Is California Dreamin’? An early look at the AB 32 carbon cap-and-trade market

At eCO2market, we have watched the California cap-and-trade market evolve from an idea to a program on the cusp of implementation. As you probably know by now, the market rules have been set by the California Air Resources Board (ARB), and the program is set to begin with the first CCA (California Carbon Allowance) auction to occur in summer 2012. Over the next several weeks, we will look at the expectations, similarities, carbon finance and a future outlook of the California cap and trade market. Today I want to examine the program’s background.

AB 32: A Short Background

The California Global Warming Solutions Act of 2006 (affectionately known as Assembly Bill 32, or AB 32 for short) began as one of former Governor Schwarzenegger’s campaign promises to make California a model for sustainability. In 2006, the bill made it through the California legislature and was signed into law on 27 September. While the Governor later suffered politically for his decision to pursue a law that some decried as job-killing during the subsequent recession, he defended his position and insisted the State reach its goal of reducing CO2 emissions to 1990 levels by 2020–a decrease of about 22%. Thankfully for the Governor, Californians as a whole are known to generally accept pro-environment measures which gave political leadership some leeway. It should be noted that AB 32 covers more than just market based emission reduction schemes, for this blog’s purpose, we will be concentrating exclusively on the cap-and-trade mechanism.

Members from both the ARB and California legislature understood from an early point that, presumably, the California carbon market would become the de facto example for a potential federal program. Therefore, the ARB spent three years meeting with the public 46 times and individually addressing (attention: link is to a rather large, ~10 MB, PDF file) more than 1,700 comments.

Fine Print

On 20 October, 2011, the ARB officially adopted the market mechanism rules for AB 32. Starting in 2012, power generators and oil refineries that produce more than 25,000 tons of CO2e per year becomes a compliance participant. In 2015, gasoline distributors and importers will fall into the ETS as compliance participants as well.

The overall schedule for the CA ETS is strikingly similar to that of the EU ETS. There will be three compliance periods, and the overall cap decreases by just under 2% each year.

At the moment, the first CCA auction is tentatively scheduled for 15 August 2012 for the California and (few remaining) WCI participants. But what about the offsets? At the moment, CARB has approved only four project protocols (methodologies), and each is from the Climate Action Reserve. They are:

  • Urban Forestry
  • Forestry
  • Ozone Depleting Substances
  • Methane (livestock)

Naturally, there are rumors/whispers/murmurings that additional CAR protocols will be accepted, as well as additional standards like the ACR. I will be monitoring these changes.

Objections

At the moment there are two large objections to the plan. The first is that carbon offsets can only fulfill 8% of a participant’s overall cap, which, when compared to most European countries, is a lower figure. Here, in France, the rate at which companies can use CERs to comply is 13.5%.

The second, perhaps more disruptive, concern has to do with buyer liability in regards to the CLT offsets. On 3 December, California regulators confirmed that buyers will be completely liable for the validity of their offset credits. Point Carbon’s article (subscription required) points out that this high liability level could drive buyers away from the cheaper offset market, thus raising CCA prices.

There is much more to discuss vis a vis the California carbon market, so be sure to check back with us.

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2 Responses to Is California Dreamin’? An early look at the AB 32 carbon cap-and-trade market

  1. NC says:

    Just a quick observation, considering the ARB will be accrediting verifiers; training, and actively auditing the verifiers, the concept of ‘buyer liability’ for the validity of a project sounds like a recipe for disaster., ie. lawsuits.

    Any elaboration on which verification standard will be used? I saw ‘ISO’ in the documents but not specific reference to 14064(3), and it seems there will be a californian twist on it with extra statements needed to be filed. Thanks.

  2. Chris says:

    Thanks for your comment; I think you’ve brought up a great point. The connection between ARB and the verifiers create an unmistakable hazard. When push comes to shove, I think California has made it clear that it wants to avoid an over-abundance of offsets but is risking liquidity by not budging when it comes to the pleas of financial market makers, and could suffer as you point out.

    On the other hand, California moves in mysterious ways. Is it possible they will reverse this decision at the 11th hour?

    When it comes to the ISO, it’s hard to say. Verifying the CAR projects theoretically happens via verifiers that are 14064(3):2006 and 14065:2007 accredited. Where does ISO 14066:2011 fit in? Finally, as that pertains to AB32’s rules… well, that’s a very dark shade of grey for me!

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