On July 17, 2017, the California Assembly and the Senate voted to extend California’s Cap-and-Trade Program from 2021 to 2030 (Assembly Bill (“AB”) 398). Governor Brown is widely expected to sign the bill in the coming weeks.

AB 398 is considered as a major win for Governor Brown and his commitment to fight climate change, because it reinforces and extends one of California’s marque programs to reduce greenhouse gas (“GHG”) emissions. The Cap-and-Trade Program—which is administered by the California Air Resources Board (“CARB”)—requires factories, power plants, and other companies (“covered entities”) to pay for the GHG emissions associated with their industrial activities.

The Cap-and-Trade Program aims to encourage pollution reduction at the lowest possible cost by placing a cap on each source of GHG emissions, allocating GHG emissions permits to covered entities on a yearly basis, and then creating a market for covered entities to buy and sell such emissions permits through an auction process. In general, AB 398 will extend the existing Cap-and-Trade Program, with a few notable changes detailed below.

  • Ten-year extension. Extends CARB’s authority to adopt rules and implement the Cap-and-Trade Program and achieve GHG emission limits through the end of 2030.
  • Applies to the same industries and uses same industry assistance factors. The same industries will continue to be subject to the Cap-and-Trade Program and CARB’s authority. CARB will set the industry assistance factors for the post-2020 Program at the same levels that are applicable to the 2015 through 2017 compliance period.
  • Same reporting threshold. No mention of changes to the current threshold triggering reporting obligations for emissions of more than 10,000 metric tons of CO2 per year.
  • Decrease of free allowances/reduction of cap adjustment factor. Directs CARB to “apply a declining cap adjustment factor to industry allocation.” The “cap adjustment factor” is another component of the free-allowances formulas and will reduce the number of free allowances given out by 40 percent by 2030.
  • Lowers the cap for the use offset credits. Under the current law, GHG “offsets” (i.e. projects that otherwise reduce GHG emissions or mitigate the impacts of climate change) can be used for up to 8% of a regulated entity’s compliance obligation. AB 398 reduces that to 4% from 2021 through 2025, and 6% from 2026 through 2030.
  • Impact of offsets must be tied to California. Half of all offsets used for compliance from 2021 through 2030 must come from projects that have “direct environmental benefits” in California.
  • Increased focus of offset projects. CARB must develop approaches to increase offset projects in the state.
  • No specific price ceiling. CARB must consider certain factors such as the “need to avoid adverse impacts on resident households, businesses and the state’s economy.”
  • Two price containment points. The “price containment points” will be two prices set below the price ceiling for the yearly GHG emissions permit auction. CARB must offer for sale certain amounts of allowances at those two price containment points.
  • Suspension of fire prevention fee. Suspends a fee that primarily affects rural landowners.
  • Establishes an Independent Emissions Market Advisory Committee. 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.
  • Establishes a Compliance Offsets Protocol Task Force. Directs CARB to create 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.
  • Linking with other jurisdictions. Allows for linking of California’s program with other jurisdictions, which helps spread effective climate policy beyond state borders.
  • Preemption. Preempts regulation by local governments or regional air quality management districts of GHG emissions by any stationary sources covered by the Cap-and-Trade system until 2031.
  • Extends tax breaks. Extends sales and use tax exemptions to manufacturers and research and development activities in the state, and expands them for electricity production through 2030.
  • Annual reports on specified GHG emissions targets. Requires the Legislative Analyst’s Office to annually report to the Legislature on the economic impacts and benefits of specified GHG emissions targets.
  • Use of money. Cap-and-Trade Program moneys are to be appropriated in accordance with specified order of priorities, but no instruction on how money from the Program will be used.The link to the final bill can be accessed at: http://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201720180AB398

AB 398 goes hand-in-hand with other recently-approved legislation, including AB 617, which is meant to address local air quality concerns, and ACA 1, which puts a measure on the 2018 ballot regarding control of the cap-and-trade program’s revenue spending.

The link to the final bill can be accessed at: http://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201720180AB398