In brief

What has happened?

On 16 December 2010 California approved a cap-and-trade emissions trading scheme (ETS) to reduce greenhouse gas emissions to 1990 levels by the year 2020.

What does this mean for Australia?

California is the world’s 8th largest economy and produces 13% of the USA’s gross domestic product. California’s implementation of an ETS gives further impetus to the establishment of a carbon price in Australia. It follows the implementation of ETSs in the European Union and in New Zealand.

Experience under the Californian ETS will be relevant to Australian regulators and businesses.

Next steps

The Californian ETS will commence on 1 January 2012.  

Who needs to know?

This article is relevant to you if your business is likely to be exposed to a carbon price.

How will the Californian ETS work?


The Californian ETS regulations (regulations) will apply to facilities that emit 25,000 tonnes of carbon dioxide equivalent per year, the same threshold proposed under Australia’s shelved Carbon Pollution Reduction Scheme. The regulations will cover approximately 600 facilities operated by 360 companies representing 80% of California’s emissions.

The number of companies that will need to comply with the regulations will increase over three compliance periods from 2012–20, until all regulated companies are covered by 2020. For example, the first compliance period from 2012–14 will only apply to operators of large processing facilities, electricity generating facilities, electricity importers and suppliers of carbon dioxide. More information is available in the timeline below.


From 2012, California will set limits on emissions and will release allowances (in the form of permits to emit) up to those limits. Regulated companies will need to surrender sufficient permits or other approved offset credits to cover their emissions (required permits) for three-year compliance periods.

Although the required permits will be calculated on the basis of a three year compliance period, a percentage of required permits will need to be surrendered annually to avoid non-compliance. The remainder is to be surrendered at the end of each three year compliance period.

It has been indicated that approved offset credits are likely to be from sources including the U.S. Forests Protocol, Livestock Manure Digester Projects Protocol, Urban Forests Projects Protocol and Ozone Depleting Substances Projects Protocol.

To assist with the transition and prevent against leakage,1 free allowances will be allocated to most companies during the initial compliance period. The allocations will be made on the basis of industry benchmarks. Companies which are not allocated free allowances will need to acquire them. Companies will be able to acquire permits on the market or at state-conducted auctions.

The number of free allocations and the number of permits on issue will gradually reduce over time until a 15% reduction of emissions is achieved by 2020.

What does this mean for Australia?

The use of an ETS in Europe and New Zealand and now in California indicates a recognition, at least in those jurisdictions, of the advantages of setting carbon prices by means of an ETS.

California’s moves are likely to increase the momentum of the Federal Government’s plans to implement an Australian carbon price (with an ETS the frontrunner).2


Click here to view the Timeline.

Key references

  • California’s Proposed Cap-and-Trade Regulation3
  • California’s Air Resources Board News Release4