Highlights:

  • California Governor Jerry Brown signed Assembly Bill (AB) 398 into law on July 25, 2017. The legislation extends California’s cap-and-trade program, which would have expired in 2020, until December 31, 2030. AB 398 aims to ensure California meets its target to reduce greenhouse gas emissions to 40 percent below 1990 levels by 2030.
  • It authorizes the California Air Resources Board (CARB) to establish declining emissions limits for businesses that are subject to State emissions regulations;
  • It reduces the amount of carbon offsets businesses can use to comply with the program, and requires that half of the offsets provide direct environmental benefits in California;
  • It establishes a “Compliance Offsets Protocol Task Force,” to advise CARB on approving new offset protocols “while prioritizing disadvantaged communities, Native American or tribal lands, and rural and agricultural regions.”
  • The impact on the offsets industry and the businesses who comply with the cap-and-trade program depends on how CARB implements AB 398 in its 2030 Scoping Plan.

Legislation Overview

AB 398 passed in both the California State Senate and Assembly with a two-thirds majority of bipartisan lawmakers. It received support from businesses and environmental advocates alike. Governor Jerry Brown signed the bill into law this Tuesday, July 25, 2017. The legislation extends California’s cap-and-trade program from December 31, 2020 through December 31, 2030.

The legislation indicates that it intends to ensure California continues to meet its ambitious climate change goal to reduce greenhouse gas emissions to 40 percent below 1990 levels by the year 2030 (Senate Bill 32, passed into law on September 8, 2016).

However, it contains important changes to the current cap-and-trade program that will impact businesses participating in the program. It authorizes CARB to implement lower emissions limits that decline between 2020-2030 for businesses subject to the cap-and-trade regulations. It also authorizes CARB establish a price ceiling, and to set “price containment points” below the price ceiling, after considering the “need to avoid adverse impacts on resident households, businesses, and the state’s economy.”

Carbon Emissions Offsets

Notably, the legislation reduces the use of out-of-state carbon offsets, as follows:

  • “(I) From January 1, 2021, to December 31, 2025, inclusive, a total of 4 percent of a covered entity’s compliance obligation may be met by surrendering offset credits of which no more than one-half may be sourced from projects that do not provide direct environmental benefits in state.
  • (II) From January 1, 2026, to December 31, 2030, inclusive, a total of 6 percent of a covered entity’s compliance obligation may be met by surrendering offset credits of which no more than one-half may be sourced from projects that do not provide direct environmental benefits in the state.”

The legislation defines “direct environmental benefits in the state” as a “reduction or avoidance of emissions of any air pollutant in the state or the reduction or avoidance of any pollutant that could have an adverse impact on waters of the state.”

On its face, the legislation strengthens the cap-and trade program, as it provides certainty to businesses that the cap-and-trade program will continue through 2030. Its stricter requirements for declining emissions, declining allowances, and price ceilings will likely continue to drive the demand for offsets projects, particularly those located in the State. That is important for businesses to contain their costs of complying with the cap-and-trade program.

However, it remains to be seen how CARB will apply these parameters to carbon offsets projects. As it currently stands, the legislation raises questions as to how to treat carbon credits from projects located at State borders or on tribal reservations. The legislation could also affect cap-and-trade and offset credit programs in other states and in Canada, which are linked to California’s cap-and-trade program. It remains unclear how CARB will apply the legislation’s requirements to projects located in jurisdictions linked with California.

CARB will likely address these issues in a rulemaking proceeding on its 2030 Scoping Plan, inviting stakeholders to submit comments. Currently, CARB aims to finalize its 2030 Scoping Plan by 2018.