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CARB Approves Another Round of Cap and Trade Amendments

costantino, jon, manatt 2The California Air Resources Board (CARB) has held its most important meetings related to the Cap and Trade Regulation (Regulation) annually in October over the last few years, and 2013 was no exception. On October 25, CARB staff presented to the Board both retroactive and proactive “tweaks” to the program in anticipation of its next major milestone—the broadening of the compliance market in 2015 when transportation fuels are included. Let’s review what happened and the next steps in the process.

Some of the changes to the Regulation were well known in advance, while others were fixes that seemed to be proposed without extensive public process. On one end of the spectrum there were proposed changes to the refinery allocation methodology and further defining of the issue of electricity “resource shuffling.” These changes have been an open topic of discussion for years. But other changes, such as the shift of the industrial Assistance Factor to provide additional free allocations, caught many stakeholders by surprise when they were first proposed in the summer.

The amendments proposed by staff and “approved” by the Board could be classified into several major categories: Allocation/Leakage Prevention, Covered Entities, Electrical Generation, Offsets, Compliance Implementation, Market Oversight, and Cost Containment.

Here is a quick summary of each:

• Cost Containment: The concern over GHG price spikes has been with the program since its inception, so much so that at an earlier Board meeting staff was directed to come back with a suite of ideas that could assist in containing the upper price of a compliance instrument, and therefore the overall price tag of the program.

• Market Oversight*: “Who is participating in the market and what are they doing?” Those are the questions that staff would like more answers to moving forward, and so they recommended a variety of disclosure and transparency changes to the Regulation.

• Compliance Implementation: Determining the order of surrender for compliance instruments was the focus of this amendment.

• Offsets*: Mine Methane Capture was the only new offset protocol to make it to the Board for review, and it proved to be one of the most controversial aspects of the regulatory package. The idea was to provide more offsets to the marketplace, but the optics of potentially providing coal mines with an additional revenue source overtook the discussion. No final decision was made at the meeting.

• Electrical Generation: In addition to technical amendments related to voluntary renewable credits, the big-ticket item for electrical suppliers was the clarification of what is or isn’t “resource shuffling”—the idea that only paper reductions of GHGs occurred rather than actual reductions. Guidance issued in 2012 was the basis for these amendments.

• Covered Entities: Who is in the program is a really a fundamental question. The amendments surrounding this topic provided an exemption to some entities (military) and ensured inclusion to others (LNG). CARB also added language to address facility shutdowns.

• Allocation/Leakage Prevention*: This category of amendments sought to soften the blow of the program by adjusting the amount of freely distributed allowances provided to various entities. The general trend was to issue more allowances to more folks for a longer period of time.

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