On July 10, 2017, California Governor Jerry Brown and the top Democrats from each chamber of the California Legislature announced legislation to extend the State’s greenhouse gas (GHG) Cap-and-Trade Program. The legislation comes in the form of a two-bill package deal, with one of the two bills (Assembly Bill 617) focusing on localized emissions of criteria air pollutants and toxic air contaminants, and the other bill (Assembly Bill 398) extending and slightly altering the GHG Cap-and-Trade Program.

An Active Legislative Session for GHG Cap-and-Trade

With the legal authority for the current Cap-and-Trade Program set to expire at the end of 2020, California politicians and stakeholders have been actively debating and negotiating GHG issues throughout this legislative session, which began in December 2016. Prior to the recent announcement of a new legislative package concerning the Program, Assembly Bill (AB) 378 and Senate Bill (SB) 775 were the two cap-and-trade bills that received the most attention. AB 378 died in June when the Assembly voted it down (39 against, 35 for, and 6 not voting), and SB 775 stalled in the committee process in May.

The July 10 announcement by Governor Brown and legislative leaders signals that a political agreement concerning the Program may now be in place. The announcement comes on the heels of weeks of closed-door negotiations between the Governor, legislators, environmentalists, business interests, and other stakeholders.

Procedurally, the legislative package was filed as wholesale amendments to already existing bills, AB 617 and AB 398. Both AB 617 and AB 398 are currently pending in the Senate Standing Committee on Environmental Quality, which has scheduled hearings on the bills for July 13, 2017. Under California law, legislation must be publicly available at least 72 hours before it is finally voted on by either chamber of the Legislature. The Legislature is scheduled to take its four-week Summer recess upon adjournment on July 21, and Governor Brown has said he wants action before then. This means it is possible that votes in the full Senate could come as soon as Thursday evening (July 13). Assuming the Senate passes AB 617 and AB 398, the bills must go back to the Assembly for approval because of the amendments made in the Senate.

In June, the California Supreme Court declined to consider a challenge brought by the California Chamber of Commerce (CalChamber) and others that argued that the Cap-and-Trade Program was an illegal tax. Under California law, approval by two-thirds of the Legislature is needed to implement a new tax. The California Supreme Court’s decision means that the lower appellate court’s judgment upholding the Program stands. Nonetheless, Governor Brown has indicated that he wants a renewal of the Cap-and-Trade Program to be passed by two-thirds vote, in order to insulate the renewed program from the substantive legal challenge asserted by the CalChamber. Consistent with Governor Brown’s position, AB 398 requires approval by two-thirds of legislators. However, the companion bill, AB 617, only requires majority approval because AB 617 does not directly affect the Cap-and-Trade Program.

The Specter of More Direct Regulation

The Cap-and-Trade Program is controlled by the California Air Resources Board (CARB), acting under its statutory authority. Even if CARB’s authority to implement the Cap-and-Trade Program expires at the end of 2020 (as it will under current law), California statute will still require that statewide GHG emissions be limited to the 1990-level of emissions by 2020, and California statute will still require CARB to “ensure” that GHG emissions are reduced to at least 40% below the 1990-level by 2030. Additionally, Executive Order S-3-05 (issued by Governor Schwarzenegger) sets a target reduction of 80% below the 1990-level by 2050.

California statute requires CARB to adopt rules to achieve the GHG emissions limits. Without the Cap-and-Trade Program, it is expected that CARB will adopt direct regulatory requirements mandating “maximum technologically feasible and cost-effective greenhouse gas emissions reductions.”

Changes That Would Occur Under AB 617 and AB 398

AB 617 does not directly affect the Cap-and-Trade Program; instead, the bill is part of the legislative package aimed at garnering enough political support to extend the Program with at least two-thirds approval of legislators. If passed, AB 617 would require increased monitoring and impose stricter penalties for violations of emissions limits for criteria air pollutants and toxic air contaminants. AB 617 would also change emissions reporting requirements for some industrial facilities, require expedited schedules for implementation of best available retrofit control technology (BARCT) to stationary sources that are subject to the GHG Cap-and-Trade Program, and require CARB to establish a statewide clearinghouse that identifies best available control technology and BARCT for criteria air pollutants and related technologies for control of toxic air contaminants.

AB 398 extends and slightly alters the Cap-and-Trade Program. Currently, CARB is in the process of amending its rules regarding the Program. The changes that may be made by AB 398 will likely send CARB back to the drawing board to modify some aspects of its proposed rule changes. The most notable components of AB 398 are the following:

  • AB 398 extends CARB’s authority for the Program through December 31, 2030.
  • AB 398 requires CARB to include specified price ceilings, price containment points, offset credit compliance limits, and industry assistance factors for allowance allocation.
    • A specific price ceiling is not set by the bill. In setting a price ceiling, CARB must consider certain factors, such as the “need to avoid adverse impacts on resident households, businesses, and the state’s economy.”
    • The “price containment points” will be two prices set below the price ceiling. CARB must offer for sale certain amounts of allowances at those two price containment points.
    • Currently, offsets may be used for up to 8% of a regulated entity’s compliance obligation. AB 398 will reduce that to 4% from 2021 through 2025 and 6% from 2026 through 2030. Half of all offsets used for compliance from 2021 through 2030 must come from projects that have “direct environmental benefits” in California.
    • Under the current Program, CARB uses “industry assistance factors” as one component of formulas that are applied to each covered entity to determine how many compliance allowances (i.e., GHG emissions permits) are provided to the covered entity for free. Providing some allowances for free is intended to ease the compliance burden and reduce the chance that a business will simply move its operations out of the state in order to avoid the Cap-and-Trade Program. AB 398 requires CARB to set the industry assistance factors for the post-2020 Program at the same levels that are applicable to the 2015 through 2017 compliance period.
    • AB 398 directs CARB to “apply a declining cap adjustment factor to industry allocation[.]” The “cap adjustment factor” is another component of the free-allowances formulas. So, as with the current Program, the post-2020 Program under AB 398 would slowly reduce the number of free allowances given out. The Governor’s office asserts that reducing the cap adjustment factor as specified in the bill will decrease free allowances by 40 percent by 2030.
  • AB 398 requires CARB to develop approaches to increase offset projects in the state.
  • AB 398 establishes the “Compliance Offsets Protocol Task Force” to provide guidance to CARB in approving new offset protocols for the purposes of increasing offset projects with direct environmental benefits in the state while prioritizing disadvantaged communities, Native American or tribal lands, and rural and agricultural regions.
  • AB 398 establishes the “Independent Emissions Market Advisory Committee” to report to CARB and the Joint Legislative Committee on Climate Change Policies on the environmental and economic performance of the Cap-and-Trade Program and other relevant climate policies.
  • AB 398 requires the Legislative Analyst’s Office to annually report to the Legislature on the economic impacts and benefits of specified greenhouse gas emissions targets.
  • Existing law requires all moneys, except for fines and penalties, from the Program to be deposited in the Greenhouse Gas Reduction Fund and to be available upon appropriation. Existing law continuously appropriates 60% of the annual proceeds of the fund for transit, affordable housing, sustainable communities, and high-speed rail purposes. AB 398 would declare the intent of the Legislature that moneys be appropriated in accordance with a specified order of priorities. The bill does not specifically dictate how money from the Program will be used.
  • Existing law expressly does not limit or expand the existing authority of air pollution control and air quality management districts. This has raised concern among business interests because the Bay Area Air Quality Management District has indicated a desire to impose additional GHG limits on facilities within its jurisdiction. AB 398 prohibits, until January 1, 2031, an air district from adopting or implementing an emission reduction rule for carbon dioxide from stationary sources that are also subject to the GHG Cap-and-Trade Program.
  • Existing law exempts from sales and use taxes, on and after July 1, 2014, and before July 1, 2022, the gross receipts from the sale of, and the storage, use, or other consumption of, certain tangible personal property for use primarily in manufacturing or other specified activities (such as research and development activities). AB 398 extends that exemption through July 1, 2030, and additionally exempts from those sales and uses taxes certain tangible personal property used primarily in the generation or production, or storage and distribution, of electric power.
  • AB 398 repeals a fire prevention fee that primarily affects rural landowners.