The California Air Resources Board (ARB) has issued its proposed greenhouse gas cap-and-trade program, pursuant to the California Global Warming Solutions Act (AB 32). The proposed regulation builds on the conceptual framework for ARB’s cap-and-trade program, released in November 2009. The 45-day public comment period on the regulation opened yesterday and closes on December 15, 2010. Whether by design or happenstance, ARB released this latest on the cap-and-trade program just before Californians will vote today on whether to suspend AB 32 under ballot box Proposition 23. Proposition 23 would suspend AB 32 until California’s unemployment rate dropped to 5.5% or less, for four consecutive quarters. Given that the state’s current unemployment rate is about 12%, and the unemployment rate has been below 5.5% for four consecutive quarters only three times since 1980, Proposition 23 could halt the implementation of AB 32 indefinitely.

Program Overview

Regulated sources have been reporting GHG emissions for several years now. Using this information, ARB will set a GHG emissions cap in 2012 based on an estimate of actual emissions for that year. The electricity sector, including imports, and large industrial facilities will be the first GHG sources subject to the program in 2012, following by fuel distributors in 2015. Any electrical generator or other stationary source emitting more than 25,000 metric tons of CO2-equivalent gases will be allocated emissions allowances in 2012 based on its emissions reporting. The overall emissions cap will decline 2% to 3% each year, with fewer allowances to be issued on an annual basis, though the overall cap will expand in 2015 with the introduction into the program of providers of transportation fuels and residential and commercial fuels. Together these sources account for 85% of California’s total GHG emissions. The regulation also gives ARB the option of expanding the program to include other emissions sources.

Compliance

A source will be able to use emissions offsets to satisfy up to 8% of its compliance obligations. Under the program as proposed, offsets can be generated by the reduction or removal of GHG emissions from an activity that is not covered by the cap and can be measured, quantified, and verified. Offsets must be real, permanent, verifiable, enforceable, quantifiable, and additional. ARB may accept existing qualified offset projects into the offsets program. It has also proposed compliance offset protocols for ozone depleting substance projects, livestock manure (digester) projects, urban forest projects, and U.S. Forest projects. The proposed regulation also establishes a framework for accepting sector-based offset credits from developing countries.

Initial emission allowances to industry and utilities will be free. ARB will allow emissions allowances to be traded and banked. Sources will have a three-year compliance period to allow for annual variations in output. An emitter that exceeds the emissions threshold in any given year will have a compliance obligation going forward.

Public Meetings

ARB staff will present an overview of the proposed program to the Board at its November 18, 2010 meeting. ARB will hold a public hearing to consider the cap-and-trade program on December 16, 2010 in Sacramento.