On November 24, 2009, California released a preliminary draft regulation for a cap-and-trade program, in accordance with the California Global Warming Solutions Act of 2006 (AB 32) for public review and comment. At 132 pages, it was a doozy. Most likely in an effort to minimize comments, the deadline for comments on the initial draft is January 11, 2010.

In this post, we’re going to review some of the important points from sub-articles 8 through 15 and summarize the draft.

SubArticle 8: Distribution of Allowance Value

Allowance value is the economic worth of allowances issued. This section has not yet been drafted. However, the discussion of concept notes that some allocation of allowance value may be justified to compensate those disproportionately impacted by the imposition of the cap-and-trade program, that allowance value could be provided to the public in the form of per-capita rebates or cuts in individual income tax rates, and that allowance value could be applied to targeted public spending programs deemed necessary to achieve the requirements set forth in AB 32.

SubArticle 9: Auction Design and Mechanisms for Distributing Auction Proceeds

The Executive Officer may serve as auction operator or select an entity to serve as auction operator. Entities that want to participate in an auction, which will be announced with at least ninety days notice, must register at least thirty days in advance.

SubArticle 10: Free Allocation Mechanism

This section has not been drafted and does not include a discussion of concept.

SubArticle 11: Trading and Banking

Trading will be somewhat restricted and trades can not be made:

• if they are to a party whose identity is not disclosed to the Executive Officer,
• if they manipulate the value of a published market index,
• if they corner or attempt to corner the market for a regulated instrument, or
• if they are fraudulent or attempt to defraud another entity.

There will be a holding limit for each registrant or group of registrants. Furthermore, the number of compliance instruments a covered entity is allowed to own may be restricted to an amount sufficient to cover its emissions.

A GHG allowance may be held, or banked, for a future compliance period, subject to the holding limits.

SubArticle 12: Linkage to External Trading or Offset Crediting Systems

Compliance instruments issued by an external greenhouse gas emissions trading system (GHG ETS) or a greenhouse gas offset crediting system may be used to meet the requirements of this article only if the GHG ETS or GHG offset crediting system has been approved by the Board as provided in this sub-article. In other words, you might not be able to buy off the CCX (Chicago Climate Exchange), the ECX (European Climate Exchange), or the ACX (Australian Climate Exchange) to meet your requirements.

SubArticle 13: Offset Credits

An offset credit used for compliance purposes must represent a reduction or avoidance of GHG emissions or a GHG sequestration that is real, additional, quantifiable, permanent, verifiable and enforceable. An offset credit will (only) result from an approved offset quantification methodology that is standardized, replicable for any offset project of that type, and that includes plans for monitoring and reporting consistent with an offset project of that type. There are a number of requirements for the methodology, including the requirement that it ensure that the offset project type does not cause or contribute to adverse effects on human health or the environment.

SubArticle 14: Enforcement and Penalties

Penalties may be assessed pursuant to the Health and Safety Code, Section 41513.

SubArticle 15: Other Provisions

Each provision of the article is deemed severable.

So what does this mean? Essentially, if you produce, or cause the production of, CO₂,

N₂O,

CH₄,

SF₆,

HFCs,

PFCs, and

NF₃, you will likely be affected by the act. If you produce less than 25,000 MTCO₂e of GHG annually, you might be exempt until 2015, but as of January 1, 2015 you will be required to track, report, and independently verify your emissions. If you do not have enough allowances, you will have to either effect a trade, which will be restricted, try to acquire more through an auction, or try to get offset credits approved. If you are unable, you will be subject to as yet undefined penalties, which may be assessed pursuant to the Health and Safety Code, Section 41513.

In a nutshell, carbon cap and trade is coming, within 5 years and one month you will be affected, and if you’re not ready, it will cost you. How much will be determined as the key sections are finalized over the next six months. If you’re a major producer of GHG emissions in California, you should probably attend the workshop to discuss the proposal being held on December 14, 2009 to get a sense of what the final draft is likely to look like, as it will likely be law in less than two years.

On November 24, 2009, California released a preliminary draft regulation for a cap-and-trade program, in accordance with the California Global Warming Solutions Act of 2006 (AB 32) for public review and comment. At 132 pages, it was a doozy. Most likely in an effort to minimize comments, the deadline for comments on the initial draft is January 11, 2010. However, if you are really interested, a workshop to discuss the proposal is being held on December 14, 2009.

The goal for the cap-and-trade program, which is being designed to be consistent with the Western Climate Initiative, is to establish a cap covering at least 85% of California’s GHG emissions and allow trading to ensure cost-effective emission reductions. The goal is to start the program in 2012 with approximately 600 of the state’s largest GHG-emitting stationary sources (including industrial sources above 25,000 MTCO₂e) and electricity imports and expand the program, which would include industrial sources under 25,000 MTCO₂e and transportation fuels, until it covers up to 90% of the state’s GHG emissions.

The current design is slanting towards three compliance periods — 2012 to 2014, 2015 to 2017, and 2018 to 2020 — and sets a cap for each. In each compliance period, a covered entity would be expected to surrender a portion of their current emissions until the 2020 target, which is to reduce GHG emission to 1990 levels, is hit.

When passed, the act, which is currently 65 pages in length and broken into 15 sub-articles, will become sub-chapter 10 climate change, article 5, sections 95800 to 96550, title 17, of the California Code of Regulations. Here are some of the important points in sub-articles 3 to 7.

SubArticle 3: Applicability

The article applies to the following greenhouse gases:

CO₂,

N₂O,

CH₄,

SF₆,

HFCs,

PFCs, and

NF₃.

The article applies to industrial entities with recognized GHG producing processes, electricity deliverers, transportation fuel deliverers, natural gas deliverers, and deliverers of natural gas liquids.

SubArticle 4: Compliance Instruments

The Executive Officer will create GHG allowances and offset credits. Each compliance instrument issues represents a limited authorization to emit up to one metric tone of CO₂e.

SubArticle 5: Registration and Tracking System

Any entity covered as of January 1, 2012 must register by March 31, 2012. Any entity that becomes a covered entity must register within 90 days of becoming covered. An entity must maintain a current and valid registration in order to receive compliance instruments (allowances and offset credits).

SubArticle 6: California Greenhouse Gas Allowance Budgets

A base budget of allowances will be created for each fiscal year. These allowances may be adjusted to account for voluntary investment in renewable sources of electricity generation.

SubArticle 7: Surrender Requirements for Covered Entities

The program will require all annual emissions reports to be verified by an independent accredited verifier. It will also require the relevant records to be maintained for at least 10 years.

In part II, we’ll cover sub-articles 8 through 15 and summarize the draft.