As discussed in our May 24, 2011 entry, California’s proposed greenhouse gas (GHG) cap and trade program suffered a setback on May 20, 2011 when a San Francisco Superior Court issued a writ of mandate enjoining the California Air Resources Board (ARB) from any further cap and trade rulemaking until ARB complies with the California Environmental Quality Act (CEQA) by analyzing alternatives to cap and trade (e.g., a carbon tax/fee).  Then, as now, many significant aspects of the cap and trade program remained unresolved and ARB had planned workshops and rulemakings for this summer to finalize the cap and trade program.  Some of the open items include critical program components such as the allocation of free GHG allowances, the use of auction revenue, the generation and use of offsets, and the designation of GHG intensity benchmarks for regulated sectors.  Based on its actions to date, ARB appears to be executing a belt-and-suspenders, parallel-path response to the Superior Court’s ruling.  ARB has sought reversal of the Superior Court’s finding of a CEQA violation and a stay of the Superior Court’s associated injunction, but at the same time it is seeking to remedy that violation.

As expected, on June 1, 2011, ARB filed a notice of appeal with the Court of Appeal, First Appellate District.  ARB followed up its appeal with a Petition for a Writ of Supersedeas on June 2, 2011, asking the First Appellate District to stay the Superior Court’s decision.  ARB’s Petition for a Writ of Supersedeas argued that the appeal itself automatically stayed the Superior Court’s writ of mandate, but also argued that even if it did not, the Superior Court’s writ of mandate should be stayed for the reasons set forth in ARB’s Petition.  On June 3, 2011, the First Appellate District:  (1) temporarily stayed the Superior Court’s writ of mandate, pending the its consideration of ARB’s Petition for a Writ of Supersedeas; and (2) ordered the Association of Irritated Residents (AIR) to file an opposition to ARB’s Petition by June 20, 2011.  On June 24, 2011, the First Appellate District granted ARB’s Petition for Writ of Supersedeas, staying the Superior Court’s injunction and allowing ARB to move forward with cap and trade implementation until the Court of Appeal renders a decision or issues another order.

In the midst of this appellate action, ARB released a “Supplement to the AB 32 Scoping Plan Functional Equivalent Document” on June 13, 2011.  The Supplement is designed to address the CEQA flaws first identified by Superior Court Judge Goldsmith in his January 24, 2011 tentative decision in AIR v. ARB (discussed here) and finalized in his March 18, 2011 statement of decision (discussed here).  A public comment period commenced upon release of the Supplement and will end on July 28, 2011 at 5:00 pm.  ARB is aiming to prepare responses to comments and certify the Supplement at its meeting on August 24, 2011.

On June 30, 2011, ARB announced via email listserv that it will be proposing changes to the cap and trade program, most notably that 2012 essentially will constitute a dry run for the program.  Additional details will be available at a July 15, 2011 public workshop where ARB will discuss, inter alia, these proposed changes to the cap and trade program.  Prior to the workshop, ARB will make the proposed changes available in discussion drafts.  It appears that a separate listserv notice will be sent when these drafts are available.  Nevertheless, this is what we suspect the changes will include:

  • There will be no allowances issued for 2012 and no compliance obligation for 2012 GHG emissions.
  • Quarterly auctions of emissions allowances would begin in the second half of 2012, rather than February 2012 as planned.
  • Entities that emit more than 25,000 metric tons of carbon dioxide equivalent per year will begin trading credits at the end of 2012 to cover their emissions reduction obligations for 2013 and later.
  • The first three-year compliance period, which originally covered 2012-14, will be shortened to two years (2013-2014).

ARB is claiming that the AIR v. ARB litigation did not influence this development, but rather its concerns about potential market manipulation drove them to propose these changes.  ARB also is claiming that since the cap was already set for 2012 at roughly the level of expected emissions, California will not forgo any emissions reductions.

For additional details on ARB’s previously proposed structure of the cap and trade program, see our April 26, 2011 Client Alert titled Despite Litigation Roadblock, California Pushes Ahead With Cap and Trade Implementation.