By Rory Carroll
SAN FRANCISCO (Reuters) - California's environmental regulator can sell carbon emission permits at quarterly auctions as part of the state's cap-and-trade program, a state court said on Thursday, in a setback to businesses that argued that the sales constitute an illegal tax.
The California Chamber of Commerce and tomato processor Morning Star sued to stop the sales last year, arguing that the permits should be given out freely to companies covered by the program.
They said the California Air Resources Board (ARB) overstepped its authority when it approved auctions as a mechanism for distributing permits.
They also said a supermajority vote by the legislature was required to implement the auctions, since in their minds it constituted a new tax. California's landmark emissions reduction law, AB 32, passed by a simple majority vote in 2006.
"The court does not find Petitioners' arguments persuasive," California Superior Court Judge Timothy M. Frawley wrote in a decision dated November 12 but released publicly on Thursday.
"Although AB 32 does not explicitly authorize the sale of allowances, it specifically delegates to ARB the discretion to adopt a cap-and-trade program and to ‘design' a system of distribution of emissions allowances."
Allowance auctions are a common feature in carbon cap-and-trade programs elsewhere, including Europe's emission trading system and the northeast's Regional Greenhouse Gas Initiative.
Environmentalists aligned with the state praised the ruling.
"The court sent a strong signal today, thoroughly affirming California's innovative climate protection program - including the vital safeguards to ensure that polluters are held accountable for their harmful emissions," said Erica Morehouse, an attorney with the Environmental Defense Fund.
But Allan Zaremberg, president and chief executive of the California Chamber of Commerce, said he disagreed with the decisions and indicated that an appeal was all but certain to come next.
"It is ripe for review and reversal by the appellate court," he said.
The lawsuit was originally filed on November 13, 2012, the eve of the program's first auction, and was seen by many in the environmental community as a stunt designed to inject uncertainty into the system and drive down participation in the inaugural auction.
It didn't work, and the state went on to hold a well-subscribed first auction. Since then it has held three additional auctions characterized by strong demand with few technical problems. The program's fifth auction is scheduled to take place on November 19.
The sales have raised $396 million for the state so far, money that was supposed to go toward efforts to further reduce the state's greenhouse gas emissions until Governor Jerry Brown decided instead to lend $500 million from the funds to the California state legislature to plug gaps in the state's budget.
Brown has said the money will be repaid to the state-run greenhouse gas emissions reduction account at a later date.
The cap-and-trade program is seen as a key tool in helping the state reduce its emissions of heat-trapping greenhouse gases back to 1990 levels by 2020.
(Editing by Eric Walsh)