CARB opts to stay the course on Cap-and-Trade Program.
On May 10, 2022, the California Air Resources Board (CARB) released its Draft 2022 Scoping Plan Update for public review and comment. Assembly Bill (AB) 32, the California Global Warming Solutions Act of 2006 (AB 32), required CARB to develop a scoping plan, to be updated at least once every five years, that describes the approach California will take to reduce greenhouse gas (GHG) emissions to achieve the goal of reducing emissions to 1990 levels by 2020. In developing the 2022 Draft Scoping Plan Update (Draft Scoping Plan), CARB evaluated four scenarios to identify the most viable path to achieve the state’s 2030 interim GHG reduction and GHG neutrality targets. Our first post on this topic discusses CARB’s ultimate selection of the third scenario, which adopts a carbon neutrality target for 2045 instead of 2035, as the best among the four. In this second post, we discuss how the Cap-and-Trade Program (the Program) features in the Draft Scoping Plan.
AB 32 authorized CARB to adopt a market-based compliance mechanism with “declining annual aggregate emission limits for sources or categories of sources that emit greenhouse gas emissions” through 2020. The market-based compliance mechanism deigned by CARB went into effect in 2012 in the form of the California Cap-and-Trade Program. In 2017, AB 398 authorized the extension of the Program through 2030, instituted certain design changes, and set a new GHG reduction goal of 40% by 2030. The AB 398 changes to Cap-and-Trade Program started to phase-in on January 1, 2021. Today, the Program regulates roughly 450 entities responsible for roughly 85% of the state’s GHG emissions. Key elements of the Program include:
- Declining Cap: Annual cap that declines by 4% annually.
- Covered Entities: The Program regulates manufacturers, electricity importers, suppliers of natural gas, gasoline and other fuels, and CO2 suppliers that emit more than 25,000 metric tonnes of carbon dioxide equivalent (MTCO2e) annually.
- Use of Offsets: Air Resources Board Offset Credits (ARBOCS) can be used by Covered Entities to satisfy their emission reduction obligations under the Program in place of allowances, up to a limit of 4% between 2021 and 2025, and up to 6% from 2026 to 2030. Half of all ARBOCs must provide direct environmental benefits to the state of California.
- Allowances Distribution and Pricing: CARB distributes allowances to the Cap-and-Trade Program market through two primary mechanisms: (1) direct allocation to regulated entities (namely, electrical distribution utilities, natural gas suppliers, and industrial facilities) and (2) sale at auction to all market participants, subject to purchase limits. Allowance floor prices increase by 5% plus inflation per year to incentivize onsite emissions reductions for covered entities.
- Allowance Banking: Registered market participants may bank and hold allowances for use in a later compliance period. Participants are subject to holding limits.
- Program Linkage: The Cap-and-Trade Regulations permit California to link its Program with that of another jurisdiction to promote cost effectiveness and facilitate greater emissions reductions. The Program has been linked with the Cap-and-Trade System of Québec since 2014.
- Use of Auction Proceeds: A recent report published by CARB indicated that the sale of state-owned allowances through Cap-and-Trade auctions have generated, after legislative appropriations, a total of $18.3 billion. To date, $10.5 billion funds have been invested into GHG-reducing projects. Per SB 535 and AB 1550, a minimum of 35% of California Climate Investments must benefit priority populations, which include disadvantaged communities and low-income communities and households across the state.
The Draft Scoping Plan Update discusses design features of the Program that went into effect in January 2021 which are intended to “help ensure that the program is able to handle periods of high and low demand for allowances while continuing to ensure a steadily increasing price signal for regulated entities to invest in GHG reduction technologies.” These design features include:
- Doubling the annual cap decline from 2% to 4% from 2021 to 2030
- Adding a price ceiling at which an unlimited number of additional allowances will be sold to satisfy high demand and contain costs
- Redesigning the allowance price containment reserve consisting of two tiers, or “speed bumps,” at which allowances designated for such purpose will be sold in order to contain rising price levels and satisfy market demand.
- Retaining a 100% leakage assistance factor for industry
- Lowering offset usage limits from 8% to 4%, and requiring half of all offsets to provide direct environmental benefits to the state of California
The Draft Scoping Plan Update noted the existence of 310 million unused allowances as a result of early achievement of the 2020 emission reduction target. While covered entities would not be required to use the banked allowances should their emissions collectively decline by 14 million metric tonnes (MMT) each and every year, the Draft Scoping Plan Update notes that “it is likely that the existing bank of 310 [MMT] allowances will be needed over the course of this decade and will be exhausted by the end of the decade.” In response to concerns regarding the unused allowances, CARB notes that Environmental Protection Secretary Jared Blumenfeld would be reporting to the Legislature by the end of 2023 on the status of the allowance supply and recommendations on potential Program modifications.
CARB did not propose any new Program design features in the Draft Scoping Plan Update and instead noted its intention to “use the modeling for the Final 2022 Scoping Plan to assess what, if any, changes are warranted to the Cap-and-Trade, or other, programs to ensure we are on track to achieve the 2030 target.” As for the role of the Program beyond the 2030 target, CARB indicated that “carbon pricing in the form of a Cap-and-Trade Program has been part of the portfolio to achieve the state’s GHG reduction targets, and it will remain critical as we work toward carbon neutrality.”
The Final Scoping Plan Update is currently expected to be published by December 2022, and is expected to be followed by a rulemaking process to amend the Cap-and-Trade Program in 2023.