On July 15, staff of the California Air Resources Board ("CARB") released a discussion draft of potential revisions to CARB's greenhouse gas emission "cap and trade" regulations. Significant issues covered by the discussion draft include:

Market Implementation and Oversight

One set of proposed revisions relates to the surrender of compliance instruments. Under existing regulations, CARB removes compliance instruments from a covered source's compliance account on November 1 of each year. A covered source may use offset credits to satisfy up to 8 percent of its compliance obligation. CARB staff propose to add a Section 95856(h), under which all offset credits in the account will be removed first, not just the 8 percent offset credit amount, followed by removal of greenhouse gas allowances. This would mean that more than 8 percent of the offset credits could be removed by the end of the applicable three-year compliance period and those "excess" credits would be lost. To avoid this possibility, covered sources should carefully manage the transfer of compliance instruments from their holding accounts to their compliance accounts. CARB staff has indicated a willingness to consider alternatives to this approach, as long as there is a default order of surrender. Timing Issues

Under the current program, some covered sources will not know their compliance obligation until after the registration period ends for the annual Reserve Sale on September 9, which is the final opportunity to purchase greenhouse gas allowances before the November 1 surrender deadline. To address this issue, CARB staff has proposed to move up the emission verification deadline from September 3 to August 15 of each year.

Insider Trading

In an effort to protect the market from insider trading and collusion, CARB staff propose to amend Section 95814(a)(6) to prohibit a covered source's consultants and employees with access to information relating to compliance instruments from becoming "voluntary associated entities" able to purchase, sell, and hold compliance instruments. CARB staff has also proposed to amend Section 95830 to require identification of the consultants and employees on the covered source's application to register with CARB.

Allocation of Allowances

The discussion draft amends Table 8 of the regulations to extend to 2015–2017 the period of 100 percent free allowances for sources with medium and low risk of leakage, and to change the percentage of free allowances from 50 percent to 75 percent for these sources in 2018 and 2020. The change is intended to provide additional time for covered sources to transition to lower carbon production methods. The draft also amends several of the product-based emission efficiency benchmarks on Table 9.1 of the regulations. Special allocation rules are also proposed for other source categories, including "legacy contract generators," universities, public service facilities, refineries, and natural gas suppliers.

Cost Containment

A proposed Section 95870(j) provides that starting in 2015, 10 percent of future greenhouse gas allowances would be allocated to the Allowance Price Containment Reserve, if needed. Under a new Section 95913(f)(5), these additional allowances would be available at the highest price tier (currently $50 per allowance), to cap allowance prices at this price.

Formal proposed regulations are expected in early September, followed by a 45-day public comment period; a hearing is scheduled for October 24 and 25.