The updates proposed by CARB Tuesday extend the cap-and-trade program from 2020 to 2030 and envision steeper annual emissions cuts, incorporating a 2015 executive order from Gov. Jerry Brown calling for the state to reduce greenhouse gas emissions by 40 percent from 1990 levels by 2030.
Under the cap-and-trade program, CARB auctions off emissions allowances to refiners, utilities and other greenhouse gas polluters as the emissions cap gradually declines. In addition to extending the program to 2030, the regulator is proposing to set initial emissions allowance budgets for 2031 through 2050, as it looks to implement a 2005 executive order calling for California to reduce its greenhouse gas emissions by 80 percent from 1990 levels by 2050.
“CARB projects to 2030, but talks about 2050, so they're already thinking about extending this thing even past 2030,” said Jon Costantino, a former CARB climate change planning manager who is now a senior government and regulatory adviser at Manatt Phelps & Phillips LLP. “They clearly state that they believe they have the authority. That's a point of contention.”
Battle lines are already being drawn. Republicans in the California state legislature recently secured a letter from the state's legislative counsel concluding that CARB doesn't have authority to extend the cap-and-trade program — or any other provision of California's landmark climate change law known as AB 32 — past 2020. If CARB finalizes the cap-and-trade revisions in 2017, as expected, legal challenges on that issue will likely follow, experts say.
“There will inevitably be a struggle over whether the air resources board has the authority to do this,” said Bill Sloan, who chairs the carbon team within Morrison & Foerster LLP's energy and environmental group.
And there’s another legal elephant in the room: a bid to invalidate the regulations that permit CARB to auction off emissions allowances, which is currently being mulled by a state appeals court. Appellants, including the California Chamber of Commerce and the National Association of Manufacturers, claim that the regulations exceed the scope of CARB's authority under AB 32. They also contend that the law can't authorize auctions because the revenue they generate constitutes a "tax," and AB 32 was passed with less than the two-thirds supermajority vote required to pass a tax under California's constitution.
“If there's a definitive winner one way or the other, it shifts things,” Costantino said.
Meanwhile, the current cap-and-trade program has suffered from legal and regulatory uncertainty. The most recent quarterly auction conducted by CARB and air regulators from Quebec — whose cap-and-trade system is linked with California's — resulted in only a fraction of the available emissions allowances being bought.
“As long as there are questions about the program's longevity and questions about its legality, it's led a lot of market participants to sit out the auctions for the moment,” said Alex Jackson, the legal director of the Natural Resources Defense Council's California climate program.
With its proposed amendments to the cap-and-trade program, it's clear that CARB has learned some lessons, experts say.
“CARB is trying to cement its position that there will be auctions and a market for allowances past 2020 and past 2030, and if you have compliance instruments that are pre-2020, you'll be able to use them after 2020,” Stoel Rives LLP associate Allison Smith said.
The regulator's inclusion of post-2030 plans in its proposal can't be underestimated. CARB knows that if it just extends the cap-and-trade program to 2030, it's merely kicking the can down the road for a few years, according to Sloan.
“They've laid down the marker, saying, 'We have these executive actions suggesting where we need to be by 2050. Why don't we try as best as we can, as the intent of this program is going to be in place for the next 34 years?'” Sloan said. “That does provide a longer on-ramp.”
Experts say CARB is also firming up the cap-and-trade program by proposing how to use it to comply with the U.S. Environmental Protection Agency's Clean Power Plan, which seeks to slash carbon emissions from existing power plants by 32 percent from 2005 levels by 2030. States have to submit implementation plans for meeting the emission reduction targets, although implementation is currently on hold while the Clean Power Plan is challenged in court.
The EPA had indicated before the court challenge, however, that regional cap-and-trade systems could be viable compliance routes.
“There's still some refinement that needs to happen with cap-and-trade to make it fit in with the CPP's requirements, but there's no huge, substantive change to California's cap-and-trade program needed to make it meet CPP requirements,” Smith said.
That could be a model for other states to emulate in order to comply with the Clean Power Plan and even join forces with California, experts say. CARB's proposal calls for its cap-and-trade program to link up with Ontario's cap-and-trade program starting in 2018.
“The linkage with Ontario is a signal that other jurisdictions are finding it beneficial to link with CARB's program,” Winston & Strawn LLP associate Drew Mayer said.
CARB is expected to vote on a final version of the cap-and-trade amendments in March 2017. How the final version looks after months of stakeholder comments and horse-trading will determine how heavy a regulatory — and financial — lift it will be for regulated industries, experts say.
The proposal envisions an emissions cap that will decline by approximately 3.5 percent per year between 2021 and 2030, much steeper than the approximately 2 percent decline under the current program.
“When you have that magnitude of reductions year over year, it's going to put more pressure on [allowance] prices and the cap,” Costantino said. “Cost containment will be an issue post-2020.”
Other key items to be hashed out include what offset programs will be available for companies that aren't able to make the required emission cuts, as well how many free emissions allowances will be available to certain industries, experts say.
“In short, CARB is proposing a lot,” Mayer said. “They've proposed specific changes to a lot of provisions and indicated they're open to changing existing provisions.”
--Editing by Philip Shea and Jill Coffey.
