CARB Adopts Pioneering Cap-and-Trade Regulation

PollutingStacksLast week, the California Air Resources Board (CARB), in an unanimous vote, adopted the final regulation for its controversial cap-and-trade program, which serves as the centerpiece of the state’s landmark greenhouse gas reduction law, the Global Warming Solutions Act of 2006, Assembly Bill AB 32 (AB 32).The program, which has had to overcome hurdles in both the court room and on the ballot during a multi-year development process, will cover some 600 facilities that emit 85% of the state’s greenhouse gas emissions.The program is being rolled out in phases with the first compliance phase beginning in 2013, covering all major industrial sources along with electric utilities. The second compliance phase, beginning in 2015, will include distributors of transportation fuels, natural gas and other fuels.

The unprecedented program establishes a statewide declining aggregate emissions cap on covered sectors. Businesses subject to the regulation will not face a specific limit on their greenhouse gas emissions, but will be required to furnish sufficient allowances, each equal to one metric ton of carbon, to cover their annual emissions. As the cap declines each year, the total number of allowances issued in the state drops, requiring companies to either 1) face the prospect of paying for additional allowances at quarterly auctions or on the market, or 2) find the most cost-effective and efficient approaches to reduce their emissions. Eight percent of a company’s emissions can also be covered by CARB-certified offset projects, which CARB hopes will spur development of greenhouse gas reducing projects in uncapped sectors such as forestry (i.e., trapping carbon in trees) and agriculture (i.e., use of dairy methane digesters). Initial auctions of allowances are scheduled for August and November 2012 and will thereafter be held on a quarterly basis.

Former Gov. Arnold Schwarzenegger, having signed AB 32 into law, released a statement praising CARB’s adoption of the regulation as “a major milestone for California’s continued leadership on reducing the world’s greenhouse gases.” CARB Chairman Mary D. Nichols also stated that the regulation “sends the right policy signal to the market, and guarantees that California will continue to attract the lion’s share of investment in clean technology.” It is anticipated that the program will motivate investment and innovation in clean technology and encourage continued growth of the state’s clean energy economy.

The adoption of the final regulation provides covered entities with an excellent opportunity to develop more detailed strategies for complying with the new program and for uncapped industries, such as agriculture, to consider ways in which they might capitalize on the opportunity to generate carbon offset credits.