Energy and Climate Change Law Alert
On June 26, 2008, the California Air Resources Board (CARB) issued a draft scoping plan for implementation of AB 32, the Global Warming Solutions Act of 2006. AB 32 requires California to reduce its emissions of six greenhouse gases to 1990 levels by 2020. The legislation tasks the CARB with implementation of the regulations necessary to achieve that goal. Under AB 32, CARB has a series of deadlines to meet as it implements the legislation.
By January 2009, CARB must approve a scoping plan “for achieving the maximum technologically feasible and cost-effective reductions in greenhouse gas emissions from sources” of greenhouse gases by 2020.” The plan must “identify and make recommendations on direct emission reduction measures, alternative compliance mechanisms, market-based compliance mechanisms, and potential monetary and nonmonetary incentives to facilitate the achievement of this goal”.
The draft scoping plan released on Thursday proposes a series of emission reduction measures designed to allow the state to meet the required emissions level and put it on track to reduce emissions to 80 percent below 1990 levels by 2050, as called for by Governor Schwarzenegger’s Executive Order S-3-05.
Electricity Sector Recommendations
According to the draft scoping plan, the transportation and energy sectors account for the majority of California’s emissions, and the plan’s recommended measures focus on those sectors. Among the key proposals is a recommendation that California implement a cap-and-trade program linked to the Western Climate Initiative’s (WCI’s) regional effort. This proposal is hardly surprising given California’s leading role within the WCI. However, what is interesting is the light that CARB’s scoping proposal sheds on its stance as to how the WCI cap and trade program should be structured.
The primary insights provided into the imminent cap-and-trade program relate to timing. No de minimis threshold is proposed in the scoping document for determining program applicability. However, CARB requests comment on the appropriateness of differing thresholds for combustion CO 2 as opposed to all other greenhouse gases. More information is provided as to timing of the cap-and-trade program. AB 32 required the adoption of greenhouse gas “emission reduction measures” by January 1, 2011 with implementation required by January 1, 2012. As proposed, the cap-and-trade program would track these deadlines, initially applying to the electricity and large industrial sources, and expanding to cover transportation fuels and residential and commercial natural gas use by 2020. The draft scoping plan proposes a cap that would decline over time to 365 million metric tons of CO 2 equivalents (MMTCO 2 E) by 2020. A cap at that level would represent a reduction of approximately 35 MMTCO 2 E below projected emissions after implementation of the other recommended reduction measures.
The draft plan offers limited information regarding the structure of the allowance allocation method and offset utilization under the cap-and-trade system. The draft scoping document makes no recommendations concerning how emissions allowances would be allocated, but suggests that allowance allocation would quickly transition from a system in which the State provides some free allowances, to a system in which the majority of allowances are auctioned in the trading market. CARB also suggests that it will consider limits on the trading of allowances in communities with “disparate environmental impacts.” The draft plan also endorses the idea of allowing the use of offsets (i.e., emission reductions generated by sources outside the cap) for compliance. However, certain restrictions are discussed.
First, and least surprising, the draft plan suggests a limit on the amount of offsets any single source can employ. A limit of 10% of an individual firm’s obligations is used as an example of a potential limit on offsets. CARB also states that it is considering limiting the use of offsets to ensure that a significant portion of the required emissions reductions come from within the state and within the regulated sectors. CARB’s concern about reductions within the state appears to contradict a fundamental WCI concept of free transferability within member states and suggests that the transfer of allowances from other WCI states into California could similarly be constrained.
In addition to the cap-and-trade proposal, the draft scoping plan also recommends several additional measures to reduce emissions from the electricity sector. Those include:
- 1. Increase California’s Renewable Portfolio Standard (RPS) from 20 percent in 2010 to 33 percent in 2020. The new RPS would apply both to investor-owned utilities and publicly owned utilities.
- 2. Increase utility-based energy efficiency standards, and impose more stringent building and appliance energy efficiency standards to achieve a total of 32,000 gigawatt-hours (GWh) of reduced electricity demand.
- 3. Achieve 3,000 MW of new solar distributed generation under California’s Million Solar Roofs Program adopted in 2006.
- 4. Increase combined heat and power electricity production by 30,000 GWh.
- 5. Increase the use of solar water heating.
CARB is also considering requiring major industrial facilities, including power plants, that emit more than .5 MMTCO 2 E per year to undergo audits to determine the potential to reduce the emissions of greenhouse gases, criteria air pollutants, and toxic air contaminants. When cost-effective reduction measures are found, CARB would consider imposing rule provisions or permit conditions to require implementation.
The draft scoping plan also lists additional reduction measures that CARB is currently evaluating and which may be implemented in addition to or in place of its recommended reduction measures. For the electricity sector, those measures include obtaining an additional 8,000 GWh of reduced electricity demand through energy efficiency measures, installing an additional 2,000 MW of solar distributed generation, and reducing the state’s use of coal-fired generation by up to 13,000 GWh, potentially by requiring retail providers to divest or otherwise mitigate portions of existing investments in coal-fired generation.
The CARB has requested comments on the draft scoping plan by August 1, 2008, and will hold a series of public workshops across California on the plan. CARB is continuing work on modeling efforts to estimate the economic, environmental, and health effects of its proposed reduction measures. The results of that work will be released sometime later this summer, although no precise date has been set. In October, CARB will release its final draft, which will be voted on by the Board at its November meeting.