This Climate Change Bulletin is one in a series provided periodically by Borden Ladner Gervais LLP's (BLG) Climate Change Group to alert our clients of emerging issues and initiatives that are relevant to their businesses and strategic interests. Comments and questions are always welcome.
Of late, news related to climate change and Greenhouse Gas (GHG) management initiatives in the U.S. has largely been negative. However, in a vote on December 16, 2010 the California Air Resources Board approved regulations and supporting documents paving the way for the first broad-based cap and trade program in the U.S.
The initiative, which will implement the state's 2006 Global Warming Solutions Act, aims to help reduce CO2 emissions to 1990 levels by 2020 – a reduction of 15% from current levels.
Under the new system, which will be in effect as January 1, 2012, annual allowances will be distributed by California to large industrial facilities including power plants, oil refineries, cement and other factories. In 2015 the program is to expand to include distributors of transportation fuels, ultimately applying to approximately 600 facilities. The idea, as with all cap and trade programs, is to allow facilities to sell allowances they do not need if they reduce their emissions below their cap. The total cap on emissions across the economy would be reduced over time.
One significant area of controversy regarding the program is the method for allocating allowances. The hearings on the initiative included several submissions criticizing the Board's decision to not follow the advice of its economic advisory committee to auction the allowances from the start. Instead, the Board decided to give away allowances initially, phasing in auctions in the future.
Some of the key design elements of the California approach include:
Penalties for Non-Compliance
Facilities that emit more than allowed will require it to submit four "compliance instruments" for every one missed, and will also be subject to possible fines of up to $25,000/day of non-compliance.
Steady Price Signals
The program includes a floor price of $10 per tonne, escalating at 5% per year to $15 per tonne by 2020, below which allowances will not be auctioned. This floor price is significantly higher than the floor price of less than $2 per tonne set by RGGI (another regional program). The floor price is designed to send a market signal for facilities to continue seeking innovative methods to decrease emissions and develop clean technologies.
Auctions for the Electricity and Transportation Sectors
Despite the concerns expressed about giving away allowances initially, it should be noted that 100% of pollution allowances in the transportation sector will be auctioned. In addition, while many allowances in the electricity sector will be auctioned as will a lower number in the industrial sector. As a result, more than half of all allowances issued under the program will be auctioned, increasing to roughly three-quarters of all allowances by 2020. Many environmental and economic experts are of the view that auctioning is the most efficient and fairest way of distributing allowances and results in less market distortion than giving away allowances.
Use of Auction Proceeds
Proceeds from the auctions in the electricity sector will be used to help customers keep their electricity bills low through programs such as rebates and other energy efficiency incentives.
CAP AND TRADE – WAXING OR WANING?
The news from California is seemingly in contrast to that out of Washington D.C. where legislators have reversed earlier movement towards the development of a national cap and trade scheme. Changing political imperatives (economic and environmental) have conspired against the development of Greenhouse Gas management regulatory regimes and cap and trade has, of late, been pronounced dead by many commentators. The Canadian government's policy of following the lead of the U.S. seemed to only lend support to this view north of the border.
The question that remains is whether the recent regulatory action in California will act as a catalyst to the broader adoption of cap and trade initiatives in other states and in certain Canadian provinces. North American sub-national governments (states and provinces) have long expressed more interest in cap and trade mechanisms than their national counterparts. Through several regional initiatives, state and provinces have participated in putative programs that could eventually result in the development of a broader cap and trade program. Further, several of these jurisdictions (among them Canadian provinces) have enacted legislation and/or regulations that require reporting of emissions by large emitters. Such reporting requirements are required in order to collect the baseline information to enact any future cap and trade regime.
On the north side of the border British Columbia, Ontario and Quebec have taken the most aggressive posture with respect to the development of Greenhouse Gas management regulation that could be integrated with broader programs. (Alberta has a program that, while arguably more advanced than any other North American sub-national jurisdiction, would be difficult to integrate with those under development). All three provinces are members of the Western Climate Initiative (WCI) that California is seen as leading. All three provinces have spent considerable time and effort developing aspects of Greenhouse Gas management regulation. Given the recent trend of waning interest in cap and trade in the U.S., these provinces have likely been wondering whether their energies have been well spent.
Albeit, California voted this fall to continue its aggressive efforts to manage Greenhouse Gases. However, the Chicago Climate Exchange's Emission Reduction Program closed at the end of 2010 and, as already noted, the prognosis for the future of cap and trade has not been good of late. What is not known at this point in time is whether the news from California regarding cap and trade will be a needed shot in the arm for cap and trade elsewhere in North America or whether it will be too little too late.
While many in the mainstream media are predicting the demise of cap and trade in North America (before its advent) the apparent desire of the Canadian members of the WCI to lead in the development of GHG regulation should not be discounted. It would not have been difficult for any of those provinces to walk away already, yet they have not done so. Moreover, they have all (to varying degrees) participated actively in the development of various aspects of WCI policies and procedures. Regulatory developments in each of these provinces are being crafted in an effort to maintain equivalency (harmony) with the WCI initiatives.
Baring major political changes (which can never be ruled out), cap and trade may still be part of the regulatory agenda in Canada as California and WCI move ahead. News of its demise, while perhaps not greatly exaggerated, is at least premature.
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