California emissions trading system
California is in the process of implementing the emissions aggressive cap-and-trade scheme in the United States. To help companies understand the issues related to cap-and-trade, this QuickCounsel will address gases and entities covered by the program, the market operations of the program, and california with other carbon markets. Each entity is required to have an emissions allowance for every metric ton of CO2 emitted. Emission allowances can be allocated to a company by the government, bought at auction, traded amongst covered entities, or created through offset projects. Entities without enough allowances to cover their emissions face a fine. Each year, the overall cap is reduced to bring the economy closer to the target emission level. The program is set to begin in the second half of At that time, the California Air Resources Board CARB will begin allocating and auctioning emission allowances. However, companies will not have any compliance obligations until The period will be a trial period to familiarize covered entities with the program and allow California to address any issues that arise. Once compliance obligations begin inCalifornia will require covered entities to submit allowances at the specified deadlines. CARB measures emissions by the metric ton of carbon dioxide equivalent MtCO2e. This means that the other covered gases, like methane and nitrous oxide, will be measured by how many metric tons of carbon dioxide are necessary to reproduce the climate effects of one metric ton of the other covered gas. The cap-and-trade regulations establish a tiered schedule for covered entities. Larger emitters, like power generators and heavy industry, will be covered in the beginning Smaller emitters, like transportation fuel providers and commercial natural gas producers, will not be subject to regulation until the next compliance period The regulations further limit compliance obligations to entities that emit 25, MtCO2e during any of the three years prior to the compliance period. Emissions instance, the regulations will cover a cement producer emitting more than 25, MtCO2e during any year between and for the period. For reference, 25, MtCO2e is equivalent to the emissions generated by about 5, passenger vehicles or electricity for 3, homes. A covered entity may drop its compliance obligation for the next compliance period when GHG emissions drop below the threshold for an entire compliance period or all processes, units, and supply operations subject to reporting cease. The cap-and-trade regulations also allow non-covered entities to voluntarily join and participate in the carbon market. The level of participation varies depending on the entity:. Another issue to consider is the emissions threshold. For companies that fall just below the threshold, an increase in production or loss of efficiency could trigger increased regulation under cap-and-trade. An awareness of both issues will be critical as your company plans for the future in California. Entities receive allowances from the government through direct allocation or auction. Once distributed, the allowances may be exchanged on a secondary market to meet the needs of various covered entities. In the beginning of the cap-and-trade program, CARB plans to freely allocate most emission allowances to specific covered entities in an effort to avoid steep price increases system shocks to the covered entities. The covered entities receiving allocated allowances are those entities in industries likely to flee California under cap-and-trade, like energy production and manufacturing. As the cap-and-trade program progresses, CARB will rely more heavily on auctions to distribute allowances. CARB will hold quarterly auctions for low flee-risk industries quarterly starting in the second half of The auctions have price floors and caps to prevent the auction price from going too low or high. In addition to regular auctions, CARB will hold quarterly advanced auctions for a portion of the allowances. Allowances purchased at advanced auctions are not valid for compliance purposes until trading year of the allowance e. The advanced auctions are designed to prepare entities for future compliance obligations and to give price signals for the periods. General counsel for covered entities should know whether they qualify for allocation or must go to auction for their allowances. That difference will affect the upfront costs of compliance, given that entities required to go to auction must pay an initial price for their allowances. Banking allows entities to hold emission allowances until the entity needs them for future compliance obligations. An entity may only retire allowances by submitting them to fulfill a compliance obligation, voluntarily retiring the allowances, or retiring them through a linked cap-and-trade program. To prevent allowance hoarding, the regulations place holding limits on the number of allowances an entity can retain in their holding account. Trading allows entities to buy and sell allowances on a secondary market to make up allowance deficits or profit from allowance surpluses. To combat market manipulation or fraud, the regulations set strict trading procedures, such as required recognition of a trade from all parties and the use of serial numbers for each allowance. The flexibility provided by banking and trading is intended to further relax the burdens placed on covered entities by compliance obligations. Offset credits are compliance instruments that represent greenhouse gas reductions or removals of one metric ton of carbon dioxide equivalent. An entity may offset its emissions by purchasing credits generated by specific projects that reduce emissions by sequestering or destroying GHGs. The regulations stipulate that only specific projects are eligible to generate offset credits:. Once a project developer proves that the offsets originated from one of the qualifying project types and are additional, the regulations further place quantitative limits on the use of offsets and require ongoing verification, monitoring, and reporting of the emission reductions. In addition to general emissions credits, the cap-and-trade program will recognize Early Action and Sector-Based Offset Credits. The Early Action Offset Credit program rewards entities that voluntarily took action to reduce emissions prior to the enactment of cap-and-trade. The regulations limit qualifying early action credits to only those emission reductions occurring between Jan. Sector-Based Offsets are credits generated by projects in a jurisdiction targeting GHG emissions in a specific economic sector. The most notable sector-based program is the UN Reducing Emissions from Deforestation and Forest Degradation Program REDDwhich encourages to preservation system forests through market mechanisms. As of the writing of this QuickCounsel, California has not approved any sector-based programs for the generation of offsets. For general counsel dealing with cap-and-trade, an awareness of offsets can be a cost-effective method of compliance. In many instances, generating offsets through projects may be cheaper than buying emission reduction technology or trading on the secondary market. General counsel should also be aware of the limits on offset use and the increased administrative burden offsets place on a company in the form of verification and monitoring costs. To ensure that the obligations are respected, CARB retains powerful enforcement measures. The cap-and-trade regulations create annual and triennial compliance obligations for each covered entity. The triennial obligation requires each entity to submit allowances equal to total compliance obligation for the entire three-year compliance period, excluding the emission allowances already submitted under california annual obligation. The annual obligations are designed to ease the burden of the triennial obligation by forcing entities to meet some of the obligation during the compliance period instead of having to meet the entire three-year obligation in one year at the end of the compliance period. CARB retains strong enforcement authority to ensure that the carbon market operates effectively. CARB may enjoin covered entities and california penalties for violations. CARB may also suspend revoke, or restrict holding accounts for covered entities. Given the stringent penalties for failed compliance, an awareness of the compliance obligations will be necessary for general counsel working with the cap-and-trade regulations. Avoiding the strict penalties will require a working knowledge of the various mechanisms that allow covered entities to bank and trade allowances and generate offset credits. Using those mechanisms and being aware of the annual and triennial obligations will allow general counsel to keep their company out of trouble. California envisions its cap-and-trade program to be part of a larger domestic and international carbon market. As of now, California has not established any links with other programs, but the cap-and-trade regulations do contain provisions establishing the procedures for linkage and the treatment of those allowances. The issue of linkage is important for general counsel in that as each connection is made with another carbon market, general counsel must be aware of the regulatory and market changes in other jurisdictions. Companies doing business, directly or trading, in California need to have a fundamental understanding of cap-and-trade and know how they can address the regulations constructively. These resources are not intended as a definitive statement on the subject addressed. Rather, they are intended to serve as a tool providing practical advice and references for the busy in-house practitioner and other readers. This site uses cookies to store information on your computer. Some are essential to make our site work properly; others help us improve the user experience. By using the site, you consent to the placement of these system. Read our privacy policy to learn more. GillSansRegular,"Gill Sans MT","Gill Sans","Trebuchet MS",Verdana,sans-serif; font-size: By Alex Hoover, Esq. Overview California is in the process of implementing the most trading cap-and-trade scheme in the United States. Carbon Dioxide CO2 Methane CH4 Nitrous Oxide N2O Sulfur Hexafluoride SF6 Perfluocarbons PFCs Nitrogen Trifluoride NF3 Other fluorinated greenhouse gases CARB measures emissions by the metric ton of carbon dioxide equivalent MtCO2e. Covered Entities The cap-and-trade regulations establish a tiered schedule for covered entities. The level of participation varies depending on the entity: Opt-In Covered Entities — entities that do not meet the emission threshold, but voluntarily submit to all reporting, verification, and compliance obligations; Voluntarily Associated Entities — non-covered entities, like brokers and non-profits, that wish to purchase, hold, sell, or voluntarily retire emission allowances. Clearing Houses — entities that intend to only hold allowances temporarily for the purpose of clearing transactions between two registered entities; Other Registered Participants — entities that do not qualify to hold emission allowances but may serve other market functions such as data verifiers, verification bodies, and offset project registries. Allocation In the beginning of the cap-and-trade program, CARB plans to freely allocate most emission allowances to specific covered entities in an effort to avoid steep price increases or shocks to the covered entities. Auction As the cap-and-trade program progresses, CARB will rely more heavily on auctions to distribute allowances. Offsets Offset credits are compliance instruments that represent greenhouse gas reductions or removals of one metric ton of carbon dioxide equivalent. General Offset Credits An entity may offset its emissions by purchasing credits generated by specific projects that reduce emissions by sequestering or destroying GHGs. The regulations stipulate that only specific projects are eligible to generate offset credits: Ozone Depleting Substances Projects — projects that destroy ozone-depleting chemicals, like many refrigerants. Livestock Projects — projects that capture and burn methane released by livestock manure to generate electricity. Urban Forest Projects — projects that sequester emissions planting trees in municipalities, school campuses, and other urban environments. Forest Projects — projects that reforest desolate areas, improve forest management, or avoid the destruction of forests in the United States. Early Action and Sector-Based Offset Credits In addition to general offset credits, the cap-and-trade program will recognize Early Action and Sector-Based Offset Credits. Compliance Obligations The cap-and-trade regulations create annual and triennial compliance obligations for each covered entity. Enforcement CARB retains strong enforcement authority to ensure that the carbon market operates effectively. Linkage California envisions its cap-and-trade program to be part of a larger domestic and international carbon market. Additional Resources Draft Proposal of California Cap-and-Trade SchemeCalifornia Air Resources Board California Delays Cap-And-Trade Auctions, Citing Potential GamingNew York Times Bottom Line on OffsetsWorld Resources Institute Bottom Line on Cap-and-TradeWorld Resources Institute Practical Tools to Implement and Assess a Big Data Program ACC Resource Library - InfoPAK - Sponsored by Hogan Lovells US LLP. Getting the Deal Through Guide - Climate Regulation ACC Resource Library - Article. Getting the Deal Through Guide - Gas Regulation ACC Resource Library - Article. 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