Our Children’s Earth Foundation v. CARB: Accommodating the Inherent Flaws of the Offset Provisions Under California’s Cap and Trade Program.

By Collin McCarthy,  GGU 3rd Year Law Student

On February 23, 2015, the First District Court of Appeal delivered its opinion in Our Children’s Earth Foundation v. California Air Resources Board, affirming the Superior Court’s ruling and upholding the offset provisions within California’s Cap-and-Trade greenhouse gas (GHG) reduction program.   While the Court’s opinion is a thorough legal vindication of California’s approach to offsets, it raises fundamental policy issues that suggest the program may not be an effective tool for greenhouse gas reduction.

This blog has previously discussed the specifics of the parties’ positions in the case  [available here], but the thrust of the appellant’s argument was that the four offset protocols adopted by the Board fail to ensure offset projects undertaken satisfy the “additionality requirement” imposed by the law. In other words, in order to receive offset credits for a project, it must be shown that the project would not otherwise occur, absent the financial incentive provided by the program.  In the appellant’s view, the offset regulations adopted by the Board violated this requirement as the methodologies for determining additionality are based fundamentally on what the typical benchmark conduct is for an industry as a whole, making too many assumptions regarding what activities would or would not likely occur in the future.

Applying the same two-part, deferential standard of review that was applied by the trial court, the Court of Appeal first found the Board acted within its delegated statutory authority in adopting the offset regulations, and then concluded the regulatory proceedings undertaken provided substantial evidence to support a finding that the Board’s formulation of the offset protocols was not arbitrary or capricious. Interestingly, however, the opinion acknowledges the fact it is “virtually impossible” to know whether an offset project is truly “additional” to reductions that would otherwise occur, as is required by the law. Nevertheless, as the panel did not believe the legislature intended to require absolute certainty, they were satisfied with the Board’s efforts to establish a workable method of ensuring additionality.

Presiding Justice Ignazio J. Ruvolo, writing for the court, disagreed with the appellant’s contentions, stating that interpreting the additionality requirement to demand such a high degree of certainty is unworkable, and not what the legislature intended. According to the court, “the fundamental problem with appellant’s interpretation…is that it refuses to account for the fact that it is virtually impossible to know what otherwise would have occurred in most cases. Whether a project would have been implemented without the offset incentive ‘is hypothetical and counter-factual – it can never be proven with absolute certainty.’” Instead, the court said it is more likely that in granting the Board rule-making authority, the legislature intended the agency establish a workable method of ensuring additionality, that is, one that is capable of enforcement, whether or not it actually achieved additionality. Because the Board did just that, it is not for the court to substitute its judgment for that of the agency’s on matters within its area of expertise.

Despite reaching the same conclusion as the Superior Court, what makes this decision noteworthy is the fact that the court seems to acknowledge the inherent flaw with offset programs. In their own words, it is “virtually impossible” to know whether an offset project is in fact additional to what would otherwise occur. This is akin to saying we recognize there is no guarantee this program is in fact reducing GHG emissions.

The court goes further in its alarming policy analysis.  It points out that assuring that a project is actually additional “would essentially preclude the Board from exercising its delegated authority to implement most, if not all, market-based compliance mechanisms.”

It may be true that determining whether an offset project is actually additional is a difficult task and would doom market-based mechanisms.  The Legislature, however, did not mandate California use market-based mechanisms.  It only allowed it if it met this hard standard, reflecting the Legislature’s distrust about market mechanisms.  The mere fact the standard is hard to meet does not justify relieving the Board of its obligations under one of AB 32’s few clear mandates.

The goal of AB 32 is to reduce emissions to 1990 levels by 2020, not to maintain current levels. The primary concern with the current approach is that it will result in illusory offsets – emissions reductions projects that would have occurred anyway, but satisfy the requirements of an offset protocol and thus generate offset credits. For example, a municipality that may have already planned to plant additional trees one year on its own initiative can now pass that off as an offset.  That offset can then be purchased by one of the fossil fuel burning GHG emitting entities subject to a cap to satisfy a percentage of its compliance obligations.  While such a system in theory may “offset” emissions by trading one for another, in fact it may not result in any real reductions from what would have happened anyway.

It may be possible for programs such as Cap-and-Trade to play a role in achieving the necessary reductions when implemented properly.  However, approving programs such as the existing offset protocols promotes exchanging the location of emissions, rather than reducing them.  The Court seems to believe under the law the California Air Resources Board has this discretion, but it is bad greenhouse gas reduction policy.

[Note, a petition for review was filed in the California Supreme Court in this case on April 6, 2015]

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