CARB Staff Recommends Realistic Regulation Changes for Cap-and-Trade

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In a July 18 workshop, the California Air Resources Board (CARB) staff presented its proposed changes to the cap-and-trade regulation.  Pending Board approval this fall, all changes to the cap-and-trade regulation will be implemented starting January 1, 2014. 

Transition Assistance to Continue at Current Levels through 2017
The most welcome of the changes proposed by staff is the recommendation to continue industry assistance factors into the second compliance period.  The second compliance period is scheduled to start in 2015.  Staff’s proposal essentially shifts the second compliance period to 2018, maintaining the level of industry assistance at 100 percent through 2017.

CLFP and other industry representatives have been advocating since 2010 for CARB to provide 100 percent allowances through all three compliance periods.  CLFP’s position has been that the declining cap, not the sale or trading of allowances, will ensure that the state’s emission reduction goals will be met in a timely manner. 

California’s cap-and-trade regulation puts a cap (or a hard limit) on the aggregate GHG emissions from large sources across the state.  CARB has created a supply of "allowances" equal to the total number of emissions under the cap, and require facilities with large emissions (over 25,000 metric tons of CO2 or its equivalent annually) to surrender one allowance for every unit of CO2 they emit.  Because the cap declines by 2-3 percent each year, fewer allowances will be available in each subsequent year as well, requiring companies either to reduce their emissions or buy increasingly costly allowances in the CARB-operated auction. 

Staff indicated that the reason behind continuing the current level of transition assistance was due to the ongoing need to finish development of industry benchmarks and to complete a number of ongoing leakage studies.  However, this change may be a reaction to indications that California industry has reduced emissions to near 1990 emissions levels already, primarily due to decreased production resulting from the continuing recession.  If accurate, there would be more than enough allowances to continue providing 100 percent of transition assistance without exceeding the cap. 

CARB is currently working on updating the Emissions Inventory in conjunction with the scheduled 2013 Scoping Plan Update.  An up-to-date inventory is needed in order to gauge the effectiveness of the cap-and-trade scheme and to determine what changes need to be made in order to reach the emission reduction goals mandated in AB 32.

The Downside
In the workshop, CARB staff noted that should the recommended industry assistance changes slow or alter the emissions reduction trajectory, assistance factors could be drastically reduced in the third compliance period in order to meet AB 32 goals.  This means that free allowances, instead of increasing, could drop below current expected amounts for all obligated entities or actually cease altogether depending on the emissions levels going into 2018.

Article written by John Larrea, CLFP Government Affairs Director

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