The California Air Resources Board ("CARB") released modified cap-and-trade regulations on July 25, 2011, and an updated Appendix A to the modified regulations on July 27, 2011. CARB intends to move quickly toward implementation of the cap-and-trade program, allowing just 15 days for the acceptance of public comments on the proposed modifications. The deadline for submission of public comments is August 11, 2011.

Prior CARB Endorsement of the Cap-and-Trade Regulations

On December 16, 2010, CARB approved a resolution ordering its Executive Officer to proceed with finalizing cap-and-trade regulations for greenhouse gas emissions. CARB’s action, along with the regulations endorsed by CARB, is described in a White Paper issued by Jones Day entitled "California Adopts Cap-and-Trade Program for Greenhouse Gas Emissions," available at http://www.jonesday.com/newsknowledge/NewsKnowledge.aspx.

The resolution directed staff to consider a number of specifically identified issues, as well as to make certain modifications to the regulations and "such other conforming modifications as may be appropriate." The modified regulations released this week are the staff’s response to the directives in the resolution. As part of finalizing the regulations, the staff will also be completing the associated environmental review document. Final regulations are scheduled to be filed with the California Office of Administrative Law by October 28, 2011.

The Proposed Modifications

The proposed modifications cover almost all sections of the regulations. Many of the changes are intended to clarify the regulations, and others are designed to promote consistency between the regulations and other related programs, such as the Mandatory Reporting Regulation at Title 17, California Code of Regulations, section 95100 et seq. Some of the revisions are intended to better align the cap-and-trade program with rulemaking efforts in other Western Climate Initiative jurisdictions to allow for future linkage between programs.

The proposed modifications add several new sections to replace sections that were viewed as too lengthy and/or hard to follow, including a new section 95977.1, addressing requirements for offset verification services, and section 95990, addressing recognition of early action offset credits. Certain provisions of section 95921 addressing compliance instrument trading were rewritten to address violations and confidentiality, and the provisions of section 95983 addressing forestry offset reversals were modified or rewritten regarding intentional reversals. Section 95985, addressing the invalidation of ARB offset credits, was also substantially revised. Many of the proposed modifications are designed to refine the 2010 draft regulations, including section 95914, which adds criteria for participating in allowance auctions, establishes confidentiality requirements, and sets allocation purchase limits.

Specific Examples of Proposed Modifications

The following are a few examples of the proposed modifications. One of the more significant changes would postpone the date when the first sources subject to the program would be subject to compliance obligations. (Each covered entity must surrender an appropriate number of compliance instruments for each year that it has a compliance obligation.) The regulations trigger compliance obligations in two phases. Under the 2010 regulations, the first phase ("first compliance period") was to start on January 1, 2012, and the second phase was scheduled to start on January 1, 2015. The proposed modification extends the date for starting the first phase by one year, to January 1, 2013. Section 95840. However, several actions under the modified regulations will continue to take place in 2012. There will be two allowance auctions in 2012, one on August 15 and one on November 14. Beginning in 2013, the auctions will be conducted each calendar quarter. Section 95910. As explained by CARB, allowance allocations and trading also will begin in 2012.

The proposed modifications revise the sections that identify the sources which do not have compliance obligations. Text was added to specify that emissions from geothermal generating units and geothermal facilities do not trigger compliance obligations, to clarify which source categories are subject to reporting but not to compliance obligations (including a broader description of qualifying fuel derived from municipal solid waste), and to clarify which fugitive and process emissions count toward a reporting threshold but not toward a compliance obligation (adding such facilities as methane from landfills, coal storage, and storage tanks at refineries.) Section 95852.2. The proposed modifications also add provisions requiring emissions from biomass-derived fuels to be verified under the Mandatory Reporting Regulation or other specified data statement in order to be exempt from a compliance obligation, along with requirements applicable to contracts for biogas and biomethane. Section 95852.1.1.

The modifications rewrite the regulatory text, establishing limits on the maximum number of greenhouse gas allowances that may be held at any one point in time. Section 95920. Among the various modifications is the creation of a new type of holding account, called an "Exchange Holding Account," that will hold allowances retained by exchange clearing services. Section 95831. (Some entities may transfer compliance instruments to clearing entities on a temporary basis while the transaction is being completed. Upon completion, the clearing entity transfers the compliance instruments to the designated account of the entity receiving the allowances.) Creating this type of account allows CARB to exempt a clearing entity from the allowance holding limit. 

The proposed modifications introduce the concept of "Voluntary Renewable Electricity," defined as electricity produced by an entity which generates renewable electricity (energy derived from solar, wind, geothermal, tidal power, and other similar sources) and which applies for "allowance retirement." Sections 95802(279) and 95802(280). Once the emission cap is set, Voluntary Renewable Electricity can reduce greenhouse gas emissions only if it is tied to a reduction in the total amount of allowances. The modifications establish a Voluntary Renewable Electricity Reserve Account to hold allowances that may be retired in recognition of Voluntary Renewable Electricity. The account will hold 0.5 percent of the allowances in 2013–2014 and 0.25 percent in 2015–2020. Section 95870. In this way, the modifications provide an incentive to support increased voluntary investment in renewable resources.

Comments

The cap-and-trade regulations, with the proposed modifications highlighted, can be found at http://www.arb.ca.gov/regact/2010/capandtrade10/capandtrade10.htm. The modifications are open for public comment until August 11, 2011. Comments may be submitted by mail to Clerk of the Board, Air Resources Board, 1001 I Street, Sacramento, California 95814, or electronically by going to the CARB homepage (http://www.arb.ca.gov/homepage.htm) and clicking on "Send Us Your Comments."