The California Air Resources Board (CARB) approved final regulations for the cap-and-trade program mandated by Assembly Bill 32 (AB 32) on October 20, 2011. AB 32 requires California to reduce greenhouse gas (GHG) emissions to 1990 levels by the year 2020.1 CARB's new regulations "cap" the volume of pollutants that all major GHG producers can collectively emit within the state.2 CARB will establish a maximum number of annual allowances, with each allowance equaling one metric ton of carbon dioxide equivalent, and this will determine the volume of pollutants that can be emitted within the cap.3 The number of allowances issued each year by CARB will decline each year as the cap decreases.4 Additionally, CARB will authorize a limited amount of emissions reductions offset credits in areas not subject to the cap.5 After the end of each compliance period, covered entities must surrender enough compliance instruments (both allowances and offsets) to match their emissions during that period, and thus fall under the "capped" amount of emissions they are allowed to produce in that given year.6 The first compliance period is scheduled for 2013 through 2014.
Obtaining Compliance Instruments
The cap-and-trade program requires regulated GHG emitters to surrender compliance instruments for each metric ton of carbon dioxide equivalent GHG emissions.7 Some entities will receive free allowances from the state, and all entities may purchase offsets, allowances at auction or from the state's reserve, or allowances from other entities.
Offset Credits and Credit Producing Projects
The rules outline two types of offset credits: (1) Registry Offset Credits, issued by non-CARB entities8 and (2) CARB Offset Credits. Both types of credits must represent GHG emissions reductions or GHG removal enhancements that are "real, additional, quantifiable, permanent, verifiable, and enforceable"9 and result from projects designed according to the requirements of approved Compliance Offset Protocols.10
Projects that produce these offset credits must comply with the requirements outlined in the Compliance Offset Protocol for that project type. The regulations have four approved Protocols for: (1) ozone depleting substances projects, (2) livestock projects, (3) urban forest projects, and (4) U.S. forest projects.11 Projects must be located in the U.S., its territories, Canada, or Mexico.12 All projects are subject to detailed monitoring, reporting, and record retention requirements (MRR) as well as verification requirements. Some projects that began prior to the enactment of regulations may be able to receive credits as Early Action Offset Credits. Subarticle 14 addresses which projects would qualify. In addition, Sector-Based Offset Credits allow for Reducing Emissions from Deforestation and Forest Degradation (REDD) projects in developing countries to be considered for credits.
Trading Features
Entities that purchase excess compliance instruments or that reduce their GHG emissions below the number of compliance instruments they hold may trade them to other covered entities.13 The regulations contain some restrictions on trading to prevent fraud and market manipulation.14 In addition, entities may bank excess allowances for current or previous compliance periods.
Fraud and Manipulation Safeguards
CARB's regulations include requirements designed to safeguard against fraud and manipulation, including, but not limited to: registration with CARB prior to receiving a permit to hold a compliance instrument, disclosure of direct and indirect corporate relationships and beneficial holding relationships, and maintenance registration of each transaction with CARB. Monitoring and surveillance groups are also charged with identifying and preventing suspicious market activity.
Linkage
The regulations allow California companies to use compliance instruments issued by other GHG emissions trading systems to meet the cap-and-trade requirements if CARB has approved linkage with that trading system.15 In addition, there is a section reserved for regional linkage with the Western Climate Initiative (WCI),16 an agreement among 11 states and Canadian provinces to cooperate in the development of a cap-and-trade program that would lower GHG emissions 15 percent below 2005 levels by 2020.17 However, a changing political landscape has slowed progress of WCI initiatives in other member states.
Footnotes
1 California Health & Safety Code §§ 38500 et seq., (Sept. 27, 2006), available at http://www.leginfo.ca.gov/pub/05-06/bill/asm/ab_0001-0050/ab_32_bill_20060927_chaptered.pdf.
2 California Air Resources Board, Supplement to the AB 32 Scoping Plan Functional Equivalent Document 12 (July 13, 2011), available at http://www.arb.ca.gov/cc/scopingplan/document/Supplement_to_SP_FED.pdf.
3 California Air Resources Board, October 2011 Final Regulation Order, Article 5: California Cap on Greenhouse Gas Emissions and Market-Based Compliance Mechanisms (October 2011), [hereinafter "Cap-and-Trade Regulations"] available at http://www.arb.ca.gov/cc/capandtrade/finalregorder.pdf.
4 Id.
5 Id. §§ 95970 through 95988. The four initial ways that a company can get an offset are projects that promote forestry, urban forestry, urban livestock management, and the removal of existing stock of ozone-depleting substances.
6 Id. § 95856.
7 Id. § 95856(a).
8 An Offset Project Registry is "an entity that meets the requirements of section 95986 and is approved by ARB that lists offset projects, collects Offset Project Data Reports, and facilitates verification of Offset Project Data Reports for offset projects being implemented using a Compliance Offset Protocol." See Id. § 95802(a)(173).
9 Id. § 95802(a)(11) and § 95970(a)(1).
10 Id. § 95970.
11 Id. § 95973.
12 Id. § 95972(c).
13 Id. § 95921.
14 Id.
15 Id. § 95940.
16 Id. § 95943.
17 Western Climate Initiative website available at: http://www.westernclimateinitiative.org/index.php.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
