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California Adopts GHG Cap-and-Trade Program

Beveridge & Diamond, P.C., October 28, 2011

California is close to finalizing the nation’s first state-administered greenhouse gas (“GHG”) cap-and-trade program.  On October 27, 2011, the California Air Resources Board (“CARB”) transmitted to the state’s Office of Administrative Law (“OAL”) a final rulemaking package for the California Cap on Greenhouse Gas Emissions and Market-Based Compliance Mechanisms (the “cap-and-trade rule” or the “rule”).  For a copy of the rule, click here.  The cap-and-trade rule is the keystone of CARB’s implementation of the California Global Warming Solutions Act (AB32), which requires the state to reduce GHG emissions to 1990 levels by 2020.  The final rulemaking package is the culmination of several years of intense negotiation between CARB and stakeholders that included a challenge to the program under California’s Environmental Quality Act, four formal public comment periods, and countless public and stakeholder meetings. 

Originally slated to begin in 2012, the cap-and-trade rule’s first compliance period is now scheduled to begin with calendar year 2013.  It will initially cover the electricity sector and large industrial facilities (those emitting more than 25,000 tons of CO2/yr or a comparable amount of six other listed GHGs) in the state; in 2015, it will expand to cover fuel and gas distributors.  Under the program, covered facilities will have to obtain allowances equal to the amount of GHGs they emit in the state.  Ninety percent of the initial allowances will be distributed to existing sources at no cost and ten percent will be auctioned off.  The first allowance auction will be held in August 2012.  The total allowances available each year will progressively decline until, in 2020, the allowance cap will reach 334.2 million tons.  In addition to allowances, covered entities will also be allowed to use offsets to meet up to eight percent of their compliance obligations.

The OAL must review and approve the rulemaking package for compliance with California’s mandatory administrative procedures before the rule can take effect.  OAL has until December 13, 2011 to make a determination; barring a challenge by OAL, the rule will likely be effective in mid-January, 2012, though CARB has formally requested that OAL set an early effective date of January 1, 2012. 

Several major stakeholders have threatened to challenge the rule in court, and any such lawsuits likely would be filed in late December after OAL makes its determination but before the rule takes effect in January.  However, on October 20, as part of its formal approval of the rule, CARB also adopted Resolution 11-32 directing CARB staff to continue to work with stakeholders to make certain significant refinements to the rule in early 2012.  The Resolution specifically directs CARB to conduct several stakeholder meetings and to discuss potential rule revisions and amendments.  Whether this prospect of opportunities to make additional changes will cause those considering court challenges to delay filing suit remains to be seen.

For more information, contact Nico van Aelstyn, at 415-262-4008 or nvanaelstyn@bdlaw.com, or Amy Lincoln, at 415-262-4029 or alincoln@bdlaw.com, in Beveridge & Diamond’s San Francisco office.