CARB Approves Final Revised AB 32 Cap-and-Trade Regulation

On Oct. 20, 2011, the California Air Resources Board (CARB) approved final regulations establishing the United States’ first economy-wide greenhouse gas (GHG) cap-and-trade program, pursuant to authority granted under the California Global Warming Solutions Act of 2006 (AB 32). Once approved by the California Office of Administrative Law, the final regulation will go into effect on Jan. 1, 2012, with the first compliance period for which covered entities must hold compliance instruments set to begin on Jan. 1, 2013. The action concludes a rulemaking process that has spanned nearly three years and was interrupted by a court order that temporarily barred CARB from proceeding with development of the cap-and-trade program under AB 32.

Background

AB 32 requires a reduction in statewide GHG emissions to 1990 levels by 2020 — estimated to represent a 15 percent cut from current GHG emission levels. As one possible mechanism for achieving the required GHG reductions, AB 32 allowed CARB to adopt regulations by Jan. 1, 2011 establishing a “system of market-based declining annual aggregate emission limits” for GHG sources in which sources would achieve the required reductions through retiring allowances equivalent to their GHG emissions over the applicable compliance period. AB 32 requires regulations implementing any such cap-and-trade system to become operative beginning Jan. 1, 2012.

Initial Draft Regulations

In its December 2008 AB 32 Scoping Plan, CARB staff announced that they would draft regulations establishing a GHG cap-and-trade system for implementation by Jan. 1, 2012. Draft regulations were presented for CARB consideration at its Dec. 16, 2010 public hearing. At that hearing, CARB directed the executive officer to develop and approve a number of modifications to the proposed regulatory language, to hold public workshops and solicit comments on the modifications, and to evaluate potential adverse environmental and economic impacts of the regulation.

CEQA Litigation

Shortly after the December hearing, a number of environmental advocacy groups filed suit against CARB (Association of Irritated Residents v CARB, No. CPF-09-509562) in San Francisco Superior Court, alleging CARB violated the California Environmental Quality Act (CEQA) by failing to adequately consider alternatives to cap-and-trade. In March 2011, the plaintiffs secured an injunction temporarily halting CARB from conducting further work on the cap-and-trade regulation until it amended its CEQA analysis to adequately consider alternatives to the proposed system. However, on June 3, CARB won a decision in the California Court of Appeal lifting the injunction and allowing work on the revised draft regulation to resume during the pendency of the appeal on the merits. The California Supreme Court affirmed that decision on Sept. 29. CARB’s appeal of the Superior Court’s CEQA decision on the merits is still pending before the Court of Appeal.

The Revised Cap-and-Trade Regulation

Following the Court of Appeal’s lifting of the trial court injunction, CARB staff continued its work on the delayed cap-and-trade regulation. On June 29, CARB Chair Mary Nichols announced that CARB would postpone the start date for covered facilities’ compliance with the cap-and-trade program for one year — until Jan.1, 2013 — citing the “need for all necessary elements to be in place and fully functional.” The announcement came just two weeks after CARB staff released a revised CEQA alternatives analysis for the cap-and-trade program.

On July 25, 2011, and Sept. 12, 2011, CARB staff released two packages of modified regulatory text and additional documents for the cap-and-trade regulations. Among other things, the modified text formally postponed the compliance obligation to Jan. 1, 2013, while maintaining a Jan. 1, 2012 start date for allocation, auction, trading and other activities under the regulations. Though the delayed start of the compliance obligation means that no retirement of allowances will be required in 2012, the regulations retained the Dec. 31, 2014 end date for the first compliance period (covering electricity generation and large industrial facilities). This means that covered sources or entities will still be required to retire allowances covering 30 percent of their verified 2013 emissions by Nov. 1, 2014, with the remainder of allowances for the two-year compliance period of 2013-2014 due by Nov. 1, 2015. The first auctions of allowances will be held in August and November of 2012, with auctions scheduled to occur on a quarterly basis starting in 2013. The final cap-and-trade regulation, which was adopted along with corresponding changes to CARB’s Mandatory Reporting Regulation, include a number of changes to address applicability of the program to imported electricity as well as a formula and resulting allocations for the state’s electricity providers. It also includes a number of revisions to provisions designed to prevent market manipulation, such as the auction purchase and holding limits.

The final cap-and-trade regulations are scheduled to be submitted to the state’s Office of Administrative Law by Oct. 28, 2011 for review and approval. 

For a description of other key elements of the cap-and-trade program (the compliance provisions of which now begin Jan. 1, 2013) please see our alert from Dec. 23, 2010, titled “CARB Adopts First U.S. GHG Emissions Cap-and-Trade Program."