What to Know about California’s Cap and Trade’s Proposed Revisions

Stoel-Rivesby Allison Smith
Stoel Rives LLP – Renewalable & Law

The California Air Resources Board (ARB) released draft amendments to California’s cap and trade regulation, including revisions to the current program in place through 2020, an extension of the program through 2030, and setting the stage for continued emissions reductions under the program through 2050. ARB’s proposed amendments come in the middle of a recent milieu of uncertainty:  pending litigation challenging the legality of the existing program, an opinion from the state Office of Legislative Counsel that ARB lacks authority under AB 32 to continue cap and trade past 2020, unprecedented weak demand at the most recent allowance auction, and legislation proposed in the California Senate to establish a statutory emissions reductions mandate for 2030 still in process this session.  With all of these balls in the air, ARB has doubled down and drafted regulations dropping the program’s emissions cap from 334.2 million metric tons (MMT) of CO2e in 2020 to 200.5 MMT in 2030, with major elements of the cap and trade regulation continuing in effect past 2020 to achieve the emissions reductions.

In addition to the extension of the cap and trade program – arguably the big fish of ARB’s proposal – the agency has outlined numerous refinements to the existing program.  Certain regulated industries would face direct impacts under the proposed revisions.  Other industries face uncertainty in allowance allocations, with ARB proposing to revise the way emissions leakage is assessed.

Industrial sectors affected by the draft amendments:

  • ARB proposes to recalculate benchmarks for (i) dairy product manufacturing, (ii) secondary smelting, refining, and alloying of nonferrous metal, and (iii) nonferrous forging.
  • Roasted nuts and peanut butter manufacturers and paper mills, except newsprint, would shift from a product-based benchmark to the energy-based allocation methodology.
  • The one-product, one benchmark policy would be reevaluated for products from two sectors: potash, soda, and borate mineral mining and other nonmetallic mineral mining.
  • Product benchmarks for the nitrogenous fertilizer manufacturing sector may be revisited.
  • Waste-to-energy facilities combusting municipal solid waste would receive an extended exemption through 2017.
  • Compliance obligations for imported liquefied petroleum gas would shift from the consignee to the importer. Liquefied natural gas providers would receive a limited exemption through 2017.
  • Exemptions would end for natural gas hydrogen fuel cells and low-bleed pneumatic devices. Cogeneration facilities and district heating facilities would be eligible for a limited exemption for certain output.

ARB is proposing adjustments to the auction system and potentially linking California’s program with that of Ontario. Additional limited linkages could come to fruition, including with Washington state for allowance trading and Acre, Brazil for sector-based offsets.  The proposed amendments would also make the necessary tweaks to the cap and trade program to allow it to meet California’s federal Clean Power Plan obligations.  Aligning with the potential expansion of the geographical boundaries California Independent System Operator and the new energy imbalance market market is also addressed, as electricity imports are regulated under the program.

ARB issued a preliminary draft of the proposed amendments on Tuesday. The final draft, for public comment, will be issued August 5, 2016, with comments accepted until September 19, 2016.  Two days of hearings by the Board are scheduled for September 22 – 23, 2016.

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