California, the U.S.’s most populous state and one of the world’s ten largest economies, has historically exerted significant influence on the design of standards in the U.S. and beyond. The world’s fifteenth largest greenhouse gas (“GHG”) emitter, it is responsible for two percent of global GHG emissions.1 With Assembly Bill 32 (“AB 32”), the Global Warming Solutions Act of 2006, California has shown leadership in legislating GHG emissions reductions. California’s efforts will have ramifications for a number of Canadian provinces, especially through their common membership in the Western Climate Initiative (“the WCI”). 2

The lead agency for the implementation of AB 32 is the California Air Resources Board (“CARB”). In June, CARB management released a draft scoping plan to accomplish the goals set in AB 32.3 On 15 October 2008, the California Air Resources Board (“CARB”) released its Climate Change Proposed Scoping Plan (the “Scoping Plan”).

An Overview of AB 32 and the Scoping Plan

AB 32 requires California to reduce its greenhouse gas (“GHG”) emissions to 1990 levels by 2020.4 The 1990 baseline is 427 million metric tons of carbon dioxide equivalent (MMTCO2E), and meeting the goal will require each Californian to reduce his or her annual emissions from 14 to 10 tons.5 The Scoping Plan calls for the goal to be met through a combination of the following activities:

  • expanding and strengthening existing energy efficiency programs as well as building and appliance standards;
  • achieving a statewide renewables energy mix of 33%;
  • developing a California cap-and-trade program that links with other WCI partner programs to create a regional market system;
  • establishing targets for transportation-related greenhouse gas emissions for regions throughout California, and pursuing policies and incentives to achieve those targets;
  • adopting and implementing measures pursuant to existing State laws and policies, including California’s clean car standards, goods movement measures, and the Low Carbon Fuel Standard; and
  • creating targeted fees, including a public goods charge on water use, fees on high global warming potential gases, and a fee to fund the administrative costs of the State’s long term commitment to AB 32 implementation.6

Certain sectors will be targeted under the California initiative: energy efficiency, waste management, agriculture and forestry, transport, and water treatment.

CARB has adopted regulations requiring mandatory reporting by large emitters, and has identified “Discrete Early Actions” that will be enforceable by 2010. The Scoping Plan’s measures are designed to exceed the reduction target to provide a “safety zone” should reduction measures in uncapped sectors fall short.7 Given their potential impact on Canadian initiatives and commitments, this bulletin will focus on the proposed cap-and-trade program (the “Cap and Trade Program”), fuel standards, and vehicle standards.

The Cap and Trade Program

Scope

Under the Scoping Plan, 85% of the state’s GHG emissions will be included in the Cap and Trade Program by 2020.8 Electricity generators and industrial facilities emitting more than 25,000 metric tons of CO2e will be included in the Cap and Trade Program as of 2012. The following will be included in 2015: transportation fuel, which will be regulated at the point where it enters commerce, and “upstream treatment of industrial fuel combustion at facilities with emissions at or below 25,000 metric tons CO2e, and all commercial and residential fuel combustion regulated where the fuel enters commerce.”9 Sector responsibilities (in MMTCO2e) under the proposed Cap and Trade Program are as follows:10

To view table view original document.

Linking with the Western Climate Initiative

CARB intends for the Cap and Trade Program to be consistent with the WCI. It notes that the WCI goal of reducing GHG emissions to fifteen percent below 2005 levels by 2020 is roughly equivalent to California’s goal, and that half of emissions under the WCI are California’s responsibility.11 Consistency between the initiatives is expected to provide liquidity and reduce leakage.12 For example, where electricity used in California is generated outside of a WCI jurisdiction, CARB anticipates attributing that electricity to the first jurisdictional deliverer; consistent with the WCI.13

Allowances and Revenues

The extent to which allowances will be auctioned will be determined by regulations, that will meet the WCI’s minimum standards.14 California’s Public Utilities Commission and Energy Commission have proposed full auctioning in the electricity sector by 2016, with all auction revenue allocated to helping utilities and their customers adjust to carbon constraints.15

CARB anticipates setting aside allowances for purposes including recognizing early action or incentivizing future action.16 CARB will determine how to distribute any free allowances in concert with other WCI jurisdictions.17 The factors CARB will consider in deciding the extent of auctioning include: competitiveness, leakage potential, effects on regulated vis-à-vis unregulated industrial sectors, consumer impacts, and “the strategic use of auction revenues.”18

Offsets

CARB is considering the design of both compliance and voluntary offsets.19 It is working with California’s Climate Action Registry (the “Registry”) in this regard.20 The Registry was created in 2001 by Senate Bill 1771 to measure and report emissions reductions.21 The Registry’s Climate Action Reserve (the “Reserve”) has designed offset project protocols and assigns a unique identifier to each ton of reductions.22

The Reserve has designed offset project protocols and assigns each ton of reductions a unique identifier.23 Protocols have already been developed for livestock waste management, landfill methane capture and combustion, forest conservation, and afforestation/reforestation. While forestry projects must be located in California, other projects may be located anywhere in the U.S.24 The extent to which the Reserve’s protocols will be integrated in the Cap and Trade Program is not yet clear.

CARB authorizes the use of offsets to meet targets under the Cap and Trade Program. An offset program will be established through regulation under AB 32. AB 32 specifies that offsets must be real, permanent, quantifiable, verifiable, enforceable, and additional.25 Offset projects will be subject to CARB-approved methodologies, and CARB will adopt regulations to verify and enforce the emissions reductions.26 The extent to which a facility can rely on offsets to meet its obligations will be limited to 49% so that a majority of emissions reductions will still occur at facilities covered by the emissions cap.27

Recognizing that Californian demand for foreign-manufactured products contributes to GHG emissions, CARB is interested in working with the WCI in developing an offset program without geographical restrictions.28 However, CARB is also exploring the idea of limiting offsets to those from any jurisdictions that commit to targets including intensity targets in certain sectors so as to minimize leakage,29 and notes that “projects in the Mexican border region may be of particular interest.”30

Voluntary offset projects are currently registered in the Reserve.31 Under Canada’s draft Protocol Developers Guide, certain protocols approved under the California Climate Action Registry are to be granted “Fast Track” status.32

Next Steps

Once the Board approves a Scoping Plan, CARB will develop guidance on the following:

  • California’s allowance budget in 2012;
  • California’s allowance budget in 2015 with inclusion of transportation fuels and natural gas;
  • the trajectory of the allowance budget between the compliance periods;
  • the threshold for inclusion in the Cap and Trade Program;
  • the length of the compliance period;
  • the design of the auction;
  • limitations (if any) on banking of allowances;
  • method of allowance distribution;
  • use of auction revenue;
  • rules for use of offsets;
  • recognition for early action;
  • recognition for voluntary action;
  • rules for and potential limits on trading;
  • methods for ensuring that criteria and toxic pollutants do not increase in communities already disproportionately impacted by them;
  • reporting and verification of compliance; and
  • enforcement and penalties for non-compliance.33

Regulations to implement the Cap and Trade Program will be developed by the end of 2010 and will focus on cap-setting, allowance distribution, and offset rules.34 In designing the regulations, CARB is required to consider localized impacts, avoid arbitrage, and ensure enforceability.35

Fuel and Vehicle Standards

In California the transportation sector, which contributes 38% of emissions, is the largest emitting sector.36 Consequently, the Scoping Plan includes a number of fuel and vehicle emissions standards, including the Low Carbon Fuel Standard (the “LCFS”) which has special significance for Ontarians. In May 2007 Ontario’s Premier and California’s Governor signed a Memorandum of Understanding committing Ontario to the adoption of the LCFS.37 The LCFS will require a 10% reduction in the carbon intensity of transportation fuels by 2020.38 Identified as a Discrete Early Action item, CARB staff expect to present a LCFS regulation to the Board for its consideration in March 2009.

The Scoping Plan also includes Light-Duty Vehicle GHG Standards (the “Standards”) that call for vehicle manufacturers, beginning with 2009 models, to make cars and light trucks that reduce carbon dioxide emissions by 30% by 2016.39 The Standards are perhaps best known for being a source of interjurisdictional wrangling. The U.S. federal government’s Environmental Protection Agency has declined to grant California the waiver necessary to promulgate the Standards.40 Both presidential candidates, however, have stated that they would grant such a waiver.41 Many other states intend to follow California’s lead on vehicle standards once a waiver is granted, and such raised standards will likely have ramifications for Canada’s automotive industry.

Conclusion

The Scoping Plan is to be considered for approval by the Board December 2008 so that its measures can be implemented by 2012 to correspond to the WCI’s first compliance period. Jurisdictions representing 73% of Canada’s economy and 20% of the U.S. economy are now members of the WCI.42 As California is the largest member, the emissions reductions measures outlined above will not only impact the design of the WCI but are also likely to impact the design of Canadian emissions reduction measures.

It should be noted, however, that California’s Cap and Trade Plan may be for naught if the congressional Dingell-Boucher Bill comes to pass. Circulated earlier this month, the draft legislation, which sets a target of reducing emissions by eighty percent below 2005 levels by 2050, would preempt state and regional cap-and-trade programs.43