The California Air Resources Board’s (CARB) timeline toward amending California’s cap-and-trade regulations progressed with the release of its final proposed amendments and supporting documentation August 2, 2016. Formal comment period starts August 5, 2016. Comments may also be presented orally or in writing at a scheduled public hearing September 22, 2016. Written comments not submitted at the hearing must be received by CARB no later than 5 p.m. September 19, 2016.

Background On July 12, 2016, CARB deviated from the typical rulemaking process and released a preliminary draft of proposed amendments to the state’s cap-and-trade regulations. Since then, CARB submitted a draft of its formal regulatory package to the Office of Administrative Law July 19, 2016. On August 2, 2016, CARB published its final proposed regulations and supporting documentation, including a full Initial Statement of Reasons (it previously published a portion of it July 12).

The proposed amendments first drew public attention for their assumed authority to extend the cap-and-trade program beyond 2020. CARB’s proposed amendments would establish decreasing aggregate emissions caps for covered entities through 2031 – and discusses reaching 2050 targets to “signal the long-term trajectory of the Program to inform investment decisions.”1

CARB has received public scrutiny on whether it indeed has such authority. In an April 19, 2016, opinion, the Legislative Counsel Bureau opined that neither CARB nor the governor has the authority, without legislative approval, to extend the provisions of Assembly Bill 32 (California’s Global Warming Solutions Act of 2006) beyond 2020. A copy of the opinion can be found here. While there may be opposition to pushing beyond 2020, Gov. Brown remains firmly committed to cap-and-trade post 2020 and will cement this authority with either legislative approval or a ballot initiative in 2018 as indicated in a statement by his office on August 4, 2016.2

CARB also takes a strong but contested position as to the viability of California’s cap-and-trade auctions of carbon allowances. This stance is at the heart of a pending court decision in the Court of Appeal of the State of California Third Appellate District. The consolidated cases of California Chamber of Commerce v. California Air Resources Board, and Morning Star Packing Co. v. California Air Resources Board, challenge the constitutionality of, and CARB’s authority, to utilize cap-and-trade auctions on various legal grounds. For more information on these legal challenges, read our previous alert. Both cases are fully briefed and are awaiting oral argument. The court is expected to calendar oral argument by fall of this year.

Proposed Amendments to CARB’s Cap-and-Trade Auction Provisions CARB’s Notice of Public Hearing identifies five specific goals it aspires to achieve from its proposed amendments to the cap-and-trade regulations:

  • To continue the cap-and-trade program beyond 2020
  • To provide for California compliance with the federal Clean Power Plan
  • To link the program in Ontario, Canada, beginning January 1, 2018, and supplement the regulatory process for potential future linkages
  • To update the program with the latest information on leakage risks and other allocation factors
  • To streamline certain aspects of the program

Included in CARB’s Initial Statement of Reasons released August 2 is a comprehensive summary of, and CARB’s rationale for, each regulatory provision. This e-alert focuses on certain proposed amendments to the auction provisions – particularly to changes to the format or participation in cap-and-trade auctions.

A few key proposed changes to the auction provisions are:

  • Order of Fulfillment of Winning Bids from Consignment Sources: If the quantity of bids accepted by the Auction Administrator is fewer than the number of allowances offered for sale, then some allowances will remain unsold. CARB proposes to change the order that the Auction Administrator will fulfill winning bids with allowances from consignment sources. Allowances previously designated by CARB for auction that remain unsold from previous auctions would be last in line for fulfilling winning bids. But with the proposed changes, these unsold allowances are used to fulfill bids before consignments bids, thus ensuring the revenue for these sold allowances inure to California before private consignment sources.3
  • Transfer of Unsold Allowances to the Allowance Price Containment Reserve: A new proposed provision allows CARB to transfer unsold allowances from the Current Auction, if unsold for 24 months after their initial sale date, to be transferred to the Allowance Price Containment Reserve and made available through a Reserve Sale. This process would come into effect January 1, 2018.4 According to CARB, this proposed provision is necessary to allow CARB to remove allowances that remain unsold after two years from immediate availability, and to supplement the Allowance Price Containment Reserve when the market is depressed for a lengthy period of time. This would restrict market access to these unsold allowances.
  • Technical Delays: CARB deletes language regarding the delay or pause of an auction bidding window because of technical systems failures. This language is proposed to be moved to a new section to expand CARB’s authority to delay, reschedule, or cancel a scheduled auction bidding window because of a technical systems failure. CARB indicates that the conduct of auctions is dependent on fully functioning and secure online systems. Based on experience in the conduct of auctions to date, if technical issues develop, CARB states that jurisdictions require additional options to reschedule or cancel an auction. This change is made with a CARB eye toward linkage to more jurisdictions and technical issues that may develop not just in California auction platforms, but in others as well.5
  • Exchange Rate: The Auction Administrator would calculate the Auction Reserve Price by setting the exchange rate as the most recently available daily closing rate (previously the noon daily buying rate) for U.S. and Canadian dollars, as published by the Bank of Canada. The Bank of Canada announced that it will cease publication of the noon daily buying rate in early 2017, but will continue to publish the closing exchange rate. This proposed amendment would reflect that change.6
  • Clarity to Auction Purchase Limit Requirements: CARB provides improved clarity of the auction purchase limit requirements. It explains that certain purchase limits apply for the Current Action and for the Advance Auction, and that purchase limits in effect for Current and Advance Auctions since 2015 are retained in the proposed amended regulations.7
  • Attestation Requirement: CARB proposes to remove the attestation requirement as it would relate to indirect corporate associations and to only apply it to those entities with whom the applicant has a direct corporate association.8
  • Surety Bond Requirement: Auction participants must provide a bid guarantee to the financial services administrator at least 12 days prior to the auction. The regulations allow an auction participant to use one or a combination of listed bid guarantees. CARB proposes to remove surety bonds as a form of bid guarantee because they are not commonly available with an ability to meet the requirement to be payable within three business days of payment request.9

CARB’s final proposed amendments to the cap-and-trade regulations can be found here.