The court's ruling that California's carbon permit auctions are not an illegal tax provides certainty for its landmark program for tackling climate change.
Environmental groups who had joined the California Air Resources Board (CARB) to defend its auctions said the decision would help cement California's role as a national and global leader in tackling climate change.
California's cap-and-trade system, including its permit auctions, are central to the state's promise to cut its emissions sharply in the coming decades. Because the state's economy is so large and its program so sophisticated, it presents an opportunity to link to other trading programs, in other U.S. states, in Canadian, Mexican and Brazilian provinces, or elsewhere in the world.
The appeals court rejected challenges by the state Chamber of Commerce and other business groups that the permit auctions were an illegal tax prohibited by Proposition 13, a 1978 amendment to the state constitution that restricts tax increases.
The permits make it easier for polluting companies to comply with the program's caps on emissions, and under a trading system, they are a valuable commodity. The companies wanted the permits be handed out for free, as is sometimes done in cap-and-trade systems.
The question of whether permits in a cap-and-trade system should be given away or sold by the government has long been debated by scholars trying to design an efficient system that encourages pollution control at the lowest possible cost.
In the California case, it was more than an academic issue.
But despite the costs to industry, the court ruled that California's solution was not a tax.
A tax, it said, is a compulsory payment for which the taxpayer receives nothing of specific value in return.
"The system is the voluntary purchase of a valuable commodity and not a tax under any test," the judges ruled in a 2-1 decision.
Read more at Court Upholds California Cap and Trade in Boon for State Climate Efforts