On October 20, 2011 the California Air Resources Control Board (CARB) passed the cap-and-trade regulation that was called for the in the AB32 Scoping Plan.  The main focus of the regulation is to establish a program that allocates a certain allowance of greenhouse gas emissions to the industry based on certain calculations. Those emissions allowances will decline over the following years and the industry will be required to either reduce their emissions or purchase offsets to reach the required overall levels of 1990 for California by the year 2020.

In 2006, the legislature approved and Governor Schwarzenegger signed AB32, the Global Warming Solutions Act of 2006, which set the greenhouse gas (GHG) goals into law.  The Act required immediate measures, as well as a scoping plan to identify what measures to take to reach the 2020 goals.  The scoping plan was approved in 2008 and provides an outline for actions to reduce GHG in California.   

The formal cap-and-trade regulations began with the release of a Staff Report on December 16, 2010, that was titled, “The Initial Statement of Reasons.”  The cap-and-trade regulation establishes an overall cap on emissions from all covered sources.  The cap declines over the period of the program leading to overall reductions by the year 2020 and from 18 to 27 million metric tons in CO2 equivalents (MMT CO2e). The cap-and-trade is a large component of CARB’s AB32 strategy and the cap-and-trade was intended to account for 20% of the emissions reduction necessary to reach the target.

Included gases are:  carbon dioxide, methane, nitrous oxide, hydro fluorocarbons, per fluorocarbons, sulfur hexafluoride, and air nitrogen triflouride.  Each of these gases are converted based on certain conversion factors to CO2 equivalents.

Although the cap declines on an annual basis to 159.7 MMT CO2e by 2014,  at the beginning of 2015 the cap is increased to 394.5 MMT CO2e to reflect emissions from fuel suppliers when they are first brought into the program. The cap then declines to 334.2 MMT CO2e for the final compliance year of 2020.

The program is divided into three separate one year compliance periods, which have been changed since their original dates. During the first period, the requirement for allowances covers electricity providers, large industrial sources, and carbon dioxide suppliers. In 2015, the program will expand to cover fuel deliverers in California.

Electricity Sector

Compliance is required at the point of generation by those who generate in-state power and deliver it to the grid. Compliance is also required by those who are the first in-state distributors of imported electricity to the California grid.  These are based on emissions from the generating facility, if it is known. For imported electricity, the generator source is not known and is considered a default emission factor based on the average emissions associated with the available electricity generators that could be sold on the spot market and brought into California.

Carbon Dioxide Suppliers

Carbon dioxide suppliers for industrial purposes will be covered to the extent they supply more than 25,000 tons of CO2.

Large Industrial Sources

Large industrial sources, including refineries, cement plants and chemical plants are covered if they admit more than 25,000 carbon dioxide equivalents.

This determination is based on individual facility reporting under the CARB's mandatory reporting regulation (“MMR”) which covers facilities with 10,000 or more dioxide equivalents. If a covered facility fails to report or its report is determined to be inaccurate CARB will assign facility compliance obligation.

Fuel Suppliers

Fuel suppliers, such as natural gas suppliers, will be covered to the extent their total deliveries in the state less those amounts covered by other covered entities (ie: electricity generators or industrial facilities) exceed 25,000 CO2e. Transportation fuel suppliers will be covered for the total omissions from the fuel that they sell or distribute for consumption in California.

Liquefied petroleum gas producers including fractioners, refiners and LPG importers have a compliance obligation for emissions resulting from full combustion or oxidation of all fuel sold or distributed in California.

Special compliance categories include combined heat and power emissions associated with electricity generated from cogeneration facilities and generation facilities have a compliance obligations to the extent the industrial facility total emissions exceeds 25,000 CO2e.

Biomass derived fuels and combustion emissions from specified biomass fuels are excluded from compliance obligations, if the biomass derived fuel is reported and verified pursuant to MMR and if the start up fossil fuels that supplement biomass derived and unverified biomass derived fuels exceed the cap-and-trade threshold, the facility will be subject to the extent of that excess. The program will exclude emissions from the combustion of biomass produced in waste management and wastewater treatment, if they can verify their biomass emissions through the MMR process. 

Waste-to-energy electricity delivers using biomass derived fuels will have a compliance obligation for any biomass dry fuel that is not verified through the MMR process. Any entity that falls within any of the covered categories but does not meet the special requirements for inclusion can opt in during any compliance period. These entities can receive free allowance on the same terms as other participants.  However, they also face all the other obligations imposed on those entities that must comply with the regulation.

Each industrial sector will get free allocations equal to about 90% of the sectors total emissions that the allocation is made up of (a combination of transition assistance and leakage) and the transition assistance will gradually decline during the nine years of the program.

Instead of allocating allowances directly to those entities in the electrical sector with a compliance obligation, i.e. in-state generators importers of out-of-state generation, the draft regulation will instead allocate the allowances to retail electricity distributors, including investor owned utilities and publicly owned utilities.  Both sets of utilities will be required to use their allowances for the benefit of the ratepayers. The IOUs will be required to auction all of their allowances at the quarterly auction of allowances held by CARB. The proceeds from their auction of allowances sold solely for the direct benefit of the ratepayers either in the form of customer rebates, bill allowances or to pay for GHG reducing measures such as energy efficiency programs

CARB is working on a market tracking system that will record information about the holders of compliance instruments among market participants.

CARB will hold quarterly auctions at which the CARB itself or anyone else with allowances, wants to sell to put their allowances up for auction.

Trading and banking trade sales allowances can take place at the auctions or separately in the secondary market.  These trades collectively establish the market price for the allowances. Trades must be between registered parties from one party’s holding accounts to the other.

While it is uncertain the effects these regulations will have on the environment, it is clear that cap-and-trade comes at a high cost to the private section businesses which in turn may pass the price down to the consumer.  It is also likely that either an unsatisfied environmental group or concerned industry group will likely bring suit on these regulations.