Recently, the California Air Resources Board or ARB adopted its long-anticipated regulations for controlling greenhouse gas emissions (GHGs) through a market-based cap and trade system. California’s regulations represent a significant development in the regulation GHGs. California could well set the model for similar controls in other states and will certainly stoke the nationwide debate over GHG regulations.
The ARB will set caps based on 2012 emissions for the state’s largest GHG emitters, including power plants, refineries, and other large industrial facilities. The cap will decline each year. Other sources will be phased in over time. The cap to be set, and the distribution of allowances, will be subject to considerable debate. The allowances will be distributed without cost early in the process, but will transition to an auction based system administered by the ARB.
If the regulated industries are unable to meet their cap, they can purchase allowances from regulated industries or purchase offset credits from businesses that don’t have caps but have met approved requirements for voluntarily reducing GHG emissions.
Think of the regulations like a forced weight loss program where all the adult neighbors on your block have to lose 10 lbs each. But the object isn’t so much that any particular person loses weight. Instead, the goal is for the entire block lose 500 lbs total. Those who are the heaviest have to lose at least 10 lbs but if that is too difficult they have an option. For example, there’s Joe down the street who can easily lose weight just by avoiding those big desserts. Joe’s willing to give those up and loses 30 lbs. He now has 20 lbs of credits to sell and those who are having trouble meeting the 10 lb loss minimum gladly buy those credits to avoid the pain of trying to reach the 10 lb mark themselves. Even the kids on the street can get in the act. They aren’t subject to the cap, but if they lose weight voluntarily, they can make some extra cash. So a group of them join a running club and are able to pick up some good pocket money with the weight they lose. At the end of the year, some have lost a lot of weight and some have lost none, but the 500 lb. goal is reached – perhaps in the least painful way possible.
As California embarks on its own version of The [World’s] Biggest Loser, there will be some painful choices that California businesses will have to make. And they, together with the ARB, will have some very big challenges in making this all work. The allowance allocation and auction system will be one of the greatest challenges of all. The regulations will kick in after the first of the year, but will get progressively more stringent over the coming years as more businesses become covered by the cap, allowances are no longer issued without cost and, most importantly, as the emissions cap is ratcheted down. The pain is likely to be felt not only by the businesses subject to the caps, but by the downstream consumers of natural gas and electricity – both commercial and residential.