On December 13, 2018, the California Air Resources Board ("CARB") adopted amendments to California's cap-and-trade regulations to implement statutory directives under Assembly Bill 398 (2017) ("AB 398"). Cap-and-trade regulations require large-quantity greenhouse gas ("GHG") emitters in California to surrender allowances or credits in proportion to their GHG emissions; create a market for allowances and credits; and set a declining annual cap on the number of such allowances issued by the state, thereby creating market pressures for regulated entities to reduce GHG emissions. AB 398 extended the cap-and-trade program until 2030, the deadline by which the state must achieve its target GHG emission level of 40 percent below 1990 levels. AB 398 also directed CARB to promulgate new regulations amending the program. Most of the amendments take effect January 1, 2021.
The amended regulations aim to reduce compliance costs and promote stability in the allowance markets. To do this, they establish a price ceiling for allowances sold in public auctions, thereby providing greater price certainty, as the declining ceiling is expected to drive future price increases. The amendments also include cost containment provisions, authorizing CARB to sell reserve allowances at fixed prices and additional allowances beyond the annual cap at the price ceiling, if needed for compliance.
The amendments also liberalize the formula used to award free allocations of allowances within industry sectors deemed most likely to depart California to avoid regulation under cap-and-trade rules. Current regulations set an "assistance factor" up to 100 percent for each such industry sector to determine the quantity of free allowances its participants may receive. The new regulations will set the assistance factor at 100 percent for all qualifying industries, thus providing for greater allowances within certain industry sectors than they otherwise would have received. This change takes effect beginning with the current 2018- 2020 compliance period.
The amendments also restrict the use of compliance offset credits. CARB awards offset credits for projects that reduce atmospheric GHGs but are not regulated under the cap-and-trade program, such as forest management and conservation projects. Qualifying projects need not be within California; indeed, many are not. Current regulation allows a regulated entity to satisfy up to eight percent of its compliance obligations by surrendering offset credits. The new amendments decrease that cap to four percent from 2021 to 2025, and six percent from 2026–2030. The amendments also add a new requirement that no more than 50 percent of the offsets surrendered by a regulated entity may have been issued for projects which do not provide "direct environmental benefits in the state." These changes address criticisms by environmental groups that offset trade emissions reductions in California for environmentally beneficial projects in other states.
Finally, among other changes, the amendments discontinue the link with Ontario's cap-and-trade program because Ontario cancelled its program in July 2018.
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