The California Air Resources Board ("CARB") is considering important amendments to California's cap-and-trade regulations. CARB staff hosted a workshop on the proposed amendments on June 25. Written public comments on the potential amendments must be submitted by 5:00 p.m. Pacific Time, on July 9. CARB staff indicated that there will be additional opportunities for public involvement as proposals are further developed. This Alert summarizes the key potential amendments.

Order of Retiring Compliance Instruments

Under the existing cap-and-trade regulations, compliance instruments equal to a source's reported greenhouse gas ("GHG") emissions must be surrendered annually and at the end of each of the three-year compliance periods. The requisite number of compliance instruments will be removed by CARB from a covered source's compliance account on November 1 of each year. The existing regulations do not specify the sequence to be used by CARB in removing the compliance instruments. CARB staff proposes that offset credits be removed first, followed, if needed, by GHG allowances. This order follows the approach adopted by Quebec's cap-and-trade program, which will be formally linked to the California program in January 2014.

If implemented, the proposed change will require advanced planning by covered sources to make sure they do not lose their offset credits. The cap-and-trade regulations establish an 8 percent cap on use of offset credits at the end of each of the three-year compliance periods. This 8 percent cap does not apply to the annual compliance periods. As explained by CARB staff, under the proposed amendment, CARB will remove all of the offset credits in a covered source's compliance account before removing its GHG allowances as needed to satisfy the annual compliance obligation, even if the percentage of credits removed exceeds 8 percent. The cumulative effect of the annual removals could result in more than 8 percent of the offset credits having been removed by the end of the applicable three-year compliance period. Any excess offset credits removed would not count toward satisfaction of a covered source's compliance obligation at the end of the compliance period, and the value of the excess credits would be lost. This can be avoided by making sure that a covered source's compliance account (as opposed to its holding account) does not include too many offset credits. According to CARB, the Compliance Instrument Tracking System Service, or CITSS, will contain information that will help sources keep track of the 8 percent cap.

Order of Events Leading up to the November 1 Surrender Date

CARB staff has recognized that there is very little time between when a source's compliance obligation is known and the November 1 compliance instrument surrender date. For example, emissions verifications are due September 3; the September reserve auction (the last auction before November 1) takes place September 27; assigned emission levels are finalized October 10; and satisfaction of the compliance obligation is due November 1. This leaves a covered source very little time to purchase allowances if the assigned emission level is above the anticipated level and above the number of compliance instruments held by the source. As a result, CARB staff is considering adjusting one or more of the dates. One option is to move the emissions verification deadline earlier, as well as related subsequent deadlines.

Public Availability of Information

CARB staff is considering broader public release of cap-and-trade information, such as information about the compliance instruments in CARB's retirement account, the identity of offset projects that are the basis of a covered source's offset credits, and data describing individual offset projects.

Data in the Reporting Tool

CARB staff is proposing to remove some of the required information fields from compliance instrument transfer requests, such as the serial numbers of the transferred compliance instruments, and to add or consolidate fields relating to the date of the transaction and the negotiated price. Staff is also considering the addition of information regarding the type of compliance instrument involved, the vintage year of the compliance instrument, and the type of agreement providing for the transfer.

Cost Containment

A CARB Board Resolution directed staff to develop a proposal for incorporating additional cost containment mechanisms into the cap-and-trade program. One of the most important current cost containment features is the allowance price containment reserve ("Reserve"). The Reserve contains approximately 122 million allowances that are available for purchase by covered entities at three pre-established price tiers. One of the goals of the Resolution is to ensure that allowance prices will not exceed the highest price tier under the Reserve. Potential options to meet this goal include the following: increasing the availability of allowances at the highest price tier of the Reserve; allowing covered entities to fulfill their compliance obligation by paying a fee equal to the highest Reserve price for each metric ton of emissions; and allowing emissions to be higher than planned if needed to contain costs coupled with a commitment for additional emissions reductions to meet post-2020 AB 32 goals.

Slides from the workshop are at http://www.arb.ca.gov/cc/capandtrade/meetings/meetings.htm.