Environmental Law ReSource : Environmental Lawyer & Attorney : Reed Smith Law Firm : Climate Change, Sustainability

California’s Global Warming Solutions Act of 2006, also known as AB 32, mandates that California reduce GHG emissions to 1990 levels by 2020. In December 2008, CARB issued a Scoping Plan that outlines California’s strategies for meeting this mandate. Establishing a California cap-and-trade program is a prominent component of the Scoping Plan. Cap-and-trade refers to a system in which production of pollutants is capped, producers receive allowances that give them the right to pollute up to specified amounts, and a market is created for trading allowances among producers. For more background on AB 32, the Scoping Plan, and cap-and-trade programs, please review our earlier postings.

California’s cap-and-trade program will include a stringent declining emissions cap, meaning the amount of emissions allowed will be reduced for each subsequent compliance period. The proposed regulations outline three three-year compliance periods (2012 to 2014, 2015 to 2017, and 2018 and 2020). But CARB is considering shortening the compliance period to one year. 

Sectors subject to the cap-and-trade program include large stationary sources of GHG emissions, electricity deliverers, and fuel deliverers that emit at or above a 25,000 metric ton of carbon dioxide equivalent (MTCO₂e) threshold. In the Scoping Plan, CARB outlined a staggered approach for phasing regulated sectors into the program. Under the staggered approach, certain sectors would be covered by the program starting in the first compliance period (e.g. 2012 to 2014) with additional sectors becoming covered in subsequent periods. The proposed regulations retain the staggered approach, with 600 of California’s largest GHG-emitting stationary sources subject to the program starting January 1, 2012. But CARB has indicated that it is considering abandoning this approach and making all regulated sectors subject to the program starting January 1, 2012.

Once covered by the cap-and-trade program, an entity will hold emission allowances that it can (1) surrender to cover its emissions, (2) bank for future use, (3) trade to another entity, or (4) retire. The preliminary draft outlines the process for each of the options. But the biggest issue left open is how emission allowances will be allocated in the first instance. Options include free allocation, auction, or a mix of the two. CARB has formed a 17-member Economic and Allocation Advisory Committee (EAAC) to advise CARB on allocation and implementation issues. EAAC is expected to issue a report regarding allocation strategies in January 2010 and the recommendations in this report will be addressed in the revised draft regulations to be issued in Spring 2010.

Additional issues addressed by the preliminary draft include offsets and linkage to other trading programs. Offsets are tradable credits that represent GHG emission reductions in areas or sectors outside the scope of the cap-and-trade program. The preliminary draft proposes that covered entities be allowed to use offsets to cover up to four percent of their emissions. Thus, instead of surrendering emission credits to cover those emissions, the entity would use offsets. Emission reductions achieved by offsets must be real, permanent, verifiable, enforceable, and quantifiable. Further, the reduction must be additional to what is required by law or regulation or would otherwise have occurred.

The preliminary draft also outlines how California’s program could be linked with regional or national cap-and-trade programs. Outside of California and the Northeast, however, little is happening with regards to cap-and-trade programs. National cap-and-trade regulations are currently stalled in Congress. Thus, rather than linkage, the issue is really one of preemption. There is concern that a later-enacted national program could conflict with California’s program or that express preemption of California’s program could hamper California’s ability to meet its AB 32 mandate. Aside from a standard severability provision, preemption is not discussed in the preliminary draft but it will remain an issue in the national debate.

The full text of the preliminary draft regulations can be found here. For additional information, including specific applicability questions, please contact the Reed Smith lawyer with whom you regularly work.

Some of the most contentious provisions of the bill were those devoted to reducing global warming pollution, in particular the bill’s cap-and-trade program, which would establish an economy-wide cap on GHG emissions that is reduced over time, forcing GHG emitters to choose between reducing their emissions through technological improvements, purchasing emissions allowances, or paying substantial penalties. Using this cap-and-trade mechanism as the primary means to reduce GHG emissions, ACESA aims to reduce GHG emissions 17% from 2005 levels by the year 2020. The bill would also institute a national standard requiring utilities to generate at least 20% of their electricity from renewable energy sources by 2020, but would allow up to one-third of this requirement to be satisfied through efficiency improvement measures. Various members of the House have expressed concerns that such a stringent energy law would harm U.S. industry already weakened by a recession, eliminate jobs and increase energy costs for American households.

As a result, the latest iteration of ACESA contains numerous compromises, many inserted shortly before Friday’s vote.  One such compromise requires the President, starting in 2020, to impose a “border adjustment” or tariff on certain goods from countries that do not act to limit their global warming emissions. This provision was purportedly added to secure the votes of those House members who were uncertain about the bill’s ultimate impact on jobs in heavy industry. Other compromises included reducing the bill’s emissions reduction targets, easing its renewable electricity mandate for utilities, and nearly eliminating the auction system for emissions allowances contained in earlier versions of the bill.

Despite its passage in the House, the future of ACESA remains uncertain, as it faces both opposition and competing bills intended to address climate change in the Senate. For example, the Senate Energy and Natural Resources Committee chaired by Sen. Jeff Bingaman (D-NM) recently passed the American Clean Energy Leadership Act. This bill addresses several of the same energy issues addressed by ACESA, but with a stronger emphasis on enhancing energy efficiency and increasing capitalization for clean energy projects, rather than mandatory emissions reduction. Additionally, the Senate Environment and Public Works Committee has preliminary plans to act on climate change initiatives expected from Sen. Barbara Boxer (D-CA) later this summer. These measures, as well as proposals from other Senate committees, will likely be combined to create the Senate version of ACESA. If the Senate passes its own version of ACESA, differences between the Senate and House bills would have to be reconciled and the final bill passed by both houses, before the bill could be sent to President Obama to be signed into law.