On July 12, 2014, the California Air Resources Board (CARB) proposed amendments to the California Cap-and-Trade Program (17 CCR 95800 et. seq.) for the first time since 2014. The amendments include major substantive changes to compliance requirements as well as new program initiatives such as post-2020 caps, additional linking, and Clean Power Plan (CPP) compliance provisions.

In an unusual move, CARB has provided a “Preliminary Draft Proposed Regulation Order and Staff Report” prior to formally initiating the rulemaking. CARB will release a draft of the formal regulatory package on July 19 for Office of Administrative Law review prior to opening the formal comment period. “Final” draft documents will be posted on August 2, and the formal public comment period will begin on August 5.

2021-2031 Emission Cap

CARB has proposed to set emissions caps for 2021 to 2031. The caps decline annually at a linear rate from 2020 to 2030. CARB set the post-2020 caps by calculating the ratio of the 2020 cap in the current regulation (334.2 MMTCO2e) to the statewide GHG target for 2020 (431 MMTCO2e) as set forth in the Scoping Plan. CARB then extrapolates that ratio—77.5 percent—using the goal of 258.6 MMTCO2e established by Governor Jerry Brown in Executive Order B-30-15. The final cap for the 2030 using this methodology is 200.5 MMTCO2e.

CARB’s proposal does not discuss the recent opinion issued by the Legislative Counsel’s office finding that CARB does not currently have authority to establish a post-2020 cap below the 1990 level.

Unsold Allowances to be Transferred to the Allowance Price Containment Reserve

Amidst concern about oversupply in the California market, CARB is proposing to revise the auction rules to effectively remove allowances from the market if they remain unsold at auction after two years. The current rule allows unsold allowances to be reintroduced to the market at auction in limited quantities after two consecutive auctions clear above the Auction Reserve Price. CARB’s proposed rules would keep this structure in place, but would move allowances remaining unsold into the Allowance Price Containment Reserve (the APCR) after two years. APCR allowances are available for purchase at auction at fixed prices as a cost containment measure. In 2016, the APCR allowances have been offered at three price tiers: $47.54, $53.49, and $59.43. Those numbers would go up under the proposed rule; CARB is proposing to consolidate the APCR into a single price tier of $60 plus the Auction Reserve Price.

The proposal for unsold allowances would only affect State-owned allowances; unsold consigned allowances would continue to be offered for sale in subsequent auctions. The proposed changes come on the heels of the massively undersubscribed May 2016 allowance auction in which market participants only purchased about 11% of current vintage allowances offered for sale. Prior to publication of the proposed rule, analysts had predicted that the allowance market would remain oversupplied well into the post-2020 period.

Clean Power Plan Compliance

In spite of the recent Supreme Court Decision to stay, the CPP has proposed amendments to bring the regulations into compliance with the Clean Power Plan post-2020. The Clean Power Plan-related interim targets for affected electricity generating units (EGUs) take effect in 2022. CARB is proposing these changes as part of its plan to comply with the CPP using the “state measures” approach, meaning that it will continue with its own cap-and-trade program rather employing the US Environmental Protection Agency rate-based or mass-based emissions standards approach.

Chief among the amendments proposed for CPP compliance is the new “backstop” proposal. CARB has developed stand-alone mass-based emissions reduction targets for EGUs within the Cap-and-Trade Program. These targets act as the “backstop trigger” for a broader set of provisions—the “backstop”—that CARB has proposed in order to bring the Cap-and-Trade Program into compliance with the CPP as a state measures program. The CPP requires that state measures programs contain a federally enforceable emissions standard for affected EGUs to ensure compliance with the federal rule.

The backstop entails the creation and distribution of a pool of California-only CPP allowances for distribution to affected EGUs in the event that aggregate EGU emissions exceed the backstop trigger. Affected EGUs would then need to cover their emissions with both ordinary Cap-and-Trade compliance instruments as well as CPP allowances. Any emissions not covered by a backstop allowance would be a violation. The proposed amendments do not include any discussion of how EPA or CARB might actually enforce against backstop violations. For example, the proposed amendments do not describe whether backstop violations would be subject to the standard cap-and-trade provisions on violations and penalties (17 CCR 96013-96014) or would be separately subject to EPA’s jurisdiction.

According to the draft proposal, CARB is also developing a Proposed Compliance Plan to incorporate CPP requirements into the Cap-and-Trade Program and CARB’s GHG emissions reporting program to use these regulations as the “state measures” plan for CPP Compliance. CARB intends to bring the Proposed Compliance Plan to the Board for adoption along with the proposed amendments, but CARB has not yet released the draft Proposed Compliance Plan.

New Linking

CARB has proposed to link the Cap-and-Trade Program with Ontario’s planned new program, effective in 2018 for the California program’s third compliance period. CARB has also proposed new forms of linking that would allow California covered entities to obtain compliance instruments from emissions trading systems in other jurisdiction for retirement towards their own compliance obligations, and vice versa, without fully integrating each emissions trading system. For example, entities in both jurisdictions could buy and sell one another’s allowances even where the two jurisdictions did not distribute the allowances via a common auction.

Next Steps

Entities that will be affected by the proposed amendments will have an opportunity to provide comments and advocate changes as part of the rulemaking process. Needless to say, the fall will be an intense period of negotiation as industry, non-governmental organizations and justice groups engage the agency to shape the final versions of the draft amendments.