California Air Resources Board Endorses Long Anticipated Cap-and-Trade Regulation

On December 16, 2010, the California Air Resource Board (CARB) adopted a resolution to approve the proposed “California Cap and Trade Program” with certain modifications that will be completed through a series of 15-day rulemakings.   The cap-and-trade program is designed as a key element in implementing AB 32, the California Global Warming Solutions Act of 2006.  The final regulation must be submitted to the Office of Administrative Law prior to October 28, 2011, and the program will begin in 2012.

Cap-and-Trade Program & Implementing Regulation

The cap-and-trade program covers approximately 80 percent of the State’s total GHG emissions. The program, as implemented through the regulation, “caps” GHG emissions by issuing annual allowances (each covering the equivalent of one metric ton of carbon dioxide equivalent (MTCO2e)) to regulated entities.  

Covered Entities

The program and regulation covers approximately 360 types of businesses representing 600 facilities throughout California. Covered entities include those that meet the inclusion threshold of 25,000 metric tons of CO2e per year and engage in the following: cement production; cogeneration; glass production; hydrogen production; iron and steel production; lime manufacturing; nitric acid production; oil and natural gas systems; petroleum refining; paper and pulp manufacturing; electricity generating facilities (including operators located in California or electricity importers); and natural gas suppliers. The regulation also allows entities that engage in the above production and manufacturing activities to opt-in even if they do not meet the 25,000 metric ton inclusion threshold. Others may also voluntarily associate into the program. 

The Program 

The program is divided into two initial phases. The first compliance phase begins on January 1, 2012 through December 31, 2014, and will cover all major industrial sources, including the electricity industry and large industrial plants that manufacture glass, paper, concrete and other products. The second compliance phase begins On January 1, 2015 through December 31, 2017, and will cover distributors of transportation fuels, natural gas and other fuels. A third compliance period starts on January 1, 2018 through December 31, 2020.

Companies are not given a specific limit on their GHG emissions, but must supply a sufficient number of allowances and/or offset credits to cover their annual GHG emissions at the end of each compliance period. CARB will then permanently retire those allowances and issue a new and reduced set of allowances for the following compliance period. The Executive Officer will serve as the accounts administrator or may contract with a registered entity to serve as accounts administrator.

The cap starts at 165.8 million GHG allowances in 2012, which is equal to the emissions forecast for that year. The cap declines approximately two percent per year in the initial period (2012-2014).  In 2015, the cap increases to 394.5 million allowances to account for the expansion of the program to cover fuel distributors. The cap then declines at approximately three percent per year from 2015-2020. The 2020 cap is set at 334.2 million allowances.

The program allows companies and other regulated parties the ability to “bank” allowances for reuse in later compliance periods without restriction.  This approach is intended to encourage regulated parties to adopt early emission-reduction strategies in order to avoid increased compliance costs as the emissions cap is reduced over time. Because each year the total number of allowances issued in California will drop, covered entities will be forced to find the most cost-effective and efficient approaches to reducing their GHG emissions. 

To ensure a gradual transition, CARB will provide significant free allowances to all industrial sources during the first period (2012-2014). Entities that need additional allowances to cover their emissions may purchase them at regular quarterly auctions conducted by CARB or from other authorized markets.

Electrical utilities will also be given allowances but will be required to sell those allowances and dedicate the revenue generated for the benefit of their ratepayers to help achieve AB 32 goals. The allocation of allowances within the electricity sector must still be developed, however. Staff has recommended that a set number of allowances be set aside each year for the electricity sector, starting with the 2012 allocation at 90 percent of 2008 electricity sector emissions and declining linearly to 85 percent of that value by 2020.  Ninety percent would be 89 million metric tons (MMT). The recommended 2012 allowance allocation to the electric sector is 97.7 MMT, declining to 83 MMT in 2020.  (See Draft Resolution 10-42, Appendix 1 (Staff Proposal for 15-day Changes to Address Electricity Sector Allowance Allocation).) The details of the final allocation system will be developed following additional comment, data review and analysis.   

Offset Credits

 Up to eight percent of a covered entity’s allowances may consist of offset credits allowing, in total, up to 232 million MTCO2e worth of offsets to be used through the year 2020.  Offset credits may be obtained from certified parties not subject to the regulated cap, including reforestation/forestry management projects, urban forest projects, dairy/livestock digester projects, and removal of ozone depleting substances in the United States (i.e., refrigerants in older refrigerator and air-conditioning equipment). Offset credit providers will be required to register with CARB or with an approved offset protocol registry.

 The offset provisions include the ability to develop international offset programs which include preservation of forests abroad. A Memorandum of Understanding reflecting this option has been signed with Chiapas, Mexico and Acre, Brazil. The regulation also contemplates the ability to link California’s program with the Western Climate Initiative (WCI), including New Mexico, British Columbia, Ontario and Quebec. Eventually, California’s program and the WCI may be linked with other regional climate programs such as the Midwest GHG Accord and the Regional GHG Initiative, which includes power generation emissions within 10 northeastern states.    


To ensure enforcement, a newly created California Cap-and-Trade Market Tracking System will track the allowances and offsets. Each covered entity will also be required to register and create an account with CARB or a designated account administrator. Covered entities, including entities that generate emissions from biomass-derived fuels, are required to report and verify their emissions pursuant to the Mandatory Reporting Regulation. Records must be kept for at least 10 years. Entities must also disclose direct and indirect corporate associations with other registered entities. Annual compliance obligations, including the surrendering of allowances/offsets equal to 30 percent of the previous year’s emissions will also be required of regulated parties. Entities that do not surrender the appropriate number of allowances/offsets will be subject to penalties as provided in sections 96010-96014.  Each day that each allowance or offset has not been surrendered is considered a separate violation.

Site visits, reports, data checks and ARB audits for offset project verifications will also be conducted. Offset verifiers must meet the accreditation requirements in title 17, section 95132 to provide verification services for GHG emission reductions or GHG removal enhancements for listed offset projects.  If the Executive Officer finds a high level of conflict of interest between a verification body, or team, as defined in section 95979, and an offset project operator or authorized project designee, the Executive Officer may set aside the positive offset and/or rescind accreditation of the verifier or verifying body.   

Next Steps – Executive Director Actions

CARB directed the Executive Director to take the following actions, among others: (1) hold one or more public workshops on the modifications proposed to the regulation as set forth in Attachment B to Resolution 10-42; (2) provide 15 days for public comment on all modifications to the regulation and consider all written comments submitted; (3) prepare written responses to comments received as required by CEQA and CARB’s certified regulatory program; (4) determine whether feasible alternatives or mitigation measures exist to reduce or eliminate the potentially significant adverse effects of the regulation; (5) make findings; (6) take final action to adopt the proposed regulation set forth in Attachment A to Resolution 10-42 as modified by Attachment B and any additional conforming revisions deemed appropriate. If warranted, the Executive Director may return the proposed amendments and findings to the Board for further consideration before taking final action.

 A copy of the draft resolution, including the attached regulation and amendments is available on CARB’s website at: