State Legislature Reaches Agreement on Extension of the Greenhouse Gas Cap-and-Trade Program; Stops the Bay Area Air Quality Management District’s Proposed Cap (and-No-Trade)

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July 19, 2017


As posted in CEQA Chronicles, on July 17, 2017 the California legislature approved an extension of the state’s greenhouse gas cap-and-trade program from 2020 to 2030. Cap-and-trade is a key program in the state’s efforts to meets its 2030 greenhouse gas reduction goals of 40% below 1990 levels covering emissions from industrial facilities and electricity and natural gas suppliers.
 
Governor Brown and legislative leaders have worked for several months on a package of bills that could achieve a 2/3 majority in the legislature, insulating the cap-and-trade program from additional challenges under Proposition 13 and providing the state with considerable discretion in spending revenues generated by the program. This grand bargain includes a cap on the price of emission allowances sold under the program, measures to reduce emissions of non-greenhouse gas pollutants from industrial facilities and refineries, an increase in maximum penalty for violations of state air rules, and tax credits for energy producers. In extending cap-and-trade, the legislation also blocks an effort by the Bay Area Air Quality Management District (“BAAQMD”) to cap greenhouse gas emissions from Bay Area refineries.
 
Under one of the bills approved, AB 398 (E. Garcia), CARB is authorized to continue a market-based (cap-and-trade) greenhouse gas reduction program through 2030. The bill sets the general parameters for this program and delegates the implementation to CARB. Important changes outlined for the program include:
  • A 40% reduction in free emission credit allowances by 2030 that will force facilities to reduce emissions or purchase allowances; 
  • Allowance price ceilings and price containment points to reduce the possibility of price spikes in the allowance market; and
  • Reductions in the amount of offsets that may be used in-lieu of emission reductions or allowance purchase. Also, at least one-half of all offsets must have “direct environmental benefits within the state.”
AB 398 also sets a list of priorities for how the legislature should appropriate revenues generated by the state’s sale of emission allowances including: pollution reduction in disadvantaged communities, low-carbon transportation, sustainable agriculture, forests, climate adaptation and research. Allowance revenues are also dedicated to replace the controversial fire prevention fee that has been charged since 2011 to owners of structures in areas of the state where the California Department of Forestry provides primary fire services.
 
While preserving other state programs to reduce greenhouse gas emissions, including the low-carbon fuel standard, short-lived climate pollutant (e.g. methane) reduction measures; and the sustainable freight program, AB 398 preempts most actions by Air Districts to regulate greenhouse gas emissions from entities covered by cap-and-trade. This preemption is clearly aimed at the BAAQMD’s proposed Rule 12-16, a first of its kind rule that would have permanently capped greenhouse gas emissions from all Bay Area refineries at current levels. The governing board of the BAAQMD considered adoption of Rule 12-16 as recently as June 21, but voted to continue its hearing to a date later in the summer to allow staff additional time to settle on appropriate cap levels.          
 
A companion bill to AB 398, AB 617 (C. Garcia, E. Garcia, Santiago), includes measures to prioritize the reduction of criteria (e.g., NOx and particulate matter) and toxic pollutant emissions from industrial and mobile sources in the state. These measures are a response to criticisms of environmental justice advocates that the cap-and-trade program does little to reduce emissions from large industrial facilities and refineries typically located near disadvantaged communities. AB 617 also increases the maximum penalties for violations of air laws in the state from $1,000 to $5,000 per violation and automatically adjusts the maximum penalty for inflation.