately pay. The fact that may be deemed legitimate fees rather than
the allowances can be sold and the profit taxes.66
retained by the seller also supports a claim that
the auction allowances are tantamount to The Sinclair Paint Court found statutes that
“development fees” in that the emitter will shifted the costs of controlling pollution from
have obtained a governmental privilege. If the the public to the polluters to be consistent with
auction proceeds were used to finance the intent of Proposition 13. The “…police
adaptation measures only, that would be even power is broad enough to include mandatory
closer to the traditional development fee than if remedial measures to mitigate the past, present
also used to fund GHG emission reduction or future adverse impact of the fee payer’s
programs. Since no court has looked at this operations, at least where, as here, the
issue, such an approach would entail some risk. measure requires a causal connection or nexus
between the product and its adverse effects.”67
Regulatory Fees. The type of fee that is most The Court continued, “[i]n our view, the shifting
likely to be found to be applicable here is a of costs of providing evaluation, screening, and
regulatory fee. Regulatory fees are imposed medically necessary follow‐up services for
under the police power, rather than the taxing potential child victims of lead poisoning from
power, and are not taxes provided the fees “. . . the public to those persons deemed responsible
do not exceed the reasonable cost of providing for that poisoning is likewise a reasonable
the services necessary to the activity for which police power decision.”68 Sinclair Paint applied
the fee is charged and which are not levied for the test set forth in an earlier case, San Diego
unrelated revenue purposes.”63 In order to Gas & Electric Co. v. San Diego County Air
avoid being called a “tax,” a fee or assessment Pollution Control District, which described the
must not be “primarily aimed at producing test for a “regulatory fee” as follows:
revenue.”64 Nonetheless, “if regulation is the
primary purpose of the fee measure, the mere (1) the fee cannot exceed the cost of the
fact that the measure also generates revenue service or regulatory activity (i.e., cannot be
does not make the imposition a tax.”65 primarily aimed at producing revenue), and
(2) the fee must be fairly or reasonably
related to the payor’s burdens on or benefit
from the service provided.69
California’s Cap‐and‐Trade Auction Proceeds: Taxes, Fees, or Something Else? Page 14Berkeley Law – Center for Law, Energy & the Environment
overall cost of the governmental regulation.
Provided the auction proceeds are spent within They need not be finely calibrated to the
the regulatory fee framework, the cost of the precise benefits each individual fee payor
allowances may be viewed as a regulatory fee. might derive. What a fee cannot do is
Part one of the test states, “the fee cannot exceed the reasonable cost of regulation
exceed the cost of the service or regulatory with the generated surplus used for general
activity.” As previously discussed, in addition to revenue collection. An excessive fee that is
the section allowing a market‐based compliance used to generate general revenue becomes
mechanism, AB 32 also contains a section that a tax.71
authorizes the imposition of fees on regulated
entities for the purpose of funding AB 32’s This language is somewhat more restrictive
implementation. Auction proceeds will not be than the Sinclair Paint language, since it
needed to fund such implementation, so in suggests that revenue generation, even if not
order to satisfy the first part of the test, the the primary purpose of the fee measure, would
auction proceeds would need to equal the cost turn a fee into a tax. Provided the auction
of the service provided, in this case GHG proceeds are not used for general revenue
emissions reductions and/or mitigation. This is purposes, however, they may be consistent
somewhat different from a traditional with this language. The Court also considered
regulatory fee where the fee is imposed in whether the statutory language “reveals a
order to fund a specific program, but spending specific intention to avoid imposition of a tax.”72
the cap‐and‐trade proceeds on mitigation and Since “there is a safeguard in the statute
adaptation would seem fit within the regulatory authorizing the SWRCB to ‘further adjust the
fee framework. Part two of the test states, “the annual fees’ if it ‘determines that the revenue
fee must be fairly or reasonably related to the collected during the preceding year was greater
payor’s burdens on or benefit from the service than, or less than, the revenue levels set forth
provided.” Since the allowances will be in the annual Budget Act…” the Court concluded
auctioned off, the cost of the allowances would that the charges were regulatory fees, not
seem to be reasonably related to the payor’s taxes.73 There is no similar provision in AB 32.
benefit from the service provided since
otherwise the payor would not have bid what it In both cases, the fees were enacted for the
did. purpose of raising revenues to fund particular
regulatory programs. For the auction
Last year, the California Supreme Court issued allowances, however, the primary purpose of
another opinion on regulatory fees that may the auction is to reduce the overall cost of
have narrowed the definition of regulatory compliance, not to fund a regulatory program,
fees.70 That case, California Farm Bureau so the auctions do not fit neatly in this category.
Federation v. State Water Resources Control The benefit of the program should be clear,
Board (CFBF), was focused largely on whether though, since covered entities purchase
the way the fee was imposed was fair, however, allowances because it is less costly than
the Court described regulatory fees as follows: installing pollution control equipment.
A regulatory fee may be imposed under the 3. A New Exception?
police power when the fee constitutes an
amount necessary to carry out the purposes Since the auction proceeds do not fall neatly
and provisions of the regulation. . . . into any of the existing exceptions from
[P]ermissible fees must be related to the Proposition 13, a court might establish a new
California’s Cap‐and‐Trade Auction Proceeds: Taxes, Fees, or Something Else? Page 15You can also read
