California's landmark carbon market is facing a major legal challenge after environmental justice group Communities for a Better Environment sued the California Air Resources Board over a last-minute change that could hand industrial polluters millions of new emissions allowances.
The complaint argues that the move could result in more fossil fuel pollution in communities that already endure some of the worst air quality in the state.
What happened?
On July 1, Communities for a Better Environment sued the California Air Resources Board, saying the agency signed off on a major cap-and-invest overhaul in late May without first completing the environmental review required by the California Environmental Quality Act.
The Los Angeles Times reported that the dispute centers on a new "manufacturing decarbonization" incentive added shortly before the vote. That program would let industrial polluters apply for up to 118 million new allowances tied to decarbonization investments.
California's cap-and-invest system requires major emitters to buy allowances for each ton of carbon dioxide they release, while the total number of allowances declines over time.
State officials have said the broader update is meant to keep California on track for carbon neutrality by 2045, including by removing 118 million allowances from the market by 2030.
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The lawsuit says that this last-minute incentive was not properly studied before approval.
Communities for a Better Environment attorney Lauren Gallagher said CEQA is an "environmental and public health bill of rights" for Californians.
Why does it matter?
The case could determine whether California approved a climate policy revision that may allow additional pollution in neighborhoods near refineries, power plants, and industrial facilities.
The complaint says low-income communities and communities of color would bear the greatest burden if extra free allowances result in more fossil fuel pollution.
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The Legislative Analyst's Office estimated the new incentive could cost the state's Greenhouse Gas Reduction Fund about $2 billion a year. That fund supports housing and transit, along with projects focused on cleaner air and water.
UC Berkeley climate law expert Ethan Elkind, who is not involved in the case, told the Times that the key question is whether the incentive creates effects that were not examined.
"It's a big, sprawling complicated program," Elkind said. "And this is a big change to it, so I wouldn't be surprised either way."
What's being done?
The lawsuit asks the court to require CARB to withdraw its approval, redo the environmental analysis, and reconsider the revised rules. The fate of this incentive could turn on whether a judge decides regulators adequately examined its likely effects.
CARB has maintained that it acted lawfully.
CARB spokesperson Lindsay Buckley said the agency "follows all applicable laws when adopting or amending regulations and the recent cap-and-invest rulemaking was no exception."
Buckley also said, "We stand firmly behind our work and are confident in our ability to fully and vigorously defend ourselves."
Even before the lawsuit was filed, some board members had raised concerns. CARB ultimately approved the incentive but committed to additional workshops, guardrails, and evaluations before any allowances are issued through the program.
CARB chair Lauren Sanchez said, "The work does not stop here with this vote."
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