Overview Of California's Preliminary Draft Cap And Trade Program

Author:Mr Thomas Donnelly
Profession:Jones Day

The California Air Resources Control Board ("CARB") released its preliminary draft regulation ("PDR") for a California cap and trade program on November 24, 2009. This is an incredibly ambitious, far-reaching, and complex program that, if adopted, will affect virtually every company that does business in California.

Under California's Global Warming Solutions Act ("AB 32"), California must reduce greenhouse gas ("GHG") emissions to 1990 levels by 2020. The AB 32 Scoping Plan adopted by CARB calls for a California cap and trade program that links with other regional partner jurisdictions in the Western Climate Initiative ("WCI") to create a regional market system. As adopted in the Scoping Plan, the cap and trade program would establish a cap covering about 85 percent of California's GHG emissions and allow trading to promote cost-effective emissions reductions. The cap and trade regulation will set up the framework and requirements for participation in the cap and trade program.

The PDR reflects the approach to cap and trade approved by CARB in the AB 32 Scoping Plan. This approach includes:

Requiring sources of GHG emissions to manage their emissions under an aggregate declining emissions cap that supports achieving the 2020 emissions target mandated by AB 32. Starting the program in 2012 with about 600 of the state's largest GHG-emitting stationary sources (primarily industrial sources and electricity generators), along with electricity imports. Including emissions from transportation fuel combustion (e.g., gasoline, diesel, and ethanol) and from fuel combustion at stationary sources that fall below the threshold for direct inclusion in the program (e.g., residential and commercial natural gas combustion) by covering the suppliers of fuel to these sources. Requiring a minimum number of allowances to be auctioned at program start. Allowing limited use of high-quality offsets outside of capped sectors to cover a portion of the overall emissions reductions. Establishing rules for emissions trading, monitoring, and enforcement. CARB's intent is for the cap and trade program to "include a stringent declining emissions cap. Emissions trading and the limited use of offsets would provide flexibility for covered entities to comply."

In CARB's proposed cap and trade program, a limit, or cap, would be put on the amount of pollutants (GHGs) that can be emitted. Each allowance would equal one metric ton of carbon dioxide equivalent. The total number of allowances...

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