This week’s sweeping victory by the Republican Party to regain control of the
U.S. House of Representative has wide ranging impacts on the future direction
and timing of climate change policy in the United States. Most prominently, a
comprehensive, market-based legislative approach to greenhouse gas (GHG)
emission reductions is off the table indefinitely at the federal level.
At the state level, however, Tuesday’s election had at least one different
result. California decided to move forward with its market-based program first
established by its Global Warming Solutions Act (AB 32) in 2006. California
voters defeated Proposition 23, a ballot measure that would have suspended
implementation of AB 32 until California’s unemployment rate dropped to 5.5% or
less for 4 consecutive quarters (currently unemployment in the state is
The defeat of Proposition 23 comes on the heels of the much-anticipated
release by the California Air Resources Board (CARB) of its proposed GHG
cap-and-trade program (“Proposed Rules”). The proposal, released October 28,
builds upon the basic conceptual framework released by CARB a year before. The
Proposed Rules are open for public comment for a 45-day period closing
December 15, 2010. More information can be found on
I. California Cap-and-Trade Program Overview
The Proposed Rules would set a cap on GHG emissions that will act as the
total program budget. Freely tradable emission allowances will be issued to all
major covered (i.e. regulated) entities in amounts equal to their portion of
the overall cap, which will be calculated based on GHG reporting amounts. The
cap will steadily decline over time to reach 1990 emission levels by 2020. The
cap will be enforced by requiring covered entities to turn in one allowance or
equivalent offset credit for every metric ton of carbon dioxide equivalent
(MTCO2e) it emits during each 3-year compliance period. The price of the
allowances will be determined by the market.
Beginning in 2012, the Proposed Rules would cover electric generation,
including out-of-state imports, and large industrial sources/processes with
annual emissions above 25,000 MTCO2e, equaling a cap of 165.8 million MTCO2e. In
2015, the program would automatically expand to include fuel distributors (e.g.
transportation fuels, natural gas and propane combustion). The expanded cap is
proposed to be 394.5 MTCO2e.
CARB will issue a total of approximately 2.7 billion allowances through 2020.
Covered entities will not be the only entities able to buy, sell and hold
allowances. Entities under the 25,000 MTCO2e threshold can “opt-in” to the
program (called “Opt-In Covered Entities”), and any interested non-covered
entities can participate as well (called “Voluntarily Associated Entities”).
The Proposed Rules include a number of cost containment mechanisms, including
the aforementioned 3-year compliance period, unlimited allowance and offset
banking, the offset regime itself, an Allowance Price Containment Reserve (i.e.
soft cap price ceiling), and finally potential linkage with other trading
systems (most notably the Western Climate Initiative).
a. Covered Entities Explained
CARB is proposing to implement a “first deliverer” approach for the
electric sector to account for emission associated with both power generated
in-state (called specified power) and power imported from out-of-state
(called unspecified power). For imports, the covered entity will be the
first entity to place power onto the California bulk transmission grid.
Electric deliverers include distribution utilities selling at retail and
energy marketers brokering at wholesale. For the industrial sector, the
covered entity will be the facility operator. The covered entity for
industrial gas users would be the supplier. For the transportation fuels,
the covered entity would be the fuel suppliers, and would be regulated based
on the quantities of fuel consumed by their customers. For natural gas, CARB
will regulate the owner of the fuel when it is distributed. Here is a
breakdown of the regulated sectors:
Points of Regulation
Year Entering the
Those who generate electricity in-state and deliver
it to the California electricity grid
First deliverers of electricity to the California
The Source for large stationary combustion and
process emission sources
Those who supply carbon dioxide
Where fuel is distributed, including natural gas
local distribution companies (LDCs) and natural gas transmission
Those who import or produce liquefied petroleum gas,
including fractioners or refiners
Transportation Fuel Combustion
Enterers and position holders of transportation
fuels, and producers of biomass-derived fuels
b. Annual Compliance Obligation
During the first two years (2012, 2013), a regulated entity will have to
surrender allowances of qualifying offsets equal to 30% if its verified
emissions for that year. After that, the 3-year compliance periods commence.
Regulated entities will have to surrender its total verified emissions. CARB
intends the ramp-up two years to allow them time to resolve all emission
reporting and verification issues with entities.
The overall allocation scheme proposed will be (1) creation of the
Allowance Price Containment Reserve, (2) free allocation of allowances to
the industrial sector for “transition” assistance and leakage prevention,
(3) free allocation to electric distribution utilities for the benefit of
ratepayers, and (4) phased-in auctioning of the remaining allowances.
d. Market Oversight
California allowances will not expire, thereby allowing covered entities
the ability to bank the assets indefinitely for later use. Borrowing future
year allowances, however, will not be permitted. CARB proposed rules to
require trading activity disclosure, prevent market manipulation (e.g.
establishing a holding limit), and prohibit fraud.
e. Linkage with Other Carbon Programs
CARB’s Proposed Rules leave open the possibility of linking the
California program with a future WCI regime or other WCI partner entities.
If officially linked through CARB Board approval, CARB would accept and
recognize allowances and offsets issued by other approved programs to meet
California compliance requirements. Covered entities would be able to use
allowances and offsets from a linked program if they were less expensive
than making reductions or buying California carbon assets.
f. Offsets Regime
CARB is initially being conservative as to what offset types qualify and
how many offsets a covered entity can use toward compliance. CARB proposes a
maximum 232 million offset credits may be used over the life of the program,
which roughly equates to an 8% limit for individual entity’s compliance
Offsets issued by CARB must be quantified and approved according to
Board-approved methodologies and protocols. While additional protocols may
be developed, the Proposed Rules include four initial offset protocols from
the Climate Action Reserve, including:
- U.S. Forest Projects;
- Livestock Manure (Digester) Projects;
- Urban Forest Projects; and
- U.S. Ozone-Depleting Substances Projects.
To receive and be issued offset credits, CARB will require that projects
meet standards established under the protocols as well as additionality and
verifiability, be located in North America, and comply with all applicable
laws and regulations at the state and federal levels.
In addition to the initial offset project types, the Proposed Rules also
leaves open the future potential to allow sector-based offsets to be
eligible for use and certification. Each sector-based crediting mechanism
would need to be approved by CARB. The Proposed Rules state that the likely
first type of sector-based program will be Reducing Emissions from
Deforestation and Forest Degradation (REDD). CARB states that any REDD
program will need to meet certain minimum criteria.
For further information on the CARB’s Proposed Rules please contact the authors.
1. Another California ballot initiative that may have
collateral impact on AB 32, Proposition 26, passed. The measure will change how
California defines taxes and regulatory fees by requiring legislative approval
of any taxes and fees going-forward post-2010 by a two-thirds majority. There
are arguments that this change could inhibit the state's ability to regulate
carbon emissions by restricting the ability to assess fees on covered entities.
The chairwoman of the California Air Resources Board (ARB), however, has stated
that Proposition 26 will not affect AB 32 implementation because it was passed
in 2006. Litigation over the applicability of these new rules to AB 32 is
2. Covered sources include refineries, power plants,
industrial facilities and transportation fuels.
3. There will be a reserve price of $10/ton in 2012 for any
auctioned allowances, however. Allowances will be sold in 1,000 unit bundles.
4. Electric sector compliance obligations are based on
emissions from plants exceeding the 25,000 ton threshold and that generate
electricity if the source is “known”. If the source is unknown, compliance is
based on megawatt-hours and a default emission factor based on the reported mix
of imported electricity within the Western Electricity Coordinating Council (WECC)
5. CARB clarified the following for other sectors of
emissions. Combined heat and power facilities will be regulated if they exceed
the 25,000 ton threshold. Combustion emissions from specified (i.e. known)
biomass-derived fuels are not regulated, unless supplemental fuel exceeds the
threshold. Landfills and wastewater treatment facilities are excluded unless it
combusts fuels or uncertified biomass-derived fuels above the threshold will
have a compliance obligation. Waste-to-energy facilities would have an
obligation for any biomass fuel is not verified through the State reporting
6. The Proposed Rule includes a reserve pool of allowances to
manage price volatility. Covered entities (but not voluntary participants) will
have the option to buy from the reserve pool at fixed prices. Sales from the
auction would take place a few weeks after each quarterly auction. The proposed
fixed prices that would increase over time are $40/ton, $45/ton and $50/ton.
7. Transition assistance includes calculation of
energy-intensive trade-exposed (EITE) entity’s emission intensity per unit of
8. Allowances allocation methodologies for electric and
natural gas distribution utilities are still under CARB consideration.
Allowances freely allocated to IOUs would be placed in the IOU’s Limited Use
Holding Account and required to be put up for quarterly auction. CARB argues
that by requiring the IOUs to auction their allowances maintains the
“competitiveness of the deregulated California electricity market”. An
additional placeholder is established for voluntary renewable energy allowance
set-asides. CARB intends to develop and review accounting rules and process for
retiring allowances from the set-aside.
9. The auction revenues could be used for a per capita
consumer rebate program, a community benefit fund, and a low carbon investment
10. For this protocol, CARB proposed to establish a Forest
Buffer Account to account for permanence issues attendant to forestry projects.