The California Air Resources Board ("CARB") has been busy adopting and implementing regulations aimed at reducing greenhouse gas emissions in California, as required by California's Global Warming Solutions Act of 2006, commonly referred to as AB 32. Cal. Health & Safety Code §§ 38500 et seq. A critical component of the regulations is CARB's cap-and-trade program, under which CARB has set a declining cap on greenhouse gas emissions and allows covered entities to purchase and trade "compliance instruments" (which include emission allowances and offset credits). 17 Calif. Code Regs. §§ 95801 et seq. This Climate Report Special California Update describes important regulatory and litigation developments regarding the cap-and-trade regulations.

  • Recent CARB Regulatory Activity

CARB Notice of the February 19, 2013 Auction. CARB announced on December 21, 2012 that it will offer for sale 12,924,822 vintage 2013 allowances and 9,560,000 vintage 2016 allowances at its auction scheduled for February 19. http://www.arb.ca.gov/cc/capandtrade/auction/february_2013/auction_notice.pdf. (To fulfill a compliance obligation, a compliance instrument must be issued for a vintage year within or before the year of the compliance obligation, or the last year of a three-year compliance period.) This compares to 23,126,110 vintage 2013 allowances and 39,450,000 vintage 2015 allowances offered at the November 14, 2012 auction. The February 19 auction is scheduled to take place from 10:00 a.m. Pacific Time until 1:00 p.m. Pacific Time. The CARB notice emphasizes that a variety of prerequisites must be met before an entity may participate in the auction. As discussed in the Fall 2012 edition of The Jones Day Climate Report , an entity must first be approved as a user of the Compliance Instrument Tracking System Service ("CITSS") and must have an account in CITSS. In addition, in order to participate in the February action, the account representative must select the CITSS Auction Participation Box on the CITSS system for the entity's account by January 21. This must be done even if the entity participated in the November 2012 auction. The account representative must also complete an auction application (first-time participant) or intent to bid confirmation (previous participant) in the Auction Platform by January 22. Bid guarantees must be completed and submitted by February 7. In a followup notice, CARB announced that the auction reserve price will be $10.71 per allowance (up from a reserve price of $10.00 for the November 2012 auction), and that the total number of allowances that will be auctioned in 2013 will be 57,628,254 vintage 2013 allowances and 38,240,000 vintage 2016 allowances. http://www.arb.ca.gov/cc/capandtrade/auction/march-2013/updated_annual_reserve_price_notice.pdf.

Proposal to Link California and Quebec. California is one step closer to linking its cap-and-trade program with a similar program in the province of Quebec. When the two programs are formally linked, compliance instruments issued by Quebec can be used to meet compliance obligations in California, and vice versa. On January 8, 2012, the CARB issued its second notice concerning amendments to the cap-and-trade regulations to effectuate the link with Quebec. See http://www.arb.ca.gov/regact/2012/capandtrade12/2nd15daylinknot.pdf. The first notice was issued in May 2012, but the California Legislature subsequently enacted SB 1018 that, among other things, requires the Governor to make four specified findings before the California cap-and-trade program can be linked to another jurisdiction. The four findings include that the proposed linked program is equivalent to or more stringent than the California program, and that California can enforce its program against entities in the linked jurisdiction to the maximum extent permitted under the U. S. and California constitutions. See Cal. Gov. Code § 12894(f). The findings are to be submitted to the Legislature. The January 8 notice explains the procedures required by SB 1018 and proposes additional amendments to the cap-and-trade regulations. The deadline to comment on the additional revisions is January 23. After the public comment period, CARB will request that the Governor make the necessary findings. If the Governor makes the findings, CARB is scheduled to consider final adoption of the proposed amendments at its February public hearing. The proposed amendments, among other things, modify the definition of "compliance instrument" to include an allowance or offset issued by a linked jurisdiction as well as by CARB (17 Calif. Code Regs. § 95802(a)(53)), provide that the California auction will sell allowances from both California and the linked jurisdiction (§ 95911(a)(5)), and add a new section providing that entities may use compliance instruments issued by the Government of Quebec to meet their compliance obligations under the California cap-and-trade regulations (§ 95943). The Quebec Cabinet approved amendments to its cap-and-trade regulations on December 13, 2012.

CARB Approval of Offset Registries. On December 14, 2012, CARB announced that it had approved both the American Carbon Registry and the Climate Action Reserve as offset project registries. See http://www.arb.ca.gov/newsrel/newsrelease.php?id=376. Offset Registries are an integral part of the California cap-and-trade program, as they are responsible for listing approved offset projects, collecting offset project data reports, facilitating verification of the reports, issuing registry offset credits, and tracking purchases and sales of registry offset credits. 17 Calif. Code Regs. §§ 95802(a)(178) and 95986(c)(3)(B). Each offset credit equals one metric ton of carbon dioxide equivalent and can be used to comply with the cap-and-trade regulation for up to 8 percent of each covered entity's compliance obligation. To date, CARB has approved four protocols for the creation of qualifying offset credits. The protocols address U.S. forests, urban forests, dairy manure digesters, and destruction of ozone-depleting substances. The web sites for both the American Carbon Registry and the Climate Action Reserve provide directions on how to include offset projects in the registry and list registered projects. CARB has trained and certified more than 60 independent third-party verifiers to evaluate the quality of offset projects submitted for approval and has certified 11 verification bodies. A list of accredited verification bodies and third-party verifiers will be posted in the future on the CARB web site.

  • Judicial Challenges

California Chamber of Commerce Challenges California's Cap-and-Trade Auction. As noted above, CARB holds quarterly auctions at which it will sell greenhouse gas allowances to the highest bidder. Covered entities, opt-in covered entities, and voluntarily associated entities may bid for allowances, which can be used to comply with the emissions cap under AB 32. On November 12, 2012—two days before CARB held its first quarterly auction—the California Chamber of Commerce filed a petition for writ of mandate challenging CARB's regulations authorizing the quarterly auctions. California Chamber of Commerce et al. v. California Air Resources Board et al., Sacramento Superior Court, Case No. 34-2012-80001313.

According to the Chamber, the regulatory provisions authorizing an auction are not sanctioned by AB 32. The Chamber further contends that the auction provisions impose an unconstitutional tax, because the auction proceeds do not constitute "regulatory fees" under Sinclair Paint Co. v. Bd. of Equalization, 15 Cal.4th 866 (1997), and AB 32 was not passed by a two-thirds majority of the Legislature, as the California Constitution requires for the imposition of new taxes.

This is a significant challenge to CARB's cap-and-trade program. Briefing on the Chamber's Petition is to be complete by May 10, and a hearing on the petition is currently set for May 31.

Decision Expected Soon in Challenge to California's Capand- Trade Offset Protocols. As discussed in Spring 2012 and Summer 2012 editions of The Jones Day Climate Report, two environmental groups filed suit challenging the four offset protocols adopted by CARB as part of the cap-and-trade regulations. Citizens' Climate Lobby and Our Children's Earth Foundation v. California Air Resources Board, San Francisco Superior Court, Case No. CGC-12-519554.

To qualify, offset credits must be for greenhouse gas emission reductions that are "in addition to any greenhouse gas emission reduction otherwise required by law or regulation, and any other greenhouse gas emission reduction that otherwise would occur." Cal. Health & Safety Code § 38562(d)(2). The petitioners contend that CARB's offset protocols violate that statutory mandate by not guaranteeing "additionality." According to the petitioners, the protocols permit the issuance of offset credits for emission reductions that would have occurred absent the offset protocols. The petitioners seek a court order prohibiting the use of offset credits, which would substantially increase the cost of complying with the AB 32 emissions cap.

The respondents, including CARB, the Climate Action Reserve, the Environmental Defense Fund, and a business group that includes (among others) major California utilities and energy companies, note that the petitioners do not challenge the validity of CARB's regulatory definition of "additional." The respondents argue that the four protocols meet that definition, under which greenhouse gas emission reductions are "additional" to the extent they "exceed any greenhouse gas reduction or removals otherwise required by law, regulation or legally binding mandate, and that exceed any greenhouse gas reductions or removals that would otherwise occur in a conservative business-as-usual scenario." 17 Calif. Code Regs. § 95802(a)(3).

Judge Ernest H. Goldsmith held a hearing on December 7, 2012, and is expected to issue at least a tentative decision in the case by early March.

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