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Pennsylvania Commonwealth Court Holds that Regional Climate Program Rule is an Illegal Tax

On November 1st, 2023, in a split 4-1 opinion with a dissent, the Pennsylvania Commonwealth Court held that Pennsylvania cannot participate in the Regional Greenhouse Gas Initiative (“RGGI”) because the regulations intended to implement RGGI pursuant to the Air Pollution Control Act (“APCA”) constitute an impermissible tax rather than a fee. Bowfin KeyCon Holdings, LLC vs. Pa. Dep’t of Env’t Prot. and Pa. Env’t Quality Bd., 2023 WL 7171547, at *1 (Pa. Commw. Ct. Nov. 1, 2023). The holding halts former Governor Tom Wolf’s efforts to make Pennsylvania the first major fossil-fuel producing state to implement a price on carbon emissions.    

Bowfin KeyCon Holdings, LLC and numerous other companies (“Petitioners”) filed a petition for review of Pennsylvania’s participation in the RGGI based on regulations promulgated by the Pennsylvania Department of Environmental Protection (“DEP”) and the Environmental Quality Board (“EQB”). DEP argued that the regulation’s authority was derived from Section 6.3 of the APCA, which permits DEP to impose fees to cover the costs of administering any air pollution program authorized under the statute. The regulation established a limit as to the emission of carbon dioxide from all fossil fuel-fired electric generating units (“EGUs”) with a capacity equal to or greater than twenty-five megawatts located within Pennsylvania (the “Rule”). Therefore, each EGU was required to obtain allowances for each ton of carbon dioxide emitted. To become a participating state in RGGI, a state must (1) develop regulations consistent with the RGGI model and (2) sign a contract between the state agency and RGGI, Inc., to engage RGGI’s services. In accordance with RGGI’s requirements, the Rule authorized DEP to participate in a multistate carbon dioxide emissions allowance auction provided that participation met or exceeded the benefits conferred to Pennsylvanians through a Pennsylvania-run auction process. The Petitioners filed suit arguing that DEP’s Rule was unconstitutional because it usurped the authority of Pennsylvania’s General Assembly by implementing a tax rather than a fee pursuant to the APCA.

The court was asked to decide whether the emissions allowances mandated by DEP were impermissible taxes beyond the scope of DEP’s authority, or if the allowances were fees issued pursuant to the APCA. The Commonwealth Court began by reviewing a previous holding issued by the court, which held that fees are distinguishable from taxes because fees are imposed to perform administrative duties, whereas a tax is a revenue producing measure. This holding had been affirmed by the Pennsylvania Supreme Court, which previously held that any licensing fee that is grossly disproportionate to the sum required to administer the regulation must be struck down as unconstitutional. With this framing, the Commonwealth Court’s reasoning relied on four undisputed facts: (1) DEP and EQB anticipated significant monetary benefit from participating in the auction because proceeds would be deposited into the Clean Air Fund; (2) there was no cited authority under which DEP and EQB may obtain or retain auction proceeds for Pennsylvania allowances that are purchased by non-Pennsylvania covered sources; (3) only six percent of auction proceeds would be for programmatic costs related to the administration of the program; and (4) the program’s proceeds would exceed $443 million when the Clean Air Fund usually maintained a budget of $20 to $25 million. Thus, the court held the Rule amounted to an impermissible tax because the funding generated in the auctions is grossly disproportionate to the costs of administering the program and related to activities beyond the scope of DEP’s regulatory authority. The court concluded by granting summary relief to the Petitioners and holding that participation in the RGGI may only be achieved through legislation duly enacted by the General Assembly rather than through a Rule enacted by DEP and EQB.

Judge Ceisler dissented from the majority because, in her view, summary relief was inappropriate as there were too many genuine issues of material fact regarding whether the emissions allowance auction imposed a tax or fee. See id. at *5-7 (dissenting, J. Ceisler). Judge Ceisler found that the facts supported both conclusions asserted by the parties. More specifically, there are facts that support the conclusion that the program implements a tax because the proceeds of the Rule will far exceed the costs of administering the program, and the proceeds would double the Clean Air Fund to more than twice the General Assembly’s total budget appropriations for DEP, as the majority concluded. On the other hand, Judge Ceisler explained, the Rule could be interpreted to implement fees because the auction proceeds are used to administer and support DEP’s program, the auction allowances create emissions credits that benefit covered sources in Pennsylvania, and allows emitters to purchase credits from other states to apply them to emissions in Pennsylvania. Therefore, Judge Ceisler concluded that there were too many genuine issues of material fact to grant summary relief.  

The majority’s decision is likely to be appealed and reviewed by the Pennsylvania Supreme Court. While some state constitutions are being interpreted to afford new protections against the effects of climate change, see e.g., Held v. Montana, 2023 WL 5229257, at *1 (1st Dist. Ct. Mont., Aug. 14, 2023), the court’s decision underscores that in Pennsylvania the constitution still serves as a check on what is deemed executive overreach.