California’s Cap-and-Trade Program for greenhouse gases (GHG) became effective on Jan. 1, 2012. The program – a central element of the state’s landmark “Global Warming Solutions Act” (AB32) – is currently applicable only to facilities that emit 25,000 metric tons of CO2-equivalent compounds per year (comparable to burning approximately 40 million BTU/hour of fuel continuously for a year).
The California Air Resources Board’s (ARB) draft list of
“covered entities” contains approximately 400 qualifying GHG generators. It is
populated primarily by companies in the food (canning, drying, brewing, dairy,
baked goods), pulp/paper, petroleum extraction and refining, industrial gas,
chemical, pharmaceutical, glass, cement, nonferrous metal and power generation
industries … plus a catch-all category called “Electricity Importer.”
There are only
three ways an included entity can escape from the program: (1) improve fuel
efficiency, (2) reduce production or (3) shut down operations. Only option 3
takes effect immediately. The other two options take effect the year after the
entity has emitted less than the 25,000 MT/year threshold for an entire
three-year compliance period.
Regulated entities can only emit GHG if they are in
possession of a “compliance instrument,” of which there are two types –
allowances and offsets.
An allowance is a
tradable authorization to emit 1 metric ton of CO2 equivalent.
Initially, allowances are issued by ARB to generators at no cost, according to
the baseline GHG emission levels they reported in previous years. Later, ARB
will auction off the available allowances to the highest bidder. The minimum
bid is currently set at $10 per MT.
An offset credit
is a tradable instrument that represents a reduction or removal of 1 metric ton
of GHG. Offset credits may be sold by one generator to another. According to
the regulation, such reductions must be “real, additional, quantifiable,
permanent, verifiable and enforceable.”
In the context of
offsets, the term “real” means resulting from a demonstrable action called an
“offset project” (e.g., changing from a high-carbon to a lower-carbon fuel);
“additional” means beyond compliance; “quantifiable” means accurately and
reproducibly measurable; “permanent” means irreversible (i.e. not simply due to
a temporary reduction in production); “verifiable” means the offset project is
documented sufficiently so that it can be reviewed objectively by a third-party
verifier; “enforceable” means subject to action by the ARB if any provision of
the law is violated.
California State GHG Budget
Each year, ARB determines how many allowances are
available to be auctioned. The sum total of allowances is equal to the state’s GHG
“budget,” or “cap.” The cap is initially equal to the sum of baseline GHG
emissions from the covered entities. The inventory subject to the cap will be
approximately 395 million MT in 2015.
Over time, ARB
will gradually reduce the cap and auction off fewer allowances; thereby, the
state’s total emission of GHG will be reduced. The program’s goal is to reduce
California’s GHG emissions to 1990 levels by 2020. Ostensibly, the goal can be
met by annual cap reductions of 3%.
Auction, Trading, Banking,
ARB will establish auctions to disburse allowances. Any entity that
purchases, holds, transfers or surrenders compliance instruments must be
registered with ARB. Covered entities must report their GHG emissions annually
and surrender allowances to match their emissions. There will be two auctions
held in 2012: Aug. 15 and Nov. 14. Beginning in 2013, auctions will be held
quarterly. Entities that must procure allowances will pass costs on to their
customers. ARB’s auction proceeds will be invested in alternative-energy
projects and given out as rebates to electricity rate payers.
A covered entity that wishes to
trade allowances to another entity may do so at any time, but the trade is not
recognized by ARB until the parties submit appropriate paperwork. Allowances
not used in the year issued can be “banked” for use in a future year.
Allowances can also be purchased by entities not covered under the program
(e.g., “green” organizations) for purposes of “voluntary retirement.” Emissions
from combustion of biomass fuels are not subject to compliance when reported as
Although entities responsible for generating less than 25,000
MT/year are not currently required to procure allowances, the mandatory
reporting threshold was recently reduced to 10,000 MT/year, which makes it
appear that significantly more entities will be covered by the program in the
future. There is also speculation that offsets will be less expensive than
allowances, but the price of each will ultimately be determined by market
Greenhouse Gas Regulation Takes Effect in California
February 1, 2012