Highlights from the Preliminary Draft Regulation for a California Cap-And-Trade program, Part II

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,





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.