Law360: Cap-And-Trade Funds For $68B Calif. Rail Project To Spur Suits

Cap-And-Trade Funds For $68B Calif. Rail Project To Spur Suits

By Erin Coe

This article was originally posted in Law360 on April 6, 2012

Law360, San Diego (April 05, 2012, 11:22 PM ET) — California’s $68.4 billion plan to build a high-speed rail system proposes to use fees collected from the state’s cap-and-trade program as a possible source of funding, but tapping those fees could spark legal challenges over the program to curb greenhouse gas emissions, experts say.

The California High-Speed Rail Authority on Monday released a revised plan that calls for $3.3 billion in federal funding and $2.7 billion in bond proceeds to be spent on the initial section of the 520-mile rail corridor, but billions of dollars for the project are still needed, and the rail authority said cap-and-trade auction proceeds would be available, as needed, “as a backstop against federal and local support.”

The rail authority’s proposal is creative and holds potential promise, but it is not clear whether the project would be the best use for those funds, according to Jon Welner, a partner at Jeffer Mangels Butler & Mitchell LLP.

“There is a large number of programs identified by the state Air Resources Board as deserving of potential funding,” he said. “The high-speed rail is identified by the board as worth doing, but it may not necessarily get the most bang for the buck with greenhouse gas reduction. There may be other actions that have a greater impact on greenhouse gas emissions.”

The cap-and-trade program is part of California’s global warming law, AB 32, which was signed into law in 2006 and requires pollution-cutting programs adopted by the California Air Resources Board to be feasible, cost effective and equitable.

“The question will be whether the allocation of those funds to the rail system meets the criteria,” Welner said. “One can see legal challenges arguing that greenhouse gas reductions through a high-speed rail system are not feasible, cost-effective or equitable.”

Rail authority spokesman Lance Simmens said it would only use the cap-and-trade funds if not enough federal funding materializes and that the agency believed the proposal was consistent with cap-and trade legislation, pointing out that a high-speed rail system could help lower carbon emissions.

Although it remained uncertain how much money would potentially be drawn from the cap-and-trade program, Simmens said the funds would not be used prior to 2015.

The cap-and-trade program, set up by the California Air Resources Board, places a cap on total greenhouse gas emissions from companies that are responsible for 80 percent of the state’s emissions, such as major refineries, cement companies and utilities. If companies are not able to reduce their pollution below certain limits by a set time, they can buy allowances to cover their expected emissions from companies that are in compliance. The allowances are going to be put up for sale at auctions by the state, beginning in November.

The program is expected to bring in between $660 million and $3 billion in the first year, according to California’s Legislative Analyst’s Office.

While lawsuits are not likely to be filed until after Gov. Jerry Brown decides how the funds raised from the cap-and-trade auction in November are allocated, a determination that those fees should go toward the rail system could prompt suits from environmental advocates as well as from industry and tax groups, according to Welner.

“Once there’s a decision on how to allocate the funds from the cap-and-trade program, there will be lawsuits challenging that decision,” he said. “Challenges to how the money is spent could come from the right or left.”

The cap-and-trade program is likely to face legal disputes over whether the revenue collected is an unconstitutional tax or a regulatory fee that furthers regulatory goals, and one argument that is likely to be raised is how the revenue is being used, according to M. Rhead Enion, a fellow at UCLA School of Law.

“If monies are being used outside the scope of the regulatory program, that’s a sign that they might be a tax instead of a fee,” he said. “Regulatory fees only fund and further a regulatory program.”

Based on a March report by Enion and others at UCLA School of Law, the closer California gets to spending the revenue collected from the cap-and-trade program on the goals of A.B. 32, the better off it will be in terms of legal standing.

If it can show why putting cap-and-trade funds toward the rail project will help drive down greenhouse gas emissions, courts will take that reasoning into account and may be more likely to defer to the government, he said.

“There’s a good argument that a high-speed rail could reduce greenhouse gas emissions over the long term,” he said. “By replacing automobile transportation with a high-speed rail, that could lead to a much lower greenhouse gas footprint that furthers the goal of A.B. 32.”

However, if the government takes the revenue from the program and puts it in the general fund for purposes unrelated to A.B. 32, courts may view the funds as a tax, he said.

“If California takes the revenue and puts it in the general fund, a court could flag that as a problem,” he said. “General fund monies are fungible and courts don’t like that.”

The rail authority’s proposal to potentially use cap-and-trade funds for the rail project has drawn opposition from the California Manufacturers and Technology Association, which contends that the cap-and-trade program is not intended to be a revenue raiser for the state and that A.B. 32 explicitly says that CARB is only allowed to generate revenue to cover the costs for the administration of the program.

“We’re not opposed to the high-speed rail; we’re opposed to CARB taking manufacturers’ hard-earned dollars and spending them on California’s pet projects,” said Gino DiCaro, a spokesman for the association. “If CARB is able to use the funds for a California project, it will become harder and harder to stop it from doing that.”