California regulators want to implement new cap-and-invest rules on 1 September, but a lawsuit by an environmental justice group may complicate the rollout.
The group Communities for a Better Environment (CBE) filed a lawsuit on 1 July that alleges that the California Air Resources Board (CARB) violated the California Environmental Quality Act (CEQA) by adopting the carbon market amendments based on an inadequate environmental impact assessment, particularly regarding a proposed industrial decarbonization incentive.
The timeline for a legal resolution is uncertain. CBE filed a similar lawsuit in 2024 against the agency's Low Carbon Fuel Standard amendments that is still moving through the courts.
Tick tock
The wild card in the short term is how fast the courts would decide on CBE's request to stop CARB from implementing its regulations while the case moves forward, said Matthew Dobbins, a partner at law firm Vinson & Elkins and a member of its environment and natural resources team in Houston.
"I don't know that the environmental group here would necessarily be able to show imminent and irreparable harm per se to get an injunction," Dobbins said.
A pause in CARB's ability to implement the program changes would have ripple effects inside and outside California.
Industrial participants covered by the program would get 137mn metric tonnes (t) of free carbon allowances over 2027-30 under the new regulations, but only 106mn t under the current regulations if an injunction is granted.
Recipients include refiners, chemical manufacturers, cement producers and hydrogen makers.
Additionally, a delay would prevent the introduction of a free allowance allocation benchmark for biofuel production in the state.
It also would stall the development of CARB's new manufacturing decarbonization incentive. While the near-term effect on allowance supply would be limited, it could slow efforts to encourage carbon capture and storage projects tied to California's 2045 net-zero goal.
The Western Climate Initiative, a joint carbon market between California and Quebec, is aiming for Washington state to join as soon as next year. But Washington needs California to complete its rulemaking, so it can adopt its own changes to ensure compatible programs.
"At least in terms of the trial court we can get a sense fairly quickly which way the judge is going to lean," said Daniel Farber, the faculty director at the University of California, Berkeley Center for Law, Energy & the Environment.
Splitting hairs
The longer the case goes on without an injunction, the more immaterial CBE's arguments may become.
"They sort of risk being in a situation where the lawsuit becomes increasingly irrelevant," Farber said, adding that a lengthy legal process could give CARB time to address any deficiencies while moving ahead with the program.
This is not the first time California's cap-and-invest program has been drawn into a CEQA case.
A San Francisco Superior Court judge in March 2011 directed CARB to halt implementation of the program until the agency addressed CEQA-related deficiencies with its climate change scoping plan. CARB appealed that ruling, which a state court of appeal overturned in 2012.
But it is rare that a CEQA case brought before the court has no merit, according to Nico van Aelstyn, a partner in law firm Sheppard's real estate, energy, land-use and environmental practice.
CBE could make a "fair argument" that by delivering the final environmental impact assessment (EIA) to board members on 26 May, there was insufficient time for consideration ahead of the vote days later, van Aelstyn said.
But that does not mean CBE would ultimately prevail. Courts have historically given CARB deference on technical emissions matters.
If a court requires CARB to redo its assessment, it could be at least six months before the agency is in a position to adopt new changes on a "better" final EIA, van Aelstyn said.
CARB must first respond to CBE's petition before the judge can rule on a request to block implementation.
