Countdown to California's "Cap and Trade" Carbon Credit Auction

by Snell & Wilmer

After a series of setbacks, the California Air Resources Board (ARB) now seems poised to host its historic initial auction for California carbon emission credits on November 14.

The auction is a key part of the greenhouse gas (GHG) cap and trade regulation, which, in turn, is a central component of the Global Warming Solutions Act of 2006 (also known as Assembly Bill 32), signed into law by former California Governor Schwarzenegger. AB 32 requires California to reduce its GHG emissions to 1990 levels by the end of 2020.

GHG compounds include carbon dioxide, methane, nitrous oxide, sulfur hexafluoride, hydrofluorocarbons and perfluorocarbons (also known as the six “Kyoto” gases), plus nitrogen trifluoride. The cap and trade regulation applies to major industrial facilities that generate approximately 85 percent of the GHGs in the state, such as power plants and refineries.

Many of these major industrial sources already have been allocated the vast majority of the GHG allowances. Nevertheless, the ARB still will auction off over 20 million additional GHG allowances for 2013 as well as an approximately 40 million additional allowances for 2015 (allowances correspond to metric tons of carbon dioxide equivalent emissions).

The economic considerations surrounding cap and trade are substantial. Governor Brown’s 2012-2013 budget includes $1 billion in new revenues attributable to cap and trade. Some economists project that this figure will exceed $10 billion in a few years. (The Wall Street Journal earlier this week reported that trading volumes for carbon credits are at a nine-month high and that prices for contracts for California carbon allowances now are at an 11-month high.)

Critics of cap and trade contend that the costs to businesses of complying with the program will further weaken the economy and the job market. Just last week, the AB 32 Implementation Group, a business coalition, urged Governor Brown to postpone the November 14 auction in order to allow more time for the development and implementation of an alternative measure to reduce GHG emissions without the perceived impact on California’s economy.   

Nonetheless, the cap and trade regulation already has survived numerous political and legal challenges. In June, after initially invalidating the regulation, the California Court of Appeal upheld the ARB’s Climate Change Scoping Plan, which had been challenged by environmental groups. In July, the ARB postponed the first auction date (scheduled for mid-August). In August, the ARB suspended a controversial element of the cap and trade program that required certain deliverers of electricity to attest that they had not engaged in “resource shuffling” (the practice of directing lower emission electricity to California at the expense of directing higher emission electricity to other states). Barring any additional challenge, the law will become effective January 1, 2013.

Snell & Wilmer’s environmental team continuously monitors new developments in environmental law throughout the United States. On December 13, 2012, the firm’s Orange County office will host a seminar regarding the pending storm water industrial general permit and its implications for businesses in California. More information will be made available on the firm’s website shortly.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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