Part 1 can be read by clickinghere.

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, Retiring
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 “Biomass CO2.”

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 forces.