United States: California Adopts Historic Cap-And-Trade Program For Greenhouse Gas Emissions

Last night, California made history by enacting the nation's first statewide, comprehensive cap-and-trade program aimed at reducing greenhouse gas emissions. As the cornerstone of California's ambitious effort to implement Assembly Bill 32 ("AB 32")—the Global Warming Solutions Act of 2006—the cap-and-trade program was unanimously approved by the California Air Resources Board ("CARB") on October 20, 2011.

KEY PROGRAM FEATURES

AB 32 requires the state to reduce overall emissions to 1990 levels by 2020. The cap-and-trade program, intended as a flexible, market-based mechanism to reduce greenhouse gas emissions, is a controversial method to achieve this goal. The program sets a fixed limit on greenhouse gas ("GHG") emissions from major sources (the "cap") and reduces those emissions by gradually lowering the aggregate cap each year. Regulated businesses are issued allowances at the start of the program, and may purchase and sell those allowances, as well as offset credits, at auction or in private transactions (the "trade").

A declining cap on aggregate emissions by covered industries will start in 2013. The cap will initially be set at approximately 2% below the 2012 level of emissions. A specified number of "allowances" will be issued, representing approximately 90% of average emissions, with each representing one metric ton of carbon dioxide or its equivalent in other GHGs (commonly referred to as "MTCO2e"). At the end of each compliance period, emitters must surrender allowances and/or "offset credits" (which may satisfy up to 8% of an entity's compliance obligation) in an amount equal to their GHG emissions during that period. (See our detailed description of allowances and offsets here). The state would then permanently retire the surrendered allowances, and issue a new, reduced set of allowances for the following compliance period.

The first phase of "covered entities" will be the electricity generation sector and large industrial sources with GHG emissions at or above 25,000 MTCO2e annually. The industrial sources are manufacturers of cement, glass, iron, steel, lime, and paper; petroleum refiners; producers of hydrogen and nitric acid; and suppliers of natural gas and other fuels. In 2015, the second phase of the program will expand to include providers of transportation fuels and residential and commercial fuels. Additionally, entities that do not meet the compliance threshold will be able to opt in as covered entities, or participate voluntarily in the trading market by holding allowances.

The proposed regulations require covered businesses to register and create an account with CARB or a designated account administrator. A tracking system will be established to track allowances and offsets as well as submittals and transactions. Businesses that do not surrender the appropriate number of allowances or offsets will be subject to CARB enforcement and penalties. Once a violation has occurred, a separate violation will accrue every 45 days that a covered entity remains out of compliance.

CHANGES FROM ORIGINAL PROPOSAL

CARB originally voted to adopt the cap-and-trade regulations in December 2010 (see our prior update here), but directed its staff to make a number of modifications to the regulatory language before making a final determination. The agency then issued two rounds of proposed revisions for public comment, in July and September of this year.

In response to public comments, CARB made extensive changes to the regulatory language. Although the overall structure of the program remained the same, the agency made numerous technical and administrative revisions. Perhaps the most significant change from the original proposal is the start date for compliance obligations, which has been postponed from 2012 to 2013. Other highlights include:

  • Aligning with rulemaking efforts through the Western Climate Initiative to allow for linkage to a future multistate cap-and-trade program.
  • Adding formulas to calculate compliance obligations for electricity providers.
  • Clarifying that not all emissions requiring reporting under the related Mandatory Reporting Rule have compliance obligations (for example, biogenic emissions generated by biomass fuel sources).
  • Providing that allowances unsold at auction remain eligible for re-auction at later dates.
  • Providing that certain allowances issued in previous years may be used for compliance.
  • Increasing quality control in the official tracking system.
  • Allowing offset projects below certain thresholds to avoid the cost of annual verifications.
  • Creating a process to determine if emission reductions associated with offset credits have been overstated and to invalidate a portion of credits as necessary.
  • Providing for tracking and verification of offsets generated through "early action" offset projects.
  • Providing that penalties for violations are to be calculated every 45-day period rather than every day.

POTENTIAL LEGAL CHALLENGES

Earlier this year, a state court ruled that CARB (1) failed to adequately describe and analyze alternatives in its Scoping Plan, specifically with regard to the cap-and-trade program; and (2) improperly began implementing the Scoping Plan prior to completing its environmental review process. (See here for our earlier summary of the ruling in Association of Irritated Residents vs. CARB).

On August 24, CARB approved a supplement to its environmental analysis (known as a Functional Equivalent Document or "FED") with an expanded alternatives analysis to respond to the lawsuit's assertions. Additionally, as part of its rulemaking on cap-and-trade, CARB adopted a program-specific FED as well as an Adaptive Management Plan that addresses localized air quality impacts. This establishes a framework for CARB to determine whether unanticipated environmental impacts have occurred relating to implementation of cap-and-trade, and to respond accordingly. However, the litigation is still ongoing, with plaintiffs asserting that they may pursue additional claims relating to the cap-and-trade program.

In addition, independent petroleum refiners and trade associations supported the unsuccessful effort in 2010 to pass Proposition 23 to delay the implementation of the portions of AB 32, including the cap-and-trade program. Further litigation to challenge the program is possible.

NEXT STEPS

At its meeting approving cap-and-trade, several CARB board members acknowledged the agency is stepping into uncharted territory, with the potential for unintended economic or environmental consequences. In recognition of this fact, CARB directed staff to closely monitor the effects of the regulations and report back frequently. CARB faces a deadline of October 28, 2011 to submit final regulations to the State's Office of Administrative Law (one year following the publication of the original draft regulations).

Covered businesses should now develop strategies for obtaining allowances and/or offsets, and/or reducing their emissions. Even businesses and private individuals that are not subject to the new regulations may be indirectly affected by increases in the cost of fossil-fuel energy as companies pass the cost of compliance to consumers, and those businesses should prepare for these impacts. Despite a general cooling of concern over climate change that seems to be resulting from the current economic challenges our country faces, California continues to charge ahead with implementation of AB 32, and companies that do business in California must plan accordingly.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions