Are There Lessons to Be Learned From California's Proposed Cap-and-Trade Program?

• Date: 01 May 2010

5-2010 NEWS & ANALYSIS 40 ELR 10469

C O L U M N

GHG emissions for the preceding three-

year period. e bill passed in the U.S.

House of Representatives, which requires

annual reductions in allowance amounts,

includes a borrowing scheme that permits

the unlimited borrowing of allowances

one year in advance, eectively creating a

rolling two-year compliance period. e

draft legislation introduced in the Senate

by Sens. John Kerry (D-Mass.) and Bar-

bara Boxer (D-Cal.) would use the same

approach. Moreover, both bills would

grant covered entities the right to borrow

up to 15% of the allowances required to

meet their compliance obligations from

up to ve years in the future. Borrowed

allowances would be subject to an 8%

interest payment. Although the ARB has

yet to decide whether it will permit bor-

rowing from future compliance periods,

the relative simplicity of California’s pro-

posed three-year compliance period may

be worth considering.

Fuel Suppliers. Initially, the A RB

proposed including fuel suppliers in its

GHG cap in the second compliance

period: 2015-2018. e ARB is consider-

ing, however, moving up their obligation

to the rst compliance period: 2012-2015.

Suppliers of all industrial, commercial,

and residential fuel, including those that

deliver natural gas and transportation

fuel, e.g., gasoline, diesel, and ethanol,

Are There Lessons to Be Learned

From California’s Proposed

Cap-and-Trade Program?

by Tom Mounteer







 Climate Change Deskbook (Envtl. L. Inst. 2009).



The U.S. Senate’s inability to pass

climate change legislation does

not arise from its inability to nail

down the particulars of a greenhouse

gas (GHG) emission cap-and-trade

program. While GHG cap-and-trade

programs have been the centerpiece of

congressional bills for a number of years,

disagreement on the mechanics of such

a program is not what has led to legis-

lative stalemate. Rather the stalemate

stems from: (1) the potential eect of

capping GHG emissions on an already

troubled economy; (2)the risk that such

caps will encourage industry to relocate

to other countries where emissions are

not capped; and (3)the interests of states

heavily dependent on coal power.

Nonetheless, it might be instruc-

tive for federal bill drafters (and perhaps

the agency regulators who will draft the

implementing rules) to study a handful

of elements of the GHG cap-and-trade

program that California’s Air Resources

Board (ARB) proposed last fall. ere is a

good reason to seek instruction. It is hard

to imagine how the United States will live

up to President Barack Obama’s Decem-

ber pledge to achieve GHG emissions

reductions at the percentages and on the

time line he set out in Copenhagen with-

out a federal cap-and-trade regime. Even

if the ARB’s proposal does not “resolve”

this handful of issues, it might shed some

more light on their intricacies.

California enacted its Global Warming

Solutions Act

1

—in which a cap-and-trade

program is the centerpiece—in 2006. e

Global Warming Solutions Act set 1990

emission levels as its baseline. Last fall,

the ARB proposed rules to implement

the cap-and-trade program. e A RB

expects to release its nal draft proposed

rules this summer and to nalize them

at its October 2010 meeting. e AR B’s

proposed rules join the rules of the north-

eastern states participating in the Regional

Greenhouse Gas Initiative (RGGI)

2

as the

most comprehensive domestic models for

cap-and-trade programs.

Even with its own cap-and-trade rules,

California will continue to participate in

the Western Climate Initiative’s (WCI’s)

regional cap-and-trade program in which

a dozen western states participate.

3

e

ARB’s proposed rules are generally consis-

tent with the WCI’s framework in terms of

when they become eective, the emissions

sources covered, the goals for emissions

reductions, and the timetable for meeting

those goals. California might impose rules

more stringent than the WCI framework.

e handf ul of issues on which one

might look to the ARB’s proposal for

instruction include: (1)the period dur-

ing which emission sources’ compliance

obligation is measured; (2) the appli-

cation of the cap-and-trade regime to

fuel suppliers; (3) how emitters satisfy

their compliance obligations through

use of “osets”; (4)the extent to which

emission allowances or osets can be

banked; and (5)how the cost of compli-

ance might be constrained.

Compliance Period. e ARB’s

proposed rule would measure emitters’

compliance over a period of three years.

In other words, emitters would have to

hold sucient allowances or osets at the

end of three years to accommodate their

Tom Mounteer

Copyright © 2010 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120.