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The Many Moving Pieces of California’s Cap and Trade Program

The calendar says May 2012, so what does that mean for California’s attempts to implement a first-in-the-nation, economy-wide Cap and Trade Program? Actually quite a bit. There are many moving parts in this complex regulatory puzzle being assembled by the California Air Resources Board (Board or CARB). CARB has control over many of these moving parts, but there are a few that they do not. How these all come together over the next six to eight months (three if you count the practice auction in August), will determine how successful the program will be moving forward.

The Basic Calendar

The schedule for the Cap and Trade Program over the next nine months is busy and includes: 1) regulatory amendments in June, 2) a practice auction in August, 3) the first official allowance auction in November, 4) tentative additional regulatory amendments in the fall and 5) program kick-off in January 2013 when greenhouse gas emissions will start to count against the cap.

The question of what to do with the projected billion dollar revenue stream from this program next fiscal year (July 2013 through June 2014) is the subject of much legislative debate as well. There are three active pieces of California legislation working their way through the process with Assembly Speaker Perez’ AB 1532 being the most flushed out. AB 1532 requires detailed spending plans before the funds can be expended, therefore in all likelihood, Cap and Trade revenues will be collected prior to being spent.

As of this writing there are two active lawsuits being heard by the courts related to Cap and Trade implementation. The oldest lawsuit surrounds the Board’s Cap and Trade authority under AB 32. It was filed by the Association of Irritated Residences (AIR) and temporarily held up implementation of the Cap and Trade portion over CEQA issues last year. AIR v. ARB is currently on appeal with arguments being set for June 6, 2012. The second lawsuit was filed earlier this year and focuses more directly on offsets, Citizens Climate Lobby v. ARB.  The “Citizens” lawsuit is scheduled to move forward in the fall.

The Program Itself

CARB is currently in a 45-day public comment period for a set of regulatory amendments that will allow California’s program to “link” with Quebec’s. The linkage board meeting will be held on June 28, 2012 in Sacramento. This is a significant event as the two sides have worked many months to solve programmatic differences in an effort to hold only one auction for both jurisdictions.

Linking with Quebec is the first step in what California sees as the ultimate goal when the Cap and Trade market-based GHG reduction program was outlined in the AB 32 Scoping Plan. Linking is the concept that separate GHG market-based programs can operate together under one common set of rules. This approach allows for broader carbon markets and increased liquidity without having to adopt a single “regional” program, i.e. Regional Greenhouse Gas Initiative or the European Union.

According to ARB Chairman Mary D. Nichols, “Linking with Québec is a significant advance in California’s efforts to fight climate change and steer our economy toward a clean energy future. Linking provides more options to California businesses and lays the groundwork for other partners to join with us.  This sends a strong message to two national governments that now is the time to support innovation, energy efficiency and the development of clean technologies.”

South Korea and Mexico recently passed laws to create carbon trading and have expressed interest in linking to regional programs. Australia also has a carbon reduction program in place that will switch from its introductory carbon tax to a market-based scheme in 2015.

In addition to linking with Quebec, CARB staff is proposing amendments to the regulation to protect against market-fraud and to the security of the market system itself. The proposed amendments include detailed Know Your Customer (KYC) requirements and rules for a first auction on November 14, 2012. CARB staff also included additional amendments to the regulation to implement the allowance and offset registry, market monitoring provisions of the regulation and collection of information necessary for the financial services operator.

On May 4, CARB held a workshop to discuss some very technical aspects of the Cap and Trade regulation’s handling of the electricity sector.  This discussion could lead to further amendments to the regulations.  CARB staff is currently reviewing comments.

By the time the Cap and Trade Program launches, the original AB 32 Scoping Plan will be four years old and the majority of its GHG regulatory measures will be well into implementation. The Scoping Plan outlined CARB’s major policy direction and the GHG accounting necessary to show compliance with AB 32. It is also required to be updated every five years.  Much has changed since 2008, including the California economy; therefore all eyes will be on this process as it begins later this year.

The Bottom Line

California’s Cap and Trade Program is still steadily progressing towards launching at the beginning of next year. Though there are outstanding questions, both legal and in the implementation, CARB is proceeding with unwavering direction. The secondary carbon market is taking notes, as witnessed by recent price adjustments on the heels of CARB’s electricity workshop, and is ramping up in anticipation of the November auction.

A recent panel held at a carbon conference in San Francisco seemed to show broad support within the Brown Administration as well. The panel was unanimous in their support of the program and included Cal/EPA Secretary Matt Rodriquez, Public Utilities Commission President Michael Peevey, California Resources Agency Secretary John Laird and California Department of Food and Agriculture Secretary Karen Ross. Along with Chairman Nichols, these Governor appointees have significant influence over how AB 32 moves forward.

As the calendar counts down towards January these pieces need to fit together. How well they do is a billion dollar question. If you ask CARB, which folks have been doing a lot lately, they have consistently answered that the program will be ready and able to start on time.

Jon Costantino is a senior adviser at law firm 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.

This column is part of a series of articles by law firm Manatt, Phelps & Phillips, LLP’s Energy, Environment & Natural Resources practice. Earlier columns have discussed the Demise of Redevelopment in California, What’s Next for the Renewable Power Industry and Renewable Energy Projects On Tribal Lands.

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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