By Leslie Z. Walker
On December 13, the Office of Administrative Law (“OAL”) approved and transmitted to the Secretary of State the regulations for the California Cap on Greenhouse Gas Emissions and Market-Based Compliance Mechanisms (Cal. Code Regs., tit 17, §§ 95800 et seq.), (“Cap and Trade Regulations”) including Compliance Offset Protocols (“Offset Protocol”). One day later, OAL approved and filed with the Secretary of State revisions to Mandatory Reporting Requirements initially enacted in 2007 (“MRR”). The Cap and Trade Regulations, Compliance Offset Protocol, and MMR are central to implementing California’s Global Warming Solutions Act (AB 32, Health & Saf. Code, § 38500 et seq.) and will take effect on January 1, 2012.
Cap and Trade
The Cap and Trade Regulations are part of the AB 32 Scoping Plan intended to reduce greenhouse gas emissions (“GHG”) to 1990 levels by 2020. The Cap and Trade Regulations were originally approved by the California Air Resources Board (“CARB”) in December of 2010. However, the rulemaking was stayed as a result of Association of Irritated Residents v. California Air Resources Board, San Francisco Superior Court Case No. CPF-09-509562, where the San Francisco Superior Court found that the functional equivalent document prepared for the AB 32 Scoping Plan violated the California Environmental Quality Act (Public Resources Code, §§ 21000 et seq.) (“CEQA”) by failing to adequately analyze alternatives to cap-and-trade as a means of reducing GHG. The court enjoined the implementation of the regulations until CARB conducted an adequate alternatives analysis under CEQA. CARB prepared a supplemental functional equivalent document and approved the document on August 24, 2011. On Tuesday, December 6, 2011, the San Francisco Superior Court issued an order discharging the peremptory writ of mandate. In so doing, the court indicated that the supplemental functional equivalent document complied with CEQA.
The Cap and Trade Regulations place a declining aggregate cap on GHG emissions from covered entities, comprised of major GHG emitting sources including but not limited to electricity generation, and large stationary sources such as refineries, cement production facilities, and oil and gas production facilities, that emit 25,000 MTCO2e per year, as well as natural gas and propane fuel providers and transportation fuel providers. The Cap and Trade Regulations will establish the total amount of GHG emissions that covered entities will be permitted to emit. CARB will distribute allowances to emit GHGs to the various covered entities through a combination of free allocation and sale at auction. The number of allocations will decrease each year starting in 2015 at a rate designed to allow California to achieve the AB 32 target in 2020. Covered entities can meet their emission limits by reducing their emissions, purchasing additional allowances, or purchasing offsets.
Starting in 2013, the Cap and Trade Regulations apply to facility operators and first deliverers of electricity emitting more than 25,000 MTCO2e per year. The emissions from these entities equal approximately one-third of the GHG emissions in California. In 2015, the program will expand to include fuel distributors, covering about 85 percent of GHG emissions statewide. CARB has issued a preliminary list of covered entities included in the 2013 compliance group.
The Cap and Trade Regulations allow covered entities to use of offset credits to meet their emission caps, so long as the offset credits are developed using CARB-adopted compliance offset protocols and the offset credits are used to meet no more than eight percent of the entity’s total compliance obligation during a compliance period. As part of the Cap and Trade rulemaking, CARB approved Compliance Offset Protocol for the following categories of projects: Livestock, Ozone Depleting Substances, Urban Forest, and other Forest. The Compliance Offset Protocol provide methods to quantify and report GHG reductions associated with the installation of a biogas control system for manure management on dairy cattle and swine farms, the destruction of high global warming potential ozone depleting substances sourced from and destroyed within the U.S., tree planting and maintenance activities to permanently increase carbon storage in trees, and activities that sequester carbon on forestland. These protocols were part of the rulemaking approved by OAL and transmitted to the Secretary of State on December 13, 2011.
California’s Mandatory Reporting Requirements were adopted in 2007, with the first reporting period beginning January 1, 2008. Revisions to the MRR were adopted this month to support the cap and trade program, harmonize the reporting requirements with the US EPA’s reporting requirements, and provide consistency with the Western Climate Initiative reporting requirements. The revised MRR requires annual emissions reporting from facilities, fuel and carbon dioxide suppliers, and electric power entities. These entities account for approximately 87 percent of the total carbon dioxide produced by California from industrial, commercial, and mobile sources of emissions. CARB estimates approximately 750 facilities, suppliers and entities would be subject to GHG reporting under the revised MMR regulations, compared to about 600 under the current regulation.
While industry stands to benefit from the alignment of California’s MRR with the Cap and Trade Regulations and the U.S. EPA’s mandatory reporting requirements, industries no doubt feel strapped by the requirement imposed by the Cap and Trade Regulations to either invest in costly strategies to reduce emissions, purchase emission offsets, or purchase additional allocations. Industry groups are likely only moments away from challenging these regulations as unconstitutional for violation of the commerce clause, AB 32, and CEQA, among other laws.
Leslie Z. Walker is an associate at Abbott & Kindermann, LLP. For questions relating to this article or any other California land use, real estate, environmental and/or planning issues contact Abbott & Kindermann, LLP at (916) 456-9595.
The information presented in this article should not be construed to be formal legal advice by Abbott & Kindermann, LLP, nor the formation of a lawyer/client relationship. Because of the changing nature of this area of the law and the importance of individual facts, readers are encouraged to seek independent counsel for advice regarding their individual legal issues.