AB 32

California leads the way on climate action

California, a leader in efficiency and clean energy policies for decades, is about to embark on another pioneering climate change program.

November 14 marks the first auction in its cap-and-trade system, which uses a market-based mechanism to reduce the greenhouse gas emissions that are warming the planet.

On its own, California’s program will drive down harmful emissions in the ninth largest economy in the world. But perhaps more importantly, California’s example could guide and prod us toward national action against climate change.

California Global Warming Solutions Act (AB 32)

Background

On September 27, 2006, then Governor of California Arnold Schwarzenegger signed into law the Global Warming Solutions Act of 2006, or AB 32. The law seeks to fight climate change through a comprehensive program reducing GHG emissions from virtually all sources statewide. The Act requires the California Air Resources Board (CARB) to develop regulations and market mechanisms that will cut the state’s GHG emissions to 1990 levels by 2020—a 25% reduction statewide. AB 32 requires CARB to take a variety of actions aimed at reducing the state’s impact on the climate.

Cap-and-Trade

AB 32 authorizes CARB to use market mechanisms as part of its portfolio of carbon-cutting policies, and on December 17, 2010 CARB decided to pursue a cap-and-trade program. The Board formally adopted the proposed cap-and-trade rule on October 20, 2011. The program is scheduled to begin in 2012, though the compliance period does not begin until 2013. The program places a GHG limit that will decrease by two percent each year through 2015 and by three percent from 2015 through 2020. The cap-and-trade rules will first apply to some of the major emitters—utilities and large industrial plants. In 2015, the rules will apply to fuel distributors as well, eventually totaling 360 businesses throughout California. The market will begin with a distribution of free allowances to regulated businesses. The portion of emissions covered by these free allowances will vary by industry, but generally will account for approximately 90 percent of the business’s overall emissions and this percentage will decline over time. For any additional emissions, the business must purchase the necessary allowances at a quarterly auction or from an entity that has excess allowances. Offsets are also allowed for up to eight percent of a business’s compliance obligation. California’s cap and trade program is scheduled to link with programs in Ontario, British Columbia, Manitoba and Quebec through the Western Climate Initiative.

Main C2ES California Cap-and-Tade Page
California Cap-and-Trade Program Summary Table (pdf)
California Cap-and-Trade Home
California Cap-and-Trade Rule
Summary of California Cap-and-Trade Rule
Western Climate Initiative
C2ES Regional Initiatives Page

Lawsuit

Association of Irritated Residents, et al. v. California Air Resources Board
In December 2010, a number of environmental justice associations, including the Association of Irritated Residents (AIR), challenged the California Air Resources Board’s (CARB) selection of a cap-and-trade program as a major element in reaching AB 32’s emission target . AIR’s lawsuit alleged that CARB violated key requirements of AB 32 and the California Environmental Quality Act (CEQA). In March 2011, a Superior Court of California judge ruled that CARB had not sufficiently considered alternatives to a cap-and-trade program and had approved and implemented its plan before completing the necessary environmental impact review (EIR) in violation of CEQA. CARB was ordered to revise its analysis of cap-and-trade alternatives, but was found not be in violation of AB 32. In June 2011, a California Court of Appeal granted CARB a stay to continue implementation of its cap-and-trade program. After the March decision CARB further analyzed alternatives to cap-and-trade, and in December 2011 this revised analysis was accepted as sufficient to fulfill the trial court’s March order. This leaves CARB in the clear to continue implementation. However, AIR has pledged to appeal the March decision that cap-and-trade does not violate AB 32, claiming it does not provide the maximum feasible and cost-effective greenhouse gas reductions.

Lawsuit News Coverage

 

Other AB 32 Elements

Prepare a Scoping Plan

  • CARB was required to prepare a scoping plan to achieve the “maximum technologically feasible and cost-effective” reductions in greenhouse gas emissions.
  • In December 2008, the Air Resources Board approved a scoping plan that will achieve emission reductions through regulations, market mechanisms, and other actions geared toward the emissions of several economic sectors.

AB 32 Scoping Plan
AB 32 Fact Sheet and Timeline

Identify 1990 Statewide Emissions Level

  • AB 32 required CARB to determine 1990 greenhouse gas emissions levels to serve as the 2020 emissions reduction target.
  • In December 2007, 427 million metric tons of carbon dioxide equivalent (MMTCO2e) was established as the 1990 emissions level and 2020 reduction limit.
  • California emitted 474 MMTCO2e in 2008 and would be projected to emit 507 MMTCO2e in the absence of AB 32.

CARB Emissions Inventory Home Page
CARB GHG Inventory Data 2000-2008
CARB GHG Projection 2020

Mandatory Emissions Reporting

  • AB 32 mandated the reporting of greenhouse gas emissions throughout the state.
  • In December 2007, the California Air Resources board adopted regulations requiring the state’s largest industrial sources to report and verify their emissions.  

CARB Mandatory Greenhouse Gas Reporting Home Page

Early Action Measures

  • AB 32 authorized the California Air Resources Board to identify discrete early action areas that could be enforced by 2010.
  • In 2007, CARB identified nine early action areas and proposed regulations for motor vehicle fuels (through the low carbon fuel standard – see below), landfill methane capture, mobile air conditioning, semiconductors, the fuel efficiency of heavy-duty tractors, tire pressure, and high global warming potential (GWP) gases in consumer products.

CARB Early Action Items Home Page

Low Carbon Fuel Standard

  • With the transportation sector accounting for 40 percent of the state’s greenhouse gas emissions and with petroleum-based fuels meeting 96 percent of transportation needs, Governor Schwarzenegger issued Executive Order S-01-07 on January 18, 2007, authorizing a Low Carbon Fuel Standard (LCFS).
  • The LCFS calls for at least a 10 percent reduction in the carbon intensity of California’s transportation fuels by 2020.
  • The LCFS was challenged in court and was blocked on December 29, 2011. CARB appealed the decision and is allowed to enforce the LCFS while the appeal is pending.

Executive Order S-01-07
CARB LCFS Home Page
CARB LCFS Question & Answer Document

Other Requirements for CARB

  • Ensure voluntary early reductions receive appropriate credit.
  • Establish an Environmental Justice Advisory Committee (EJAC) to advise CARB on implementing AB 32.
  • Establish an Economic and Technology Advancement Advisory Committee (ETAAC) to make scientific and technical recommendations on greenhouse gas reduction measures.

AB 32 Voluntary Actions Home Page
EJAC Home Page
ETAAC Home Page

 

 

Summary of California’s Cap and Trade Program

This is a summary of California’s Cap and Trade Regulation, as adopted by the California Air Resources Board (CARB) on October 20, 2011. CARB amended these regulations as of September 1, 2012. These changes are not yet reflected in the summary below, but can be found here. The cap and trade program is part of the state of California’s compliance with Assembly Bill 32, the Global Warming Solutions Act of 2006. 

 

 

SUBARTICLE 1: TABLE OF CONTENTS

SUBARTICLE 2: PURPOSE AND DEFINITIONS.

SUBARTICLE 3: APPLICABILITY.

SUBARTICLE 4: COMPLIANCE INSTRUMENTS.

SUBARTICLE 5: REGISTRATION AND ACCOUNTS.

SUBARTICLE 6: CALIFORNIA GREENHOUSE GAS ALLOWANCE BUDGETS.

SUBARTICLE 7: COMPLIANCE REQUIREMENTS FOR COVERED ENTITIES.

SUBARTICLE 8: DISPOSITION OF ALLOWANCES.

SUBARTICLE 9: DIRECT ALLOCATIONS OF CALIFORNIA GHG ALLOWANCES.

SUBARTICLE 10: AUCTION AND SALE OF CALIFORNIA GREENHOUSE GAS ALLOWANCES.

SUBARTICLE 11: TRADING AND BANKING.

SUBARTICLE 12: LINKAGE TO EXTERNAL GREENHOUSE GAS EMISSIONS TRADING SYSTEMS.

SUBARTICLE 13: OFFSET CREDITS ISSUED BY ARB.

SUBARTICLE 14: RECOGNITION OF COMPLIANCE INSTRUMENTS FROM OTHER PROGRAMS.

SUBARTICLE 15: ENFORCEMENT AND PENALTIES.

SUBARTICLE 16: OTHER PROVISIONS.

 

SUBARTICLE 2: PURPOSE AND DEFINITIONS

Citing the authority of the state’s Health and Safety Code, this Article establishes the California Greenhouse Gas Cap-and-Trade Program which aims to reduce greenhouse gas (GHG) emissions by establishing an aggregate GHG allowance budget for covered entities and providing a trading mechanism for compliance instruments.  This subarticle provides definitions for terms in this Article.

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SUBARTICLE 3: APPLICABILITY

The Program applies to the six major GHGs and also to nitrogen trifluoride (NF3) and “other fluorinated” GHGs (defined in the Definitions Section).  The Program applies to the following sources in the state whose annual emissions equal or exceed 25,000 metric tons of GHGs as measured in the equivalent amount of carbon dioxide (“CO2e”):

  • production facilities (cement, cogeneration,  glass, hydrogen, iron and steel, , lime manufacturing, nitric acid, petroleum and natural gas systems, petroleum  refining, pulp and paper manufacturing, self-generation of electricity, and stationary combustion);
  • electricity generating facilities and importers;
  • suppliers of natural gas (utilities, distributors and suppliers of blended fuels that contain natural gas);
  • suppliers of RBOB (reformulated gasoline blendstock for oxygenate blending) and distillate fuel oil  (position holders and importers) and suppliers of blended fuels that contain these;
  • suppliers of liquefied petroleum gas (refiners, etc.) and suppliers of blended fuels that contain this fuel; and
  • suppliers of carbon dioxide.

These covered sources have a compliance obligation for every metric ton of CO2e emitted from their associated activities that generate a compliance obligation, which differs for each covered source (see §95852), such as fuel combustion, process emissions, etc.  The first compliance period—for entities whose annual emissions equaled or exceeded 25,000 metric tons CO2e in any year from 2008-2011—begins January 1, 2013.  The second compliance period—for entities whose annual emissions equaled or exceeded 25,000 metric tons CO2e in any year from 2011-2014—begins January 1, 2015.  The compliance obligation remains in place until GHG emissions fall to less than 25,000 metric tons of CO2e per year during one full compliance period, or if the entity shuts down.  GHG emissions must be reported and verified under the Air Resources Board’s (ARB’s) Regulation for the Mandatory Reporting of Greenhouse Gas Emissions. 

This subarticle allows for voluntary participation in the Program by entities engaged in the above-listed activities but falling below the annual 25,000 metric tons CO2e threshold.

This subarticle also allows for other market participants to participate.  Non-covered entities, including those operating a registered offset project, may apply to purchase, hold, sell, or voluntarily retire allowances under the Program.   Verification bodies, offset registries or early action offset programs as identified in subarticle 14 do not qualify to hold allowances but may qualify as a “registered participant.”

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SUBARTICLE 4: COMPLIANCE INSTRUMENTS

The Executive Officer must create California GHG allowances and assign each allowance a unique serial number.  Each allowance represents limited authorization to emit up to one metric ton in CO2e of any GHGs.  The allowance does not constitute property or a property right.  The Executive Officer may issue and register offset credits, provided that all provisions set forth in subarticle 13 are met.

Entities may use various instruments (such as allowances, offset credits, sector-based credits, as described in this rule) to comply with this section of the law.

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SUBARTICLE 5: REGISTRATION AND ACCOUNTS

Only a registered entity or an entity registered with an approved external program (pursuant to subarticles 12 or 14) can hold a compliance instrument.  To register, an entity must complete an application.  The application must designate a single authorized account representative and a single alternate authorized account representative.  The accounts administrator may deny an application based on information provided or if the accounts administrator determines the applicant has provided false or misleading information, or withheld information.

An entity that meets or exceeds the inclusion threshold must register with the account administrator within 30 calendar days of the reporting deadline in the ARB’s Mandatory Reporting of GHG Emissions (MRR) if the entity is not covered as of January 1, 2013; or by January 31, 2012 or within 30 calendar days of the effective date of this regulation, whichever is later, for an entity that exceeds the inclusion thresholds for any data year 2008 to 2011.

This subarticle also describes the different account types used for compliance and by the Executive Officer.  Each entity can have at most one holding account, one limited use holding account, one  compliance account or one exchange clearing holding account.  When the Executive Officer approves a registration for a covered entity, an opt-in covered entity, or a voluntarily associated entity, the accounts administrator will create a holding account for the registrant.  When a covered entity or an opt-in covered entity completes the registration process, the account administrator will create a compliance account for the entity, into which the entity may transfer compliance instruments at any time.  A limited use holding account with transfer restrictions will be created for an entity that qualifies for a direct allocation. An exchange clearing holding account with transfer restrictions will be created for a voluntarily associated entity. The Executive Officer may remove compliance instruments from a compliance account to satisfy a compliance obligation.  The accounts administrator will also create accounts under the control of the Executive Officer, including: an Allocation Holding Account, used to hold the allowances when they are created; an Auction Holding Account, into which allowances are transferred from holding accounts of entities for which allowances are being auctioned; a Retirement Account, to which the Executive Officer or other entities transfer compliance instruments from compliance accounts that are to be retired; an Allowance Price Containment Reserve Account, into which serial numbers of allowances allocated to this application will be transferred and from which the Executive Officer will authorize sales at allowance reserve sales; and a Forest Buffer Account, into which ARB will place ARB offsets credits generated from a forest offset project, which will be used in the case of unintentional project reversals.

This subarticle also describes the selection and responsibilities of a single authorized account representative and a single alternate for each account.

This subarticle also requires registered entities to disclose direct and indirect corporate associations with other registered entities.  Beneficial holding relationships between registered entities must also be disclosed.

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SUBARTICLE 6: CALIFORNIA GREENHOUSE GAS ALLOWANCE BUDGETS

The first compliance period is from January 1, 2013 to December 31, 2014.  The second compliance period is from January 1, 2015 to December 31, 2017.  The third compliance period is from January 1, 2018 to December 31, 2020.

At the start of the first compliance period, in 2013, the annual total allowance budget is 162.8 million CA GHG allowances.  In 2014, the last year of the first compliance period, the annual allowance budget decreases to 159.7 million CA GHG allowances (1.9% decrease).  In 2015, the first year of the second compliance period, allocations start at 394.5 million CA GHG allowances and decrease to 370.4 million CA GHG allowances (6.11% decrease) at the end of the three-year period.  The allowance budget increases from the first to second compliance period because the program covers a larger number of entities starting in the second compliance period (See Subarticle 7).  In the first year of the third compliance period, allocations start at 358.3 millions of CA GHG allowances and decrease to 334.2 million CA GHG allowances (6.73% decrease) at the end of the period.

Renewable electricity that is used in California but does not count towards Renewable Portfolio Standard compliance can result in retired CA GHG allowances.

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SUBARTICLE 7: COMPLIANCE REQUIREMENTS FOR COVERED ENTITIES

Covered entities are subject to the Mandatory Reporting Regulation and to record retention requirements.

This subarticle sets forth the phase-in of coverage of different types of covered entities.  Operators of facilities (i.e., industrial facilities like cement and glass producers), first deliverers of electricity (which are electricity generating facilities in California or electricity importers), and suppliers of CO2 who exceed the annual emissions thresholds described in Subarticle 3 are covered beginning with the first compliance period.  Suppliers of natural gas, suppliers of RBOB and distillate fuel oils, suppliers of natural gas liquids, and suppliers of blended fuels who exceed the emissions thresholds above are covered beginning with the second compliance period.

Operators of facilities have a compliance obligation for every metric ton of CO2e for both stationary combustion and process emissions.

First deliverers of electricity must hold allowances to cover both in-state stationary emissions and emissions associated with electricity imported into California from a jurisdiction without an approved, linked GHG emissions trading system.

Natural gas suppliers have a compliance obligation for all GHG emissions that would result from combustion of all fuel delivered to end users in California, save for fuel delivered to covered entities.

Suppliers of gasoline “blendstock” – RBOB and distillate fuel oils – have a compliance obligation for all GHG emissions that would result from combustion of all such fuels that are imported or delivered to California.

Suppliers of natural gas liquids have a compliance obligation for the GHG emissions that would result from full combustion of all fuel consumed in California.

Suppliers of carbon dioxide have an aggregated compliance obligation for every metric ton of CO2 supplied for use in California and imported, less any CO2 that is verifiably sequestered. 

CO2 emissions from specified source categories count toward reporting thresholds but do not count toward an entity’s compliance obligation.  These include: verifiable biomass-derived fuels such as agricultural crops or waste, wood and wood wastes; biodiesel; fuel ethanol; biogenic municipal solid waste; biomethane; specified fugitive and process emissions; and emissions from geothermal generating units and geothermal facilities. 

A covered entity that exceeds the relevant emissions thresholds in any of the three years preceding the start of a compliance period is a covered entity for the entire compliance period.  Entities that first exceed the emissions threshold during an ongoing compliance period have a compliance obligation for all of their annual emissions in the first year that they exceed the threshold and each year thereafter.

Covered entities are limited in the number of offset credits that they may surrender to meet their compliance obligations.  The ratio of offset credits used for compliance by a covered entity to the covered entity’s total compliance obligation (i.e., all of its covered emissions) must be less than 0.08.   Moreover, sector-based offset credits cannot account for a ratio over 0.25 of the quantitative usage limit on compliance instruments in the first compliance and second compliance period and 0.50 of the quantitative usage limit on compliance instruments in subsequent compliance periods.

Covered entities have an annual compliance obligation equal to thirty percent of their GHG emissions from the previous year.  Submission of allowances pursuant to the annual compliance obligation for a given year is due November 1 of the following calendar year (depending on a covered entity’s deadline under the reporting program).  Surrender of allowances pursuant to a covered entity’s triennial compliance obligation is due by November 1st of the calendar year following the third year of the compliance period.

Surrendered allowances must be from an allowance budget year that is from the same year, the previous compliance year, or the last year of a compliance period for which a triennial compliance obligation is calculated. 

A covered entity that fails to surrender sufficient allowances pursuant to its compliance obligation must surrender allowances to cover four times its “excess emissions” (i.e., the difference between the entity’s compliance obligation and the number of allowances and or offsets surrendered on time by the entity).  At least three-fourths of the compliance obligation for untimely surrender must come from CA GHG allowances or allowances issued by a GHG ETS.  Up to one-fourth can be fulfilled by ARB offset credits or other compliance instruments.  The untimely enforcement surrender is due within five days of the first auction or reserve sale conducted by ARB following the applicable surrender date. If covered entities fail to surrender such allowances, enforcement actions will be undertaken.  Three-fourths of the compliance instruments used to fulfill the untimely surrender obligation will be transferred to the Auction Holding Account, while the remaining one-fourth will be deposited in the Retirement Account.

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SUBARTICLE 8: DISPOSITION OF ALLOWANCES

This subarticle specifies how the allowances under the cap shall be allocated.

The Allowance Price Containment Reserve will be allocated as follows:

  • One percent of the allowances from budget years 2013-2014,
  • Four percent of the allowances from budget years 2015-2017, and
  • Seven percent of the allowances from budget years 2018-2020

Ten percent of the allowances from budget years 2015-2020 will be allocated to the Auction Holding Account on December 15, 2011 for future auctions.  Auction proceeds from will be deposited into the Air Pollution Control fund and will be available upon appropriation by the Legislature for designated purposes.

Allowances are freely allocated to electrical distribution utilities.  Electrical distribution utilities receive 97.7 million allowances in 2012 with the annual cap adjustment factor  declining by roughly 2 percent per year each year thereafter.  The Executive Officer will place an annual individual allocation in the limited use holding account of each eligible distribution utility on or before January 15 of each calendar year.

Allowances are also freely allocated to covered industrial sources based on the methodology described in Subarticle 9. As the table below shows, industrial sectors are classified according to leakage risk (the risk that industry would locate somewhere other than California to avoid GHG regulations) and assigned different assistance factors.  The higher the assistance factor, the more allowances are directly allocated to covered industrial facilities.

Direct allocations of GHG allowances are specified for covered industrial facilities from the sectors listed in Subarticle 8 and electrical distribution utilities. 

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SUBARTICLE 9: DIRECT ALLOCATIONS OF CALIFORNIA GHG ALLOWANCES 

Direct allocations of GHG allowances are specified for covered industrial facilities from the sectors listed in Subarticle 8 and electrical distribution utilities. 

Direct allocations to covered industrial facilities are based on a product output-based allocation calculation methodology for industrial sectors with benchmarked product outputs (e.g., paper products, refined petroleum products, and steel) and on a thermal energy-based calculation methodology for other industry sectors.  The direct allocation to a covered industrial facility in a given year is a function of the applicable output-based or thermal energy-based benchmark, the facility’s actual output or energy use, the industry sector-specific assistance factor (see table in Subarticle 8), and an adjustment factor that declines over time to reflect the declining cap level.

All direct allocations of allowances to investor-owned electrical distribution utilities are placed into a limited use holding account for each electrical corporation.  Publicly-owned utilities can split their direct allocations of allowances between a limited use holding account and a compliance account with an advance notice to ARB. In 2012, one sixth of the allowances placed in a distribution utility’s holding account must be offered for sale at each of two auctions scheduled for 2012. After 2012, all allowances in a utility’s limited use holding account must be offered for sale at auction each year unless they are for a budget year that is after the current calendar year.  Auction proceeds obtained by an electrical distribution utility shall be used exclusively for the benefit of retail ratepayers of each electrical distribution utility.  Investor owned utilities are required to ensure equal treatment of their customers or customers of electricity providers and community choice aggregators.

A placeholder is included for direct allocations for natural gas distribution utilities.

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SUBARTICLE 10: AUCTION AND SALE OF CALIFORNIA GREENHOUSE GAS ALLOWANCES

In 2012, two auctions of California GHG Allowances will take place on August 15 and November 14. Beginning in 2013, subsequent auctions shall be conducted on the twelfth business day of the second month of each calendar quarter.  The Executive Officer will hold two auctions each quarter – the Auction of Allowances from the Current and Previous Budget Years and the Auction of Allowances from Future Budget Years.  During each quarter’s Auction of Allowances from the Current and Previous Budget Years, one fourth of the allowances allocated for the current calendar’s budget year will be offered.  In 2012, each Auction of Allowances from Future Budget Years will offer half of the allowances designated for the advanced auction from the 2015 budget.   Beginning in 2013, each Auction of Allowances from Future Budget Years will offer a quarter of the advance auction allowances designated for advance auction from the budget year three years subsequent to the current calendar year.  Entities owning limited use holding accounts may consign allowances for sale in the quarterly auctions and accept the auction settlement price for such allowances.

Auctions will consist of a single round of sealed bidding.  Auctions shall include an auction reserve price (i.e., a price floor below which no allowances will be sold).  For 2012 and 2013, the auction reserve price for 2013 vintage allowances will be $10 per metric ton CO2e.  For calendar years after 2013, the auction reserve price will equal the previous calendar year’s auction reserve price plus an increase of  an annual rate of 5 percent plus inflation.  The auction reserve price for 2012 auctions of vintage 2015 allowances will be $10 per metric ton CO2e.

For auctions conducted in 2012-2014, a single entity with a compliance obligation or a group of such entities with a corporate association (see below for definition of corporate association) can purchase no more than 15 percent of the total allowances offered in any given auction.  Any other single auction participant is limited to purchasing no more than 4 percent of total allowances in any given auction.  These limits do not apply, though, to investor-owned electrical utilities.

This subarticle also includes provisions governing auction administration and registration.  In particular, California allowances may be offered through an auction conducted jointly with other jurisdictions to which California links, provided the joint auction conforms to this subarticle’s requirements.

This subarticle governs the operation of the Allowance Price Containment Reserve.  Only covered entities, including opt-in covered entities, can purchase allowances from the Allowance Price Containment Reserve.  The first reserve sale will be conducted on March 8, 2013.  Subsequent sales shall be conducted six weeks after each quarterly allowance auction.  All allowances in the reserve shall be offered for sale at each such reserve sale.  These allowances shall be divided into three equal-sized tiers with varied pricing.  In 2013, the reserve allowance prices shall be: $40 per allowance for the first tier; $45 per allowance for the second tier; and $50 per allowance for the third tier.  After 2013, these prices shall increase each year at an annual rate of 5 percent plus inflation.

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SUBARTICLE 11: TRADING AND BANKING

This subarticle regulates the practices involved in trading and banking of allowances. 

It establishes the maximum number of allowances held by any entity in a calendar year, called the “holding limit.” The holding limited is calculated as follows:

                Holding Limit = 0.1*Base + 0.025*(Annual Allowance Budget – Base)

·         “Base” equals 25 million metric tons of CO2e

·         “Annual Allowance Budget” is the number of allowances issued for the current budget year

Limited exemption from the holding limit is allowed for allowances transferred to a compliance account for a year, up to the amount of emissions reported in the previous year.  The limited exemption is the sum of all previous annual transfer limits, will be reduced by the sum of the entity’s emissions over a compliance period on December 31, and will be assigned by the Board according to set requirements if a positive or qualified positive verification statement is not made. 

The Executive Officer may not approve transactions that would exceed an entity’s holding limit.  Holding limits of entities with corporate associations will be treated as those held by a single entity unless they are prohibited by law from coordinated market activity including transfer of instruments.  If an entity is found in violation of the provisions of this subarticle, the Executive Officer may also limit the number of instruments held by an entity to an amount sufficient to cover its reported emissions, subject an entity to additional annual surrender requirements, and suspend or revoke registration of entities.

This subarticle sets the requirements of trades acceptable to the accounts administrator.  The administrator must have the following information before a transaction settlement is completed: the account number and representative of the seller and purchaser, the serial number of the instrument, the transaction date, the settlement date, the price, and the account number and representative of whom the instrument is to be held in benefit.

It also establishes that allowances for a current or previous compliance period may be banked, while allowances for a future period may also be held.  Allowances do not expire until they are surrendered to and retired by the Executive Officer, are voluntarily retired, or are retired by an external trading system linked to the California system.

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SUBARTICLE 12: LINKAGE TO EXTERNAL GREENHOUSE GAS EMISSIONS TRADING SYSTEMS

This subarticle allows compliance instruments from approved external (i.e., outside of California) greenhouse gas emissions trading systems to be used to meet the requirements of this program.  Approval of external systems may be given by the Board after public notice and comment in accordance with California Administrative Procedure Act.  Allowances issued by external systems are not subject to the quantitative offset usage limits in this Article, but external offset and sector-based offset credits are subject to the quantitative use limits when used to meet a compliance obligation under this Article.

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SUBARTICLE 13: OFFSET CREDITS ISSUED BY ARB

Offsets must be GHG reductions or removals that are “real, additional, quantifiable, verifiable, permanent and enforceable.”  The Board shall provide public notice of and opportunity for public comment prior to approving any Compliance Offset Protocols. 

This subarticle describes the requirements for Compliance Offset Protocols.  To be approved by the Board, a Protocol must: establish data collection and monitoring procedures that are relevant to the offset project type; establish a “conservative” business-as-usual baseline; account for leakage through activity-shifting and market-shifting; account for quantification uncertainty; ensure GHG reduction permanence; include a mechanism ensuring sequestration permanence; and establish the length of the crediting period.  The details for achieving each of these delineated requirements is left for the Protocol to address and the Board to ensure are upheld. The crediting period for a non-sequestration project can be no less than 7 years and no greater than 10 years while a sequestration project crediting period must be no less than 10 years and no greater than 30 years.  In addition to complying with an approved Compliance Offset Protocol, an offset project must also be located in the United States, Canada or Mexico. 

This subarticle also describes the details for registering an offset project for listing.  The project operator (or their “designee”) must be registered with ARB and must not be subject to a hold restriction on their account.  They must also attest to ARB as to the truthfulness and completeness of the project submission as well as acknowledge that they are voluntarily entering the Cap-and-Trade program complete with the accordant regulatory requirements.  The project listing must contain all of the information required for that project type based on the appropriate Protocol (once developed).  There are four Compliance Offset Protocols: Ozone Depleting Substance Projects, Livestock Projects, Urban Forest Projects, and U.S. Forest Projects.  If the project listing is incomplete in that context, the ARB (or the registry being used) must notify the operator or designee within 30 days.  If the project list is complete the listing status is changed to “Proposed Project” pending approval for listing by the registry.  Projects rejected by the registry may be appealed to the ARB (who, in turn, may consult with the registry in making a final determination).  

This subarticle describes requirements for verification of GHG emissions reductions or GHG removals from offset projects.  An offset project operator must obtain the services of an ARB-accredited verification body for the purposes of verifying projects.  Verification for offset projects other than sequestration must be done annually while the verification for sequestration projects must be done once every six years.  To perform verification services, a given project cannot be verified by the same service provider for more than six years in a row (for any project type).  A service provider must be at least three years removed from verifying a particular project before reengaging with that same project again.  This subarticle also contains detailed information on procedures that verification service providers must follow, as well as the procedures to be employed to ensure that there exists no conflict of interest that could compromise the independence of the verification service provider.

A registry offset credit, representing one metric ton of CO2e, will be issued only if the project is listed pursuant to the requirements in this subarticle, the emission reductions or GHG removal enhancements were issued a Positive Offset or Qualified Positive Offset Verification Statement, and ARB (or the registry being used) has received this statement from an ARB-accredited verification body.  ARB (or the registry being used) will issue an offset credit no later than 45 days after a Positive Offset or Qualified Positive Offset Verification Statement is received.  ARB or the registry must notify the Offset Project Operator of the issuance within 15 days of issuing the credit.  If offset credits originate from an offset project submitted through an Offset Project Registry, this Registry must retire the original credits issued in its system before ARB issues a compliance offset credit for the same amount retired by the Registry.  ARB will only issue compliance offset credits for a project submitted through a Registry after reviewing the project related documentation and ensuring all regulatory criteria have been met for compliance offset credits.For forest sequestration projects, a portion (the amount to be determined in the Compliance Offset Protocol for U.S. Forest Projects) of the offset credits issued must be placed into the Forest Buffer Account.  If ARB determines that there has been an unintentional reversal it will retire offset credits in the amount of tons reversed from the Forest Buffer Account.  If an unintentional reversal lowers the project’s actual standing live carbon stocks below its project baseline, the project will be terminated by ARB or an Offset Project Registry.  Another project may be initiated within the same boundary.  If an unintentional reversal does not lower the project’s actual standing live stocks below its baseline, the project may continue without termination as long as the unintentional reversal has been compensated by the Forest Buffer Account.  If an intentional reversal occurs, the Project Operator shall give notice in writing to ARB and the Offset Project Registry and provide a written description of the intentional reversal within 30 days of the reversal.  The Project Operator must submit ARB offset credits or other approved compliance instruments in the amount of CO2e reversed within six months of notification by ARB , and new offset projects may not be initiated within the same boundary. 

Offset Project Registries can apply to provide registry services under this article.  Their primary business must be operating an Offset Project Registry for voluntary or regulatory purposes.  They may not act as an Offset Project Operator, Authorized Project Designee, or offset project consultant, or act as a verification body once approved as an Offset Project Registry.  Offset Project Registries shall use Compliance Offset Protocols approved pursuant to this subarticle to determine whether an offset project may be listed with the Offset Project Registry for issuance of registry offset credits.  Any credits issued by a Registry are subject to ARB review before being transitioned into compliance offset credits.  Credits issued by a Registry cannot be used for compliance until ARB reviews all relevant project documentation and determines that the credits meet all regulatory requirements.  The subarticle describes requirements placed on Offset Project Registries for reporting  and verifying GHG emissions reduction projects.

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SUBARTICLE 14: RECOGNITION OF COMPLIANCE INSTRUMENTS FROM OTHER PROGRAMS

This subarticle describes the requirements placed on offset credits used for early action.  Offset credits from projects registered with an approved third-party offset program (according to the procedures outlined in Subarticle 13 for Offset Project Registries) or from a program that meets a list of requirements described in this subarticle shall be accepted by ARB for early action use.  The requirements placed on early action offset credits specify that the GHG reductions: must have occurred between January 1, 2005 and December 31, 2014; must result from an early action offset project that is listed or registered with an Early Action Offset Program prior to January 1, 2014, must result from a project located in the United States, and must result from the use of one of the approved offset quantification methodologies.

Once an offset credit that is issued by an approved third-party offset program is determined by ARB to meet the criteria in this subarticle, ARB will assign an ARB serial number to the offset credit.  When ARB retires a credit, it will notify the third-party program to simultaneously retire it.  An ARB offset credit may not be issued for an early action offset credit that has been retired, cancelled, or used to meet a voluntary commitment, or surrender obligation in any voluntary or regulatory system.

Any offset credits issued by an approved third-party program must be verified by an ARB-accredited verification body.

ARB may consider for acceptance compliance instruments issued from sector-based offset crediting programs that meet requirements in this subarticle and originate from developing countries or subnational jurisdictions within those developing countries.  Sector-based offset credits may be generated from Reducing Emissions from Deforestation and Forest Degradation (REDD) and other sources as yet to be defined. 

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SUBARTICLE 15: ENFORCEMENT AND PENALTIES

The relevant legal jurisdiction is the State of California, including the authority of ARB and the Superior Courts of the State of California.  The ARB Executive Officer may suspend, revoke, or place restrictions on account holders who are found to be in violation of this Article.  Violation of this Article can include failure to surrender a sufficient number of allowances to meet the compliance obligation, and penalties may be assessed pursuant to Health and Safety Code section 42403(b).

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SUBARTICLE 16: OTHER PROVISIONS

This subarticle provides for severability and confidentiality.  Emissions data submitted to the ARB is public information, but reporting entities can request that material be classified as confidential based on the entity’s belief that the information is either trade secret or otherwise exempt from public disclosure under the California Public Record Act.

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California’s Air Resources Board Unveils Draft GHG Reduction Plan

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On June 26, 2008, California’s Air Resources Board (ARB) unveiled a draft Scoping Plan designed to reduce state greenhouse gas emissions to 1990 levels by 2020 as mandated by The Global Warming Solutions Act of 2006, AB 32. The plan outlines a variety of strategies for achieving the required reductions. Key features of the plan include developing a state cap-and-trade program that will link to the Western Climate Initiative’s forthcoming regional cap-and-trade program, increasing California’s renewable portfolio standard from 20 by 2010 to 33 percent by 2020, establishing new vehicle efficiency standards, setting higher building and appliance efficiency standards, and implementing a low carbon fuel standard. The full suite of proposed strategies can be found in the draft Scoping Plan.

The ARB is scheduled to vote on the Scoping Plan in November 2008 after a series of public workshops. Once adopted, the mechanisms are scheduled to be in place by 2012.

ARB Scoping Plan
AB 32

Bay Area Air Quality Management District Enacts Greenhouse Gas Fee

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On May 21, 2008, the Bay Area Air Quality Management District (BAAQMD) voted 15-1 to approve a new Greenhouse Gas (GHG) Fee for stationary sources.  Effective July 1, 2008, over 2500 GHG sources across the region, such as power plants, oil refineries and cement plants, will be subject to a fee of 4.4 cents per metric ton of CO2 equivalent.  Most facilities are expected to pay less than $1 annually, while the top seven emitters in the region will owe more than $50,000.  According to BAAQMD’s Staff Report, the Fee’s estimated Fiscal Year 2009 revenue of $1,116,000 is intended to offset the costs of the District’s Climate Protection Program (CPP).  The CPP provides input and support for helping meet the statewide emissions targets established in the 2006 California Global Warming Solutions Act, AB 32. The fee represents one of the first policies of its kind in the United States; the city of Boulder, Colorado, enacted a tax on GHG emissions from electricity generation in November 2006.

BAAQMD Staff Report
Read more about the California Global Warming Solutions Act
Boulder Climate Action Plan Tax

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