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Calif. Carbon Credits Could be Free to Firms at Risk of Leaving State

The California Air Resources Board – the state’s air regulator – is considering giving free carbon credits for its forthcoming cap-and-trade program to companies deemed to be at risk of leaving the state when the program comes into force, according to reports.

CARB, which will regulate the new program, is looking to stem the tide of possible emission “leakage” – a term describing companies leaving for other jurisdictions after the implementation of environmental regulations, reports Reuters Point Carbon. The body is weighing giving free credits in “trade-exposed” industries like cement production, the news service says.

The European Union and Australia have implemented similar programs as they have sought to keep businesses within their boundaries following the implementation of their cap-and-trade programs, Reuters says.

California’s program begins in January 2013 but carbon credits will begin to be auctioned in November 2012 – an operation expected to raise $1 billion. To begin with 90 percent of these allowances were planned to be given away and 10 percent purchased.

Under the new provisions discussed on Monday, any company deemed to be of high, medium or low risk of leaving the state after the introduction of the cap-and-trade program will receive all the allowances they need to comply with the program, free of charge, for the first two years, Reuters reports.

Those businesses with a medium or low risk of leaving would see their free allowances decline from 2015 onwards, by as mush as half, the news service says.

The cap-and-trade plan was finalized in October 2011. Under the plan, the state will limit carbon emissions from its 350 or so biggest emitters starting in 2012, with enforcement starting in 2013. The carbon cap will drop every year until 2020. Over this time, CARB expects the program to prevent 273 million metric tons of carbon emissions.

The regulations will cover electric utilities and large industrial plants first, later expanding to cover fuel distributors. Each company covered by the program will need to hold allowances for carbon that they emit over the cap, and companies will be able to trade these allowances in the marketplace. This will create the world’s second-largest carbon market behind that of the EU, with about $10 billion in allowances traded by 2016, according to the Los Angeles Times.

An analysis of the program and its implications by Jon Costantino of Manatt, Phelps & Phillips is available here.

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