Introduction

California is ranked as either the twelfth or the sixteenth largest producer of greenhouse gases (GHGs) in the world, depending upon the study. On a per capital basis in 2004, each Californian generated over 13 tons of GHGs, which is more than any state other than Texas. While for some states and many politicians, the debate continues on whether global warming exists or whether burning fossil fuel throughout the world contributes to rises in the earth’s temperature, those debates are over for all practical purposes in California. Leaving those debates behind, it has become the first state in the nation to legislate GHG emission controls aimed at combating climate change.

California’s burning ambition to reduce its production of greenhouse GHGs was transformed into state law in 2006 by the Global Warming Solutions Act (“AB 32”). AB 32’s preamble states that the phenomenon of global warming is not open to debate and its consequences for the state are real and dire. AB 32 sits in stark contrast to the current federal approach of funding research and reducing the rate of increase of GHG production.

By enacting AB 32, California has committed its citizens and its economy to roll back the clock on actual GHG emissions. By 2020 AB32 will return California to the level of GHG production it had thirty years earlier in 1990. Because unchecked GHG emissions in 2020 are estimated to be 600 million tons, AB 32’s commitment means that Californians must eliminate 173 million tons of GHG by 2020 to reach 1990 levels. That means achieving an estimated 29% reduction in a little more than 12 years – a Herculean task by any measure. In fact, according to the Sacramento Bee, this goal is the “equivalent of cutting the state’s gasoline use almost 70%.”

In the year since AB 32 was signed by Governor Swarzenegger, the reality of what reductions will be necessary to meet the Act’s goals is taking shape under the leadership of the California Air Resources Board (“CARB”). That shape indicates that the path back to 1990 GHG emission levels will not necessarily be an easy road and the way that many businesses operate and in particular how energy is provided will have to change as 2020 approaches

California GHG Emissions from Transportation

Furthermore, that road back to 1990 looks more than a little murky in 2008 due to what many perceive as the unregulated 800 pound gorilla in the room – the GHG emissions from motor vehicles and light duty trucks on California’s highways. GHG emissions from these mobile sources are arguably controlled by federal law and that therefore cannot be regulated or reduced by unilaterally by California. These so-called transportation GHG emissions constitute between 36-40% of total GHG emissions in California depending upon the year. Consequently, without significant reductions in this sector that so far have not been forthcoming from the federal government, the burden of GHG emission reduction will have no choice but to fall more heavily on emission sources that are subject to AB 32.

The following sections are designed to present an overview of how AB 32 works and what control measures are currently under consideration and actual rulemaking by CARB. This overview will also highlight what efforts are underway by California and other states to regulate mobile GHG emissions. Finally, the overview will turn to the important Californiabased regional initiatives on carbon trading that will play an important role in GHG emission reduction in the West and ultimately the nation.

AB 32 – How It Came To Be

The origins of AB 32 can be found in legislation signed more than four years ago by former California Governor Gray Davis. In July 2002, he signed Assembly Bill 1493 that took two important steps toward addressing global warming. First, AB 1493 established the California Climate Action Registry to develop certified greenhouse gas emission baselines and emission results. But most importantly, AB 1493 took a direct aim at reducing a significant subsection of the California’s largest single source of GHG emissions – passenger vehicles and light duty trucks. According to AB 1493, these sources are responsible for approximately 40% of total GHG produced in the state. The legislation required CARB to adopt regulations that would achieve the “maximum feasible” and “cost effective” reduction of GHG emissions for new motor vehicles by the 2009 model year and all subsequent model years.

CARB moved ahead under AB 1493’s mandate and promulgated final rules in October 2005 that set standards for reducing GHG emissions in the 2009 new motor vehicles. The staff at CARB estimated that these state-of-the-art standards would reduce GHG emissions by approximately 30 million metric tons by 2020 and more than 50 million metric tons in 2030. But enactment of these regulations was only the first step toward requiring Detroit’s automakers to engineer new, less GHG-producing cars. Under federal law, California required a waiver from the federal Environmental Protection Agency (EPA) to allow it to deviate from federal auto emission standards that applied across the nation.

California Clashes with EPA over Clean Air Act Waiver

According to the provisions of the federal Clean Air Act, California is authorized to have its own set of motor vehicle emission standards that are more stringent than the federal government standard if certain conditions are met. For example, California tailpipe standards for its cars are more stringent than emissions standards for models sold elsewhere in the United States. Since in 2005 there were no federal Environmental Protection Agency (“EPA”) standards for reducing GHG emissions from motor vehicles, California’s standards under AB 1493 could only become effective if California could show that the standards were necessary in California to address “compelling and extraordinary conditions.”

To make this showing, California was required to request a formal “waiver” from EPA under the Clean Air Act to require automakers to comply with its standards by model year 2009. CARB first requested the waiver shortly after its regulations were promulgated in 2005, citing the substantive negative effects of global warming on California as the basis for the waiver request. More than two years passed while the waiver request remained pending with EPA.

EPA finally acted on California’s waiver request as a result of substantial political pressure and threats of lawsuits from Governor Swarzenegger along with the governors of thirteen other states who wanted to follow California’s lead and enact the California’s motor vehicle standards in their states. In December 2007 EPA Administrator Stephen Johnson denied California’s waiver request by finding in a letter to Governor Swarzenneger that in light of the global nature of climate change, California did not have a “need to meet compelling and extraordinary conditions” required for a waiver under the Clean Air Act. According to EPA, any need that California had to address the GHG emissions from transportation sources had already been addressed in very recent federal legislation (the Energy Independence and Security Act of 2007) that enacted increased fleet motor vehicle gas mileage requirements. (Note: The Energy Independence and Security Act of 2007 set fuel economy standards, not GHG emission standards.) California filed a Petition for Review on January 2, 2008 in the 9th Circuit Court of Appeals to appeal EPA’s denial.

Administrator Johnson’s letter has caused a firestorm of controversy in Congress. Senate Environment & Public Works Committee Chairwoman Senator Barbara Boxed (D-CA) has requested all documents related to that decision. Administrator Johnson appeared before the Committee on January 24, 2008 to testify about his decision, and he emphasized his reliance on the failure of California to demonstrate its need to meet compelling and extraordinary conditions and downplayed the role of the Energy Independence and Security Act of 2007 in his decision. The legal issues over whether the Administrator’s letter constituted “final agency action” that is a legal prerequisite for judicial review will be decided by the courts as part of an expedited appellate briefing schedule – California’s briefs are due in March, EPA’s briefs in April and any reply briefs in May. The bottom line is that California cannot rely on any federal action to reduce GHGs from the transportation sector at the very least during the pendency of the Bush Administration.

Beyond Executive Order S-3-05

Now turning back to GHG reduction initiatives in California leading up to AB 32, Governor Swarzenegger was not content to sit still during the pendency of the waiver request, so he moved aggressively forward on other fronts to start reducing GHG emissions. In June 2005 Executive Order S-3-05 established greenhouse gas reduction “targets” for California. These ambitious targets were to reduce GHG emissions to 2000 levels by 2010, reduce GHG emissions to 1990 levels by 2020, and then further reduce GHG emissions to 80% below 1990 levels by 2050. They were based on a comprehensive study undertaken by the Tellus Institute, a private non-profit energy institute to determine what needed to be done to address global warming (CHECK). Executive Order S-3-05 also established a Climate Action Team made up of the heads of various California state agencies and chaired by the Chairperson of CARB to figure out how to achieve these reductions.

But the Governor and the executive branch determined that realistically, the mechanism of an Executive Order was not going to achieve the ambitious goals the Order set for California. So under the leadership of Assembly Speaker Fabian Nunez, the California Legislature passed AB 32, which codified many of the emission goals established by Executive Order S-3-05. Specifically, AB 32 required by statute that California will reduce carbon emissions to 1990 levels by year 2020 and will set a statewide emissions cap that includes emissions generated by electric power that California imports from other states.

When AB 32 passed the California Legislature, Assembly Speaker Nunez stated in his press release that Californians “... have the will, ability and solutions to slow global warming and encourage technology that can help the rest of the world... we are giving the gift of a more stable environment to our children... and we are creating a new economic sector for the development of clean technologies that have the potential to add to California’s strong economy.” With this background in mind, how will AB 32 operate to achieve these goals?

AB 32 – How It Works

The critical first step to mandating GHG reductions is to either (1) determine a baseline inventory of emissions as a precursor to reducing them or (2) define an emissions reduction goal to achieve. AB 32 does both. First, AB 32 defines California’s GHG emissions in 1990 as the goal to achieve by 2020. But since in 1990 there were no requirements for quantifying or reporting GHG emissions, CARB relied on a number of data sources to establish (some might say “estimate”) the 1990 GHG levels. These sources include inputs related to fuel combustion, industrial processes and agricultural practices.

After an accelerated rulemaking process, in December 2006 CARB approved its staff’s figure of 427 million metric tons of CO2 equivalent as the 1990 GHG emissions level/2020 statewide emissions cap. But what does this figure mean in terms of GHG emissions reductions? It means that assuming that CARB’s estimate of uncontrolled emissions in California in 2020 would be 600 million metric tons of GHGs, California must eliminate 173 million metric tons of GHGs between now and 2020.

CARB’s 1990 emissions level/2020 statewide emissions cap is based on quantifying emissions based on data sources, and not necessarily measurements of actual emissions from real sources of GHGs. But the history of air pollution control demonstrates that developing a baseline of actual emissions, applying pollution controls and then measuring emissions reductions is the only certain route to determine if the pollution control technology is reducing emissions. With that principle in mind, AB 32 requires mandatory emissions reporting so that GHG emissions reductions can be quantified.

Mandatory Emissions Reporting

AB 32 sets up a mandatory emissions reporting program (“MER”) that will develop real numbers on GHG emissions of specific industries and activities over the next few years. According to CARB staff, the emissions reporting will cover approximately 94% of the total CO2 produced in California from industrial and commercial stationery sources. The estimated number of sources affected by MER is approximately 800 facilities. The cost of reporting (and verification) are between $21 and $30 million annually, and are expected to decrease over time.

The initial large CO2 emitters subject to MER are categorized by industry and they include electricity generating facilities, electricity retail providers and power marketers, oil refineries, hydrogen plants, cement plants, cogeneration facilities and industrial sources that emit more than 25,000 metric tonnes per year of CO2. These industrial sources cut across a wide range of industries including food processing, glass container manufacture, oil & gas production, industrial gases, paperboard manufacturing and mineral processing.

MER proscribes how and when to report for each individual industry sector. The methodologies for each sector uses the protocols already established by the California Climate Action Registry (“CCAR”) when such protocols apply. For industries in general, combustion, process and fugitive emissions must be reported for CO2, nitrous oxide and methane (three of the six so-called Kyoto Protocol gases – named for the international protocol to address GHGs). There are special reporting requirements for the electric power industry which includes both utilities and power marketers. In addition to emissions from power plants that provide electricity, whether or not located in California, this industry must report specific types of electricity transactions that typically occur across state lines like purchases, sasles, imports, exports and exchanges. The list of compounds subject to reporting are also different for this industry – two additional Kyoto Protocol gases (sulphur hexafluoride and hydrofluorocarbons) must be included.

Emissions reporting is scheduled to begin in 2009 using emissions data generated by the affected industries in 2008. Beginning in 2010, the MER regulations require that all data be “verified” in accordance with elaborate verification procedures. The procedures require state approval of the technical consultants that will undertake verification of emissions. These consultants must comply with specific educational requirements and must pass a state exam. The air quality management districts in California that regulate air quality can also verify emissions.

Since this verification process is a boon to environmental consultants, the MER regulations set up complex conflict of interest rules to improve the integrity of the verification process. The process is justified by the real world experience in the area of toxic air pollutants where the source initially “over reports” emissions in the baseline inventory in order to make future reductions from that baseline automatically and thereby make initial reductions both easier and less costly.

How Does AB 32 Set Enforceable GHG Emissions Reduction Standards?

CARB’s next step after setting the emissions cap is to adopt a Scoping Plan by January 1, 2009. According to AB 32, the goal of this Plan is to achieve the “maximum technologically feasible and cost-effective reductions in GHG emissions from sources or categories of sources of GHG by 2020.” CARB describes the Scoping Plan as the main strategies to reduce GHGs. Key to the development of the Scoping Plan is the involvement of various energy related state agencies (Public Utilities Commission and the State Energy Resources Conservation and Development Commission) to insure that the CARB regulations are “complementary, non-duplicative and can be implemented in an efficient and cost-effective manner.”

The Scoping Plan is directed to focus on identifying and defining direct emission reduction measures, alternative compliance mechanisms, market-based compliance mechanisms, voluntary actions, so-called “cap and trade” systems, as well as potential monetary and nonmonetary incentives for GHG sources and source categories. There will also be a de minimis threshold of GHG emissions that will trigger regulation in an effort to reduce AB 32’s impact on small businesses.

The current accelerated schedule for this important document starts with four public workshops held between November 30, 2007 and March 25, 2008. The draft Scoping Plan will be issued by CARB staff in June 2008, followed by more workshops in July. After the workshops are completed, the Scoping Plan as revised will be presented to CARB for adoption in November 2008.

Dubbed across the internet as the launching of Noah’s Ark, CARB’s time line to generate the Scoping Plan will consider how to divide GHG sources into six economic sectors: electricity, local initiatives and land use, transportation; business and industry; agriculture and forestry. “There are a lot of animals on this ark, and we have to examine each separately,” says a CARB spokesperson.

Once the Scoping Plan is adopted by CARB, the next step will be to use the Plan as a blueprint for CARB to draft rules that will take effect by January 1, 2012.

What Happens Between Now and 2012?

AB 32 takes the position that there are a number of so-called “discrete early action” (DEA) GHG reduction measures that can be implemented on or before January 1, 2010. These initial early action measures were unveiled in Summer 2007 and include (1) the low carbon fuel standard established by Executive Order S-01-07; (2) restrictions on “do-it-yourself” automotive refrigerants in motor vehicle air conditioning systems and (3) use of state-of-the-art landfill gas methane capture technologies. CARB staff estimates that these measures will collectively reduce GHG emissions between 13 and 26 million metric tonnes of CO2 equivalent annually be 2020.

In October 2007, CARB expaned the list of DEAs from 3 to 6. The additional 6 DEAs include the (1) Green Ports Initiative; (2) reducing high GHGs used in consumer products; (3) reducing PFCs from semi-conductor manufacturing; (4) improved truck movement efficiency via “SmartWay;” (5) sulfur hexafloride reductions from the nonelectric sector and a (6) tire inflation program. These topics will have enforceable rules in place on or before January 1, 2010.

The Big Picture

Attachment 1 is Table 1 from CARB’s October 2007 “Expanded List of Early Action Measure to Reduce Greenhouse Gas Emissions in California Recommended for Board Consideration.” This Table lists all forty-four (44) measures that are in the pipeline for Board adoption between now and 2012. The measures range from anti-idling enforcement and manure management to proposals to electrify truck stops.

California’s Regional Influence – Western Climate Initiative

Air pollution is rarely a localized problem due to meteorological and climate conditions, so consequently, GHG emissions are not tied to either state nor political boundaries. Recognizing this fact, once again California has chosen to take a leadership role at the regional level through Governor Swarzenegger’s plan to bring together a number of Western States’ governors to address climate change on a regional basis. Originally started with the governors of California, Oregon, Arizona, New Mexico and Washington, the Western Climate Initiative (WCI) has been joined by British Columbia, Manitoba, Montana and Utah. Observer states and provinces include Alaska, Colorado, Idaho, Kansas, Nevada, Wyoming, Ontario, Quebec, Saskatchewan and Sonora (Mexico). The purpose of the WCI is to “collaborate in identifying, evaluating and implementing ways to reduce GHG emissions and to achieve related cobenefits.”

When it was formed in February 2007, WCI announced its three primary objectives: (1) to set an “overall regional goal” by August 2007 to reduce carbon emissions; (2) develop a design for regional “cap-and-trade” of GHG emissions to achieve the regional goal and (3) to participate in a regional GHG registry to track, manage and credit entities to reduce GHG. Consistent with its schedule, WGH announced its overall GHG emissions goal in August 2007: WCI participants will commit to reduce emissions 15% below 2005 levels by 2020. (Note that this goal differs from California’s goal to reach 1990 emission levels by 2020. According to the Union of Concerned Scientists, this goal translates to “about 2% above the 1990 levels by 2020,” which is not quite as ambitious as California.) The Climate Registry under the auspices of WCI is now a reality that is built upon the framework of the existing California Climate Action Registry. According to the WCI website, The Climate Registry is planning to begin accepting data in early 2008.

In the meantime, WCI has established the following 5 subcommittees to work on the regional cap-and-trade program: Reporting, Scope, Electricity, Allocations and Offsets. A number of these subcommittees have issued Options Papers under consideration by the WCI participants and stakeholders. The options discussed in these Papers and the corresponding workshops will set the stage for the emissions trading program. The ambitious schedule for WCI’s “design recommendations for a regional cap-and-trade program” calls for release of those recommendations by August 2008. engage in expensive and protracted litigation on issues such as market definition and analysis of market impacts. The Court’s seeming bipolar approach to these fundamental questions about the role of antitrust litigation in shaping the economic playing field may say more about its strong belief that modern economic thinking has created such substantial questions about the continuing wisdom of the rule announced in Dr. Miles that other goals had to be sacrificed.