In brief: GHG emission regulation and allowances in USA

General GHG emissions regulation

Do any obligations for GHG emission limitation, reduction or removal apply to your country and private parties in your country? If so, describe the main obligations.

Various national, regional and state programmes exist in the United States to regulate GHG emissions. The main programmes are regulations issued under the CAA, federal motor vehicle fuel economy standards, California’s cap-and-trade programme, a similar programme in the State of Washington, and the Regional Greenhouse Gas Initiative (RGGI). California and Oregon also have Low Carbon Fuel Programs (LFCS), which govern the carbon intensity of certain fuels.

The Biden administration’s ‘whole-of-government’ approach to climate change is having an enormous impact on US GHG policy, as is the Biden administration’s goal of net-zero GHG emissions for the United States by 2050. Individual states are also driving significant changes in US climate policy. At present, 12 states have binding net-zero GHG emissions targets (typically by 2045 or 2050) and another 11 have similar non-binding targets. Another eight states have binding GHG emissions reduction requirements in the 80–95 per cent range. Collectively, these state and federal policy pronouncements are beginning to lead to significant changes in both voluntary and mandatory GHG reduction and regulation programmes around the country, across numerous sectors.

Are there any requirements for obtaining GHG emission permits or approvals? If so, describe the main requirements.

Certain stationary sources are required to obtain CAA Title V operating permits and prevention of significant deterioration (PSD) permits for GHG emissions. Under the CAA’s ‘cooperative federalism’ approach, most states manage GHG permitting in conjunction with any applicable state laws or programmes. Typically, any applicable New Source Performance Standards GHG emissions limits will be incorporated into a facility’s Title V operating permit. When obtaining permits under the PSD programme, sources must evaluate available emissions reduction options to determine the ‘best available control technology’ for that facility, which are made on a case-by-case basis considering energy, environmental and economic impacts, and other costs. Over time, technological advancements increase the degree of attainable emissions reductions. GHG considerations also become relevant in certain permitting actions, including those under NEPA and analogous state laws, which may require permit applicants to take into account GHG emissions related to a specific project.

Several market-based permit systems also exist: California and Washington now have state-level cap-and-trade programmes requiring major emitters to obtain permits to release GHGs, and 11 states participating in the RGGI have a cap-and-trade programme covering the electricity sector.

How are GHG emissions monitored, reported and verified?

EPA’s mandatory GHG Reporting Rule requires reporting of GHG data and other relevant information for facilities in 41 source categories. EPA compiles reported GHG emissions to create its annual GHG inventory for the United States. Compliance for covered sources is mandatory and administrative, civil or criminal penalties may apply for violations. Several states have also implemented GHG reporting rules, and the reporting thresholds differ by state. Entities must comply with both federal and state GHG reporting requirements, if applicable. According to EPA, the GHG Reporting Rule covers over 8,000 US facilities.

In 2010, the SEC issued interpretive guidance regarding required disclosures by companies of their climate change-related risks. On 4 March 2021, the SEC announced the creation of a Climate and ESG Task Force within the Division of Enforcement. Although the ‘materiality’ standard still currently provides the threshold for required disclosures in the United States, in 2021 the SEC also issued a specific request for comments regarding whether changes are needed to its GHG disclosure rules. In May 2022, the SEC proposed new disclosure and reporting requirements for public companies that would significantly expand current climate risk reporting requirements while also imposing new requirements related to GHG and ESG disclosures.

Environmental groups, investors, and shareholders also are increasingly driving changes to climate risk reporting by companies in the United States. Companies may now face dozens or even hundreds of requests for data and information on how they assess and disclose climate-related risks, and there has been increased adoption of third-party disclosure standards, including those published by the Task Force for Climate-Related Financial Disclosures and the Sustainability Accounting Standards Board.

The US Federal Trade Commission (FTC) appears poised to significantly refresh its guidelines for the Use of Environmental Marketing Claims (Green Guides). On 2 July 2021, the FTC published its 10-year regulatory review schedule indicating that the agency will initiate a review of the Green Guides in 2022, and a proposal is widely expected in the second half of 2022. This action is in line with the global trend toward more scrutiny of claims and substantiation, including actions within the European Union requiring enhanced substantiation for environmental claims.

GHG emission allowances (or similar emission instruments)

Is there a GHG emission allowance regime (or similar regime) in your country? How does it operate?

There is no mandatory GHG allowance regime at the federal level. The Regional Greenhouse Gas Initiative (RGGI), California and Washington operate cap-and-trade programmes with associated emissions allowance regimes.

RGGI, the first market-based GHG reduction scheme in the US, currently encompasses the eastern states of Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, Vermont and Virginia. RGGI lowered its GHG emissions cap beginning in 2014 to 91 million short tons, with annual follow-on decreases of 2.5 per cent from 2015 to 2020. In August 2017, RGGI members approved measures to extend RGGI to 2030, with a further 30 per cent reduction in GHG emissions during that time. Membership in RGGI is voluntary and subject to change; New Jersey withdrew from RGGI in 2011 but rejoined in 2019. Virginia joined RGGI in 2020, and Pennsylvania is considering joining the programme.

RGGI is limited to the power sector and uses an allowance system for compliance; electric power generators subject to RGGI are required to hold CO2 allowances equal to the amount of CO2 they emit in a given compliance year. Each RGGI state issues allowances in an amount defined by each state’s applicable law or regulation implementing RGGI. Collectively, these allowances comprise the annual RGGI cap and are distributed through quarterly auctions. RGGI also utilises a cost containment reserve system to allocate and auction additional allowances when needed to limit price volatility that, combined with periodic over-supply, has kept prices low but has also frustrated efforts to create a market for carbon offsets in RGGI states. An Emissions Containment Reserve, which allows states to withhold allowances from auction if reduction costs are lower than projected, will allow more dynamic response to market conditions and may have the effect of stabilising or raising slightly the cost of RGGI allowances.

California’s Global Warming Solutions Act (AB 32), signed into law on 27 September 2006, established a mandate to reduce GHG emissions to 1990 levels by 2020 and granted broad authority to the California Air Resources Board (CARB) to develop and implement a broad strategy to achieve that goal. In September 2016, a new bill (SB 32) extended and expanded the state’s commitment to reducing GHG emissions, establishing a new reduction target of 40 per cent below 1990 levels by 2030. CARB’s strategy to achieve these emission reduction goals is set forth in its Scoping Plan and includes programmes in nearly every sector of the economy. CARB’s updated 2022 Scoping Plan outlines a concrete plan for the state to achieve carbon neutrality by 2045. The Plan builds on the 2017 update evaluating emissions reductions needed in the electricity, transportation, industrial and building sectors. The 2022 update went beyond the 2017 plan to detail strategies for reductions in short-lived climate pollutants and carbon dioxide removal. It also reduced the role that the multi-sector cap-and-trade GHG emissions programme, first implemented in 2013, will play. As proposed in 2017, the programme governed 80 per cent of GHG emissions in the state and is one of the largest carbon markets in the world. However, according to the 2022 plan, to meet its goal, the state needs 27 per cent lower emission reductions from cap-and-trade than what was planned for in 2017. The cap-and-trade programme will be revised in 2023. On top of these mandates, the Clean Energy and Pollution Reduction Act of 2015 establishes state-wide goals in California for 2030 of 50 per cent electricity generation from renewable resources and doubling energy efficiency in electricity and natural gas usage.

CARB sets an annual cap on GHGs and issues a limited number of emission allowances, each of which authorises its holder to emit one MtCO2e. The number of available allowances is limited by the cap, and declines by approximately 3 per cent each year. Entities that emit 25,000 MtCO2e annually are obliged to surrender a certain number of compliance instruments to CARB, consistent with each entity’s reported emissions. Compliance instruments consist primarily of allowances, which can be purchased from CARB at quarterly auctions. In addition, up to 8 per cent of a covered entity’s obligation can be met with CARB-certified offsets, but starting in 2021 this number will drop to 4 per cent, then increase to 6 per cent in 2026. Both allowances and offsets may also be bought and sold on the secondary market, subject to certain restrictions. Covered entities are required to disclose substantial information to CARB, including information about corporate ownership and affiliates, directors and officers, high-level employees, and legal and market-strategy advisers.

On 17 May 2021, Washington Governor Jay Inslee signed into law the Washington Climate Commitment Act, which creates a state-wide cap on GHG emissions that will decline over time, and a limited trading system for carbon credits that can be sold to entities requiring credits to meet their individual GHG emission limits. Beginning on 1 January 2023, all sources emitting more than 25,000 MtCO2e will be subject to the cap and will be required to purchase credits sufficient to meet their emissions. Allowed permits will decline over time until a 90 per cent reduction in GHGs over 1990 emissions levels is achieved in 2050. An annual auction of GHG permits will be conducted by the Washington Department of Ecology, with revenues dedicated to programmes for the reduction of carbon emissions, climate resiliency, support of renewable energy and reduction of GHGs in agriculture. Trading linkages will be established to carbon markets in other jurisdictions to permit the purchase of allowances from those markets, which could then be applied to Washington’s GHG limits. On 17 May 2022, one year after Governor Inslee signed the CCA, Ecology announced that it is seeking public comment on its proposed Climate Commitment Act Program Rule (Chapter 173-446 WAC). The proposal would adopt specific administrative rules governing the operation of Washington’s 'cap-and-invest' programme.

Are there any GHG emission allowance registries in your country? How are they administered?

There is no GHG allowance regime at the federal level. The registry for RGGI allowances is called the ‘CO2 Allowance Tracking System’. Each RGGI allowance has a unique serial number, which then tracks initial ownership, transfer and retirement of allowances. California and other linked jurisdictions utilise the Compliance Instrument Tracking System Service (CITSS) as an allowance registry, which tracks the issuance, initial ownership, transfer and retirement of allowances and offsets within the Western Climate Initiative (WCI), which encompasses the CA programme. WCI conducts financial audit reports and RGGI periodically assesses the presence of any anticompetitive effects.

What are the requirements for obtaining GHG emission allowances? How are allowances held, cancelled, surrendered and transferred? Can rights in favour of third parties (eg, a pledge) be created on allowances?

There is no GHG allowance regime administered by the federal government. California (and its CITSS platform) and RGGI each maintain rules and systems for the issuance, auction, trading, banking, transfer and retirement of emissions allowances. Any qualified party can participate in RGGI allowance auctions; auction rules limit the number of allowances that associated entities may purchase in a single auction to 25 per cent of the total allowances offered for auction. California conducts quarterly auctions of GHG emission allowances. Both entities that are covered by California’s cap-and-trade programme, and others opting into the programme, can participate in the auctions. Washington will follow a model similar to California’s.

While some CA allowances are allocated to entities to prevent leakage, most are auctioned. RGGI and California auctions have recently set price records, with RGGI allowances selling for US$13.90 and CA allowances selling at US$30.85. In general, market participants must hold instrument trading accounts and be eligible to purchase and hold such instruments. Holding caps may also apply. Compliance entities must surrender or retire a volume of instruments equal to their covered GHG emissions each reporting period; retirement is facilitated through the relevant registry system.

Trading of GHG emission allowances (or similar emission instruments)

What GHG emission trading systems or schemes are applied in your country?

There is no national GHG allowance regime or national-level emission trading system. Concerning voluntary markets, there is no consolidated registry or trading system. Each allowance issuer or registry maintains its own trading platform, and as a result, the market is fragmented. Most transactions occur as over-the-counter bilateral transactions, or through brokers. Each registry or issuer has its own rules concerning trading, banking, and retirement, but in general voluntary carbon offsets may be freely transacted, pledged or securitised. The Commodity Futures Trading Commission (CFTC) regulates carbon offsets as environmental commodities, and certain transactions may be subject to CFTC rules.

Are any standard agreements on GHG emissions trading used in your country? If so, describe their main features and provisions.

No, although a variety of common terms are found in most emissions reduction purchase agreements and similar agreements used to facilitate such transactions. As a result, many transactions are conducted through similar Emissions Reduction Purchase Agreements.