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California Air Resources Board Releases Updated Draft Scoping Plan (Part 2) | Latham & Watkins LLP

California Air Resources Board Releases Updated Draft Scoping Plan (Part 2) |  Latham & Watkins LLP

CARB chooses to stay the course on the Cap-and-Trade program.

On May 10, 2022, the California Air Resources Board (CARB) released its Update of the draft framework plan 2022 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 outlines the approach that the California will adopt to reduce greenhouse gases ( GHGs) to meet the goal of reducing emissions to 1990 levels by 2020. When developing the updated 2022 draft plan ( scoping plan), CARB evaluated four scenarios to identify the most viable path to achieving the state’s interim 2030 GHG reduction and GHG emissions reduction. neutrality goals. Our first Publish 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 of the four. In this second article, we discuss how the cap and trade program (the program) figures into the draft framework.

AB 32 authorized CARB to adopt a market-based compliance mechanism with “declining annual aggregate emission limits for sources or source categories that emit greenhouse gas emissions” through 2020 The market-based compliance mechanism designed by CARB came into effect in 2012 in the form of California’s cap and trade program. In 2017, AB 398 authorized the extension of the program to 2030, instituted some design changes, and set a new GHG reduction target of 40% by 2030. The AB 398 changes to cap and trade program began to take effect in January. 1, 2021. Today, the program regulates approximately 450 entities responsible for approximately 85% of the state’s GHG emissions. Key elements of the program include:

  • Descending heading: Annual ceiling which decreases by 4% per year.
  • Covered entities: The program regulates manufacturers, importers of electricity, suppliers of natural gas, gasoline and other fuels and suppliers of CO2 that emit more than 25,000 metric tons of carbon dioxide equivalent (MTCO2e) per year.
  • Use of offsets: Air Resources Board Offset Credits (ARBOCS) may be used by Covered Entities to meet their emission reduction obligations under the program in lieu of allowances, up to a limit of 4% between 2021 and 2025, and up to 6% between 2026 and 2030 Half of all ARBOCs must provide direct environmental benefits to the State of California.
  • Allocation and pricing of allowances: CARB distributes allowances to the cap and trade program market through two primary mechanisms: (1) direct allocation to regulated entities (i.e., electric utilities, natural gas and industrial facilities) and (2) auction to all market participants, subject to purchase limits. Allowance floor prices increase by 5% plus inflation per year to encourage on-site emission reductions for covered entities.
  • Bank allowance: Registered Market Participants may bank and hold allowances for use during a subsequent compliance period. Participants are subject to holding limits.
  • Link to program: Cap and trade regulations allow California to link its program to that of another jurisdiction to promote cost-effectiveness and facilitate deeper emissions reductions. The program has been tied to Quebec’s cap and trade system since 2014.
  • Use of Auction Proceeds: A recent report published by the CARB reported that the sale of state-owned allowances through cap-and-trade auctions generated, after statutory appropriations, a total of $18.3 billion. To date, $10.5 billion has been invested in GHG reduction projects. According to SB 535 and AB 1550, at least 35% of California’s climate investments must benefit priority populations, including disadvantaged communities and low-income communities and households in the state.

The draft scoping plan update addresses program design features that came into effect in January 2021 that are intended to “help ensure the program is able to handle periods of high and low quota demand. while continuing to guarantee an ever-increasing price signal for regulated entities to invest in GHG reduction technologies. These design features include:

  • Double the decrease in the annual cap from 2 to 4% from 2021 to 2030
  • Addition of a ceiling price at which an unlimited number of additional allowances will be sold to satisfy high demand and contain costs
  • Redesign the allowance price containment reserve consisting of two levels, or “speed bumps”, during which allowances designated for this purpose will be sold in order to contain rising price levels and satisfy market demand.
  • Maintenance of a 100% leakage assistance factor for the industry
  • Lower offset usage limits from 8% to 4% and require half of all offsets to provide direct environmental benefits to the State of California

The draft framework plan update noted the existence of 310 million unused allowances due to the rapid achievement of the 2020 emissions reduction target. While covered entities would not be required to use allowances banked if their emissions collectively decreased by 14 million metric tons (MMT) each year, the draft scoping plan update notes that “it is likely that the existing bank of 310 [MMT] allocations will be needed during this decade and will be exhausted by the end of the decade. In response to concerns about unused allocations, CARB notes that Environmental Protection Secretary Jared Blumenfeld would report to the Legislature by the end of 2023 on the status of the supply. allocations and recommendations on potential program changes.

CARB did not offer any new program design features in the draft scoping plan update and instead indicated its intent “to use modeling for the final 2022 scoping plan to assess what changes, if any, are warranted for cap and trade, or other, programs to ensure we are on track to meet the 2030 target.” Regarding the role of the program beyond the 2030 target, CARB reported that “carbon pricing in the form of a cap and trade program is part of the portfolio to meet the GHG reduction targets of the State, and this will remain essential as we work towards carbon neutrality.

The final update to the framework plan is currently expected to be released by December 2022 and is expected to be followed by a rulemaking process to amend the cap and trade program in 2023.