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Dissecting California’s Cap-and-Trade Plan: What’s your Free Piece of the Carbon Pie?

It sounds like an old regulatory joke:

Professional #1: “If the 8th largest economy in the world put a price on carbon and started a Cap and Trade Program, how many free allowances would you get?”

Professional #2: “I don’t know. How many free allowances would I get?”

But California is serious about putting price on carbon. Four years after the passage of AB 32, The Global Warming Solutions Act of 2006, the California Air Resources Board (CARB or Board) released their 3,900-plus page proposed Cap and Trade regulatory package.  The Cap and Trade regulation is the final policy component of the broader GHG mitigation package outlined in 2008’s Scoping Plan to be brought to the Board for adoption. AB 32 required that all regulations necessary to achieve reductions to 1990 levels by 2020 be adopted by December 31, 2010. The Board will hear the Cap and Trade regulation and the necessary amendments to the Mandatory Reporting Regulation on December 16th.

This Cap and Trade program will be the first binding program to control greenhouse gas emissions (GHGs) on an economy-wide scale though the use of market mechanism (trading) in the nation. Once fully implemented, it will directly or indirectly touch every manufacturer, fuel provider, business, and individual in California.

Though the Board had released a Preliminary Draft Regulation (PDR) in November 2009, there were still many questions left to be answered about the program. The biggest one was: Who, if anybody, will be allocated free greenhouse gases allowance and who has to pay for the right to emit greenhouse gases? And when? The amount of greenhouse gas allowances freely distributed to entities in the program is truly a billion-dollar policy question. A single allowance is equal to one metric ton of CO2e emissions.

So who gets what for free?

The easy answer is that California industrial facilities will receive free allocations in the early years of the program, also known as the First Compliance period (2012-2015). The number of fee allocations will decline annually until 2020. But, as with anything this complicated, it really depends on a variety of factors. And it is still not yet finalized. The Board’s staff is currently accepting comments until the Board acts on December 16, 2010. The proposed regulation also has ten sections reserved for future language, including some directly affecting allowance distribution. It is expected that some of these questions will be answered by the Board on the 16th, and that others will be included in future modifications to the regulation after the Board meeting.

So how does it work?

The proposed regulation has two formulas for free distribution for industrial entities — one based on production and the other on thermal use (steam and fuel), with applicability dependent on the type of industrial facility. For electrical utilities, CARB has yet to decide the specifics for allocation distribution. These formulas are hard-wired into the regulation and will dictate how many allowances each industrial facility will be provided for free in any given year and include the following adjustment factors:

–Benchmark Efficiency Factor: This factor is sector-specific and is intended to reward those facilities that are more energy efficient than others in their own industry.

–Assistance Factor: This factor is intended to help specific industries compete with entities outside of California and prevent emissions leakage.

–Cap Adjustment Factor: This factor starts at 1.0 in 2012 and declines annually to reduce the amount of free allowances available each year.

Inputs to these formulas come from either tables in the regulation, or from verified GHG Mandatory Reporting data.

So what does this all mean?

The program is set up to provide greater free allowances in the early years, with a year-by-year reduction toward 2020. Any allowances a subject entity doesn’t receive for free must be purchased at the State auction, through offsets credits, or from another market participant. In reality, the amount of free allowances for each facility will vary in a declining trend from year to year.

Additionally, the Cap and Trade program contains many other complexities. These additional complications come from the other aspects of the Cap and Trade program: offset limitations, enforcement penalties, market trading rules, offset protocols, environmental/economic analysis, and more. All of these program facets have an interplay and will be discussed by staff and the Board before a final program emerges.

In the end, CARB has proposed a complex long-term program to reduce GHG emissions that starts with short term goal of having as little impact on California industry as possible. As the free allowances are reduced, the established formulas for who receives what will become all the more important. Decision day is on the 16th, tune in to the webcast to watch how it all unfolds.

Jon Costantino is a Senior Advisor at Manatt, Phelps & Phillips, LLP, in the Sacramento Government practice group. He manages complex political and regulatory issues for clients in the area of  climate change, clean energy and environmental issues and previously served as Climate Change Planning Manager within the Office of Climate Change at the California Air Resources Board. Mr. Costantino can be reached at (916) 552-2365 or jcostantino@manatt.com.

Jon Costantino
Jon Costantino is a Senior Advisor in the Government practice of Manatt, Phelps & Phillips, practicing in the Sacramento office. He manages complex political and regulatory issues for clients in the area of environmental law and previously served as Climate Change Planning Manager within the Office of Climate Change at the California Air Resources Board. Mr. Costantino can be reached at (916) 552-2365 or jcostantino@manatt.com.
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4 thoughts on “Dissecting California’s Cap-and-Trade Plan: What’s your Free Piece of the Carbon Pie?

  1. I can’t keep scaring my kids like this. Climate Change was a mistake, exaggeration and NOT pollution and everyone I talk to is getting very very angry at this irresponsible fear mongering. The good news is that it IS dying but climate change was too big to fail and thus it’s slow death we are seeing.
    The REAL GREENS are both Liberal and Conservative. We demand:
    System Change, not Climate Change.
    Love, not windmills.
    Courage, not fear.
    Love the planet, not SAVE the planet.
    Justice to the criminal scientists.
    Climate Change Scientists predicting unstoppable warming were just more politicians, but in lab coats. Keep in mind that while politicians can’t be jailed for lying, you lab coat consultants can be and it will most certainly happen. The politicians need enemies and YER IT! You criminal scientists must all be charged with treason for leading the world to war against a non existent enemy of climate change. Climate change was a 3rd World War and justice shall be done not only to the corrupt scientists, but to the news editors and leaders of the environMENTAL groups that threatened our kids with CO2 death warrants for 25 years of wrong predictions.
    Scientists and journalists we now know are to science and journalism, what abuse priests were to religion.
    A wave of rage from Liberal Climate Change Deniers has arrived. This criminal fear was unsustainable. History has shown that climate change was science’s and Liberalism’s Iraq War of lies and fear mongering. You have all been served.

  2. California is doing a great service to the nation by standing up for the rights of the natural world when the national government has given up. Those that still deny the science behind climate change will continue to live hapless existences, absorbing anything and everything they read and hear without applying any form of critical interpretation. To those that are convinced that regulating GHG emissions is not necessary and will further destabilize the economy, I say do some research. There does not exist a single peer reviewed scientific document that discredits the science behind climate change warnings. Scientists operate with much higher regard to truth and transparency than any politician could manage. Meme Mine, if you really cared for your children you would recognize that there is no possible way that we can extract fuel resources that have been building under the surface of the earth for millions of years, millions! and pump them from the ground and burn them for energy, emitting pollution in the process, in a matter of one hundred years and not expect a chemical imbalance in our atmosphere. It’s fairly simple mathematics: millions of years of carbon sequestration emitted in one hundred years equals… no consequences? wake up. If you want there to be a tract of land for your children to grow food on, a habitable mountain valley that provides clean air and water for them to live, and any sort of society for them to work in you need to be teaching them about sustainability, not ignorance. Even George W. Bush admitted the effects of climate change were occuring, your king of illusion and conspiracy could not hide from the truth, and neither can you.
    California is implementing a program that will brighten not only its environment, but its economy as well. When your children are older would you like them to look back and wonder why in the world you didn’t act when everyone knew what the consequences would be? Rising oceans, more frequent and intense storms, the extinction of mass plant and animal life, millions of refugees displaced from uninhabitable lands–a global dilemma that affects each and every person no matter income or ethnicity. Or would you like them to look back, and be glad that at least their mother supported what actions were being taken.
    Climate change is not a political issue, it transcends race, gender, socioeconomic status, nationality, age, and ability. We will face the consequences as a human race.
    So you can continue to wallow in pessimistic insinuations, or you can join the movement for a better, more sustainable future. Hmm, hard choice huh.

  3. The years 1000 AD to 1350 AD were the warmest in the past 2000 years. There were no anthropogenic sources of CO2 (power plants or SUVs). The Medieval Warming was part of the natural acyclic change in net solar input to the planet. The warming of Century XX was just another acyclic manifestation of nature, as was the Little Ice Age of 1400-1850 AD. The Pacific Decadal Oscillation is now entering a cooling trend. CO2 has nothing to do with global temperature. AB 32 is utter political theater that will be the final nail in the California economic coffin. Californians had a chance to kill AB 32. They were brainwashed by left-wing environmental propaganda. They will now pay the price for their foolishness as AB 32 cranks up. Future Governor Brown would be wise to invoke AB 32’s provision allowing delayed implementation for a year; and then keep invoking that for the next four years until everyone finally sees the light as the climate of the 1950s returns to California again.

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