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California Air Resources Board Releases 15-Day Rule Changes for Cap and Trade Program

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On Monday, July 25, CARB released its formal "15-Day Rulemaking Package" for a first round of proposed changes to its Cap and Trade Rule. CARB will accept public comments until August 9, 2011.

The rule package contains a few "substantive" changes from the discussion draft of the regulation that CARB released on July 7, 2011. Some of the proposed changes include:

Alignment with WCI Reporting Scheme will require Facilities emitting 10,000 MMCO2e to submit Annual Reports
CARB has proposed aligning its mandatory reporting with the Western Climate Initiative (WCI) reporting requirements under the Final Essential Requirements of Mandatory Reporting. Any facility that emits 10,000 metric tons CO2e or more per year in combined emissions from one or more of the source categories must submit an annual GHG emissions report to CARB under AB 32.

10 Percent Average Shortage in Allocations for all Sources: CARB has proposed allocating allowances to investor owned and municipal utilities in amounts representing 90 percent of the 2008 electricity sector emissions. Allocations will then decline to 85 percent of 2008 emissions by 2020. Added to that, CARB still indicates that all other industry sectors will be 10 percent short on average.

Buyer Liability for Offsets: Unlike any other existing cap and trade programs where the seller is 100 percent liable, CARB is requiring buyers to be liable for offset failures. Buyer liability is expected to impact compliance hedging and other activities. Prospective offset buyers and traders are strongly advocating for amendments that include one or more of the following elements:

  • Leave the liability for maintaining the credits with the seller, especially those that are subject to CARB-administered permits;
  • Include an insurance pool funded through a "tax" applied to every project certified and/or trade executed;
  • No buyer liability for credits that are traded after CARB project certification.

Command and Control: CARB is inserting "command and control" requirements by mandating industrial audits that force energy efficiency changes.

8 Percent Offset Limit: CARB continues to limit the volume of offsets that facilities can use for their annual compliance obligation to only 8 percent. This will likely cause an artificial rise in the cost of compliance. Sources are advocating that the 8 percent offset limit be increased or, in the alternative, eliminated.

No Forward Carry of Unused Offset Capacity: Facilities and market participants will not be able to bank unutilized offset compliance requirements year after year. In addition, there is some question as to whether facilities will be prohibited from trading unused offset capacity. For example, a source with an ability to use 500 offset tons cannot use 100 offsets and trade the balance to another company.

Limited Offset Classes and Volumes: CARB has yet to approve more than four offset protocols for use. This has created uncertainty regarding the available volume and cost of compliance. To ensure that a sufficient number offsets will be available to both buyers and sellers, many stakeholders are advocating that CARB quickly approve the use of additional offset protocols.

No Multi-year Allocations: CARB is only issuing allowances on a one-year-forward basis and not multiple years, creating uncertainty for financial and capital planning purposes. In addition, CARB is only auctioning off current year allowances and two year-ahead allowances, instead of multiple years of allowances. Sources advocate that CARB follow the Acid Rain and RECLAIM program examples whereby sources were issued and allowed to trade multiple years of credits.

No Ability to Use Allowances and Credits that Result from Shutdowns or Curtailments: CARB continues to resist any efforts to credit shutdowns that will happen separately or as a result of AB 32 implementation.

 

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