One of the most notable features of California's recently-proposed cap and trade program for greenhouse gases (GHGs) is a commitment to free allocation of tradeable allowances to all covered entities. But how, exactly, will the California Air Resources Board ("CARB") determine the number of allowances to which each entity is entitled?

Industrial Facilities

CARB's allocation of allowances to covered industrial facilities will be based on two main factors: (1) efficiency-adjusted output and (2) transition assistance and leakage prevention.

In determining how many allowances a facility will receive, CARB will first look at how much the facility emits. But that is only the beginning of the analysis. In an effort to reward early adopters of GHG-reducing technology (and to create incentives for additional reductions), emissions will be compared to a "benchmark" designed to represent GHG-efficient production methods. Each industrial sector will use a different benchmark. Facilities "above" the benchmark will receive more allowances than they need for compliance under the new cap-and-trade system, while facilities "below" the benchmark will receive fewer allowances than they need for compliance. This arrangement is almost certain to create "natural buyers" and "natural sellers" of allowances.

CARB staff appears reasonably sensitive to stakeholder concerns that "natural buyers" will, instead of purchasing allowances on the open market, either reduce production (thereby negatively impacting the California economy) or shift industrial production to other, uncapped jurisdictions (a phenomenon known as "leakage" which negatively impacts the environmental purposes of the cap-and-trade program). To address these concerns, staff developed so-called "assistance factors" representing projected leakage risks for each industrial sector covered by the cap-and-trade program. The greater a covered facility's "assistance factor," the more allowances the facility will receive. For most industries, "assistance factors" are scheduled to decline beginning in 2015 (the beginning of the second cap-and-trade compliance period).

Electric Utilities

CARB has identified two potential bases for determining how many allowances will be distributed to electric utilities: (1) retail sales and (2) historical emissions. But the agency has yet to settle on a method for allocating allowances to utilities. Resolution of this issue will play an important role in determining the success of California's cap-and trade program, both because electric utilities account for a significant amount of the State's GHG emissions and because the solution devised for electric utilities may also be applied to natural gas distribution utilities (which will be covered by the program beginning in 2015).

Opportunities for Comment

CARB is accepting comments on its cap-and-trade proposal through the agency's mid-December board meeting. Because leakage risk and facility efficiency/benchmarking will play a especially important roles in determining who gets what under the proposed program, covered entities should carefully review CARB's analyses of those issues.