Just days before Californians rejected a ballot measure that would have suspended the state's landmark climate change law, the California Air Resources Board ("CARB") issued a detailed proposal that would create a comprehensive cap-and-trade program and an environmental emission trading scheme, as part of the implementation of A.B.32.
CARB's proposal took some observers by surprise. Yes, it calls for an allowance based system for compliance. Yes, it doubles the amount of offset credits that can be used for compliance. Yes, it allows for banking of credits. It emulates the model for emissions trading programs: Title IV of the 1990 Clean Air Act, which created dramatic emissions reductions at far lower costs than direct regulation.
The surprise: CARB proposes to allocate 90% of the allowances to affected sectors. Auctions are a relatively minor aspect of the proposal. And most remaining compliance obligations can be met by acquiring offsets, a concept many businesses have cheered because offsets minimize the cost of compliance. Offsets in the "voluntary" market are currently selling for less than $10 per ton and many at less than $5 per ton. CARB's proposal would specifically authorize the use of Climate Action Reserve offsets, and also provides a framework for future approval of additional offset types.
The emission cap is set at a "business as usual" level (at least for efficient users) and requires no reductions until 2013. At that point, the cap would reduce by 2% a year until 2015 and then 3% a year by 2020. Early reports suggest that there will still be sales of allowances. But with offsets being allowed for almost all of the commitment level, the proposal has many cost containment mechanisms. Among other things, banking of allowances is allowed in an unlimited fashion and 4% of the allowances will be held back in the event that the prices become too high.
The cap-and-trade proposal was released for public comment effective November 1. CARB will consider the proposal at its December meeting, currently scheduled for December 16 and 17, 2010.
If approved, the cap-and-trade proposal would create both challenges and opportunities for regulated entities. Companies will need to decide how to reduce their emissions and/or how to value -- and choose from among -- the various offset options authorized by CARB. And the proposal also provides an incentive for new technologies to be developed, both to reduce the cost of carbon emissions and to develop new technologies capable of producing recognized offsets.