California's cap-and-trade auction may be disrupted by Chamber of Commerce lawsuit

California's most powerful business lobby filed a last-minute lawsuit Tuesday that could spoil today's launch of the state's cap-and-trade market to curtail greenhouse gases.

The lawsuit by the California Chamber of Commerce challenges the validity of the state-run auction of carbon emission allowances – the centerpiece of AB 32, California's climate change law. The chamber, which has been protesting the auction for months, says the sale is really an unconstitutional tax.

California expects to raise billions of dollars from selling carbon credits over the next several years, with the first sale set for today.

In its lawsuit, the chamber didn't seek a court order blocking today's auction, and state officials said the sale would proceed as scheduled. Instead, the chamber is trying to eliminate future auctions, which are set for regular intervals over the next eight years, said Loren Kaye of the California Foundation for Commerce and Education, a chamber affiliate.

Even though today's auction will go forward, the chamber's lawsuit could have a chilling effect on the bidding.

"Filing this lawsuit on the eve of the first auction really seems quite unsavory," said Tim O'Connor, director of the Environmental Defense Fund's California climate and energy initiative. "They're throwing a wrench in California's comprehensive program" to curb greenhouse gases.

Jon Costantino, executive director of the Association of Carbon Market Participants, said potential bidders might think twice about jumping into today's auction. He envisioned a scenario in which "you're a successful bidder and the auction is invalidated."

The program works this way: The California Air Resources Board has set a cap on the volume of carbon emitted by more than 400 big industrial polluters. The cap will decline each year.

To stay under the cap, the polluters will have to reduce their emissions or purchase carbon credits. State officials say it's a flexible, market-based approach that encourages creativity.

Business groups say they support AB 32 and don't mind cap and trade. What they don't like is having to pay for 10 percent of their carbon credits to kick-start the market. They want all of them handed out for free. If a company exceeds its allowance, it will buy whatever credits it needs from other companies, and the state will achieve its goal of reducing emissions.

The auction "is the most costly way to implement AB 32 and it will hurt consumers, the job climate and the ability of businesses to expand here," said Chamber President Allan Zaremberg in a news release.

Chamber officials insisted they weren't trying to foul up the first auction by filing suit the day before. The suit "is not in relation to this specific auction," Kaye said.

Between today and a second auction set for February, the state expects to raise up to $1 billion in the market's first year. The amount is expected to grow considerably in 2015, when oil refiners will have to buy credits to cover emissions from cars and trucks.

In its lawsuit, filed in Sacramento Superior Court, the chamber says the auctions are unconstitutional.

The state is trying "to extract literally billions upon billions of dollars from California taxpayers," the chamber said in court papers. "Only the Legislature can raise such massive sums of money and only through the enactment of taxes or fees. AB 32 was not enacted with enough votes to qualify as a tax." Taxes require a two-thirds supermajority.