Sneak Peek: The Future of California’s Cap and Trade

Few government pronouncements are as highly guarded or anticipated as details of a California Air Resources Board (ARB or Board) Cap and Trade amendment package. It may sound wonky, and Janet Yellen may disagree, but California’s Cap and Trade Regulation is a multibillion-dollar-a-year endeavor and affects much more. From carbon market participants to regulated parties to legislative budget writers and climate regulators around the globe, what is contained in a major amendment proposal is as far-reaching and widely watched as any state agency document gets. Though Tuesday’s release of the post-2020 proposal did lead with a few TBD sections, it didn’t disappoint in terms of laying out a significant vision of what Cap and Trade could become through 2030 and on its way to 2050.

Much uncertainty remains surrounding the Cap and Trade program. It has pending litigation. It has pending legislation. And now it has pending regulations. But through it all, the Board has steadfastly moved in the direction of extending its signature program past its initial 2020 milepost. This effort, if initially approved in September and adopted in March, would extend the program past the tenures of both Chairman Mary Nichols and Governor Jerry Brown. So in that sense it really is a legacy effort.

Overall, the proposed program stays the course from a foundational perspective. Regulated entities still need to match up allowances with emissions, there is an ever-declining cap on those emissions, auctions are still prominently featured (and therefore Cap and Trade Auction Revenues), and it is still couched as the backstop for all of California’s climate change efforts. The proposed changes are the myriad of details and program elements that make up its complexity—compliance period lengths, leakage protection, industrial benchmarking, and auction details. Each of these “complexities” can be broken down into a dollar value that both compliance entities and third-party market participants will be analyzing over the next two months.

The “big ticket” items that will surely shape the future of the program include:

• ARB’s explicit statement that the original language of AB 32 provides the authority to move beyond a 2020 program (this position is not universally shared);
• A proposed linkage with Ontario, Canada, the second province to commit to a similar economy-wide GHG reduction program;
• Amendments to prepare the California market for the eventual implementation of the federal Clean Power Plan;
• No commitment to allow Washington State to use California allowances in its nascent “cap and reduce” program;
• No inclusion of REDD offsets, also known as international forestry offsets; and
• A commitment to keep studying ways to quantify the push to electrify the transportation sector.

Another interesting piece of the regulatory process puzzle is that this announcement does NOT start the formal comment period. This timing is a change from past practice and is actually a first-time event. Since there were so many changes on the table, the Board wanted to provide extra time for preview and analysis. ARB did provide a road map of what lies ahead:

• Jul. 19, 2016: ARB will provide a draft of the formal regulatory package, including the full Staff Report and appendices.
• Aug. 2, 2016: Pending review by the Office of Administrative Law (process double-checkers), ARB will post revised versions of all documents.
• Aug. 5, 2016: The formal public comment period should begin when OAL publishes ARB’s Notice of Public Hearing.
• Sept. 19, 2016: The formal comment period will close.
• Sept. 22-23, 2016: First of two ARB Board Hearings to consider proposed amendments.
• Oct. 2016: Release of a supplemental (15-day package) set of amendments.
• Mar. 23-24, 2017: Second Board Hearing to vote on proposed final package.

It really is hard to believe the Cap and Trade program is only in its fourth year of operation, but in that short time it has had outsized influence over politics, budgets, and the California economy. But now there are several clocks ticking. Over the next six weeks, the California Legislature may decide to grant broad authority or impose additional oversight on ARB. Over the next 10 weeks, until the September Board hearing, stakeholders will be analyzing the impacts on their businesses. And over the next few months, the much-anticipated court case hanging over this whole program could be decided. So stay tuned as the future of California’s signature environmental program evolves before our eyes. There is nothing wonky about that.