• California’s Global Warming Solutions Act Cap-and-Trade Program
  • September 10, 2014 | Authors: Rabia P. Chaudhry; Sean S. Varner
  • Law Firm: Varner & Brandt LLP - Riverside Office
  • In September 2006, California enacted the Global Warming Solutions Act (“AB 32”), which aims to reduce California’s greenhouse gas (“GHG”) emissions to 1990 levels by the year 2020. These levels are measured in metric tons of carbon dioxide equivalent (“mt CO2e”). Specifically, AB 32 requirements are projected to cut GHG emissions by approximately 40% from year 2020 projected business-as-usual emissions (600 Mmt CO2e), resulting in the 2020 levels reverting to those which occurred in 1990 (427 Mmt C02e).

    To accomplish California’s emissions reduction mandate, AB 32 authorized the California Air Resources Board (“ARB”) to establish a market-based cap-and-trade program (“CTP”). ARB adopted the final CTP regulation in 2011, which sets an overall “cap” on the amount of GHG released into the environment on an annual basis from specific economic sectors identified as California’s major sources of GHG emissions.

    The following information provides a general summary of California law governing what types of entities must comply with AB 32, though Varner & Brandt encourages business owners to seek qualified legal consultation to determine how the laws may apply to and/or affect their particular business.

    Targeted Sectors

    The CTP targets five key sectors responsible for approximately 85% of California’s GHG emissions in 1990:

    1. distributors of transportation fuel and natural gas;
    2. electricity generation;
    3. industrial;
    4. forestry; and
    5. agriculture.

    An entity within one or more of the key sectors emitting more than 10,000 mt CO2e must measure and report its GHG emissions to ARB. An entity within one or more of the key sectors emitting more than 25,000 mt CO2e is required to comply with CTP regulations.

    AB 32 Compliance Periods

     The CTP consists of the three compliance periods:

    1. First Compliance Period - January 2, 2013 to December 31, 2014;
    2. Second Compliance Period - January 1, 2015 to December 31, 2017; and
    3. Third Compliance Period - January 1, 2016 to December 31, 2020.

    Major industrial sources and electric utilities were required to comply with CTP beginning January 2, 2013. By 2015, distributors of transportation fuel and natural gas are also obligated to comply with CTP requirements. In addition, the CTP will likely create a market for ARB-certified offset projects in areas of livestock management, elimination of ozone-depleting substances, urban forest projects and U.S. Forest Service projects.

    Businesses Required to Comply

    A business must comply with CTP regulations and surrender the required allowances at the end of each compliance period if such business operates large industrial facilities (e.g., food manufacturing or processing plants) that emit 25,000 mt CO2e or more each year. Alternatively, if such business operates large industrial facilities that emit more than 10,000 mt CO2e and less than 25,000 mt CO2e, such business must only measure and report its GHG emissions to ARB.

    For reference, 25,000 mt CO2e is equivalent to each one of the following examples:

    1. Emissions from the annual energy use of approximately 2,300 homes;
    2. The annual GHG emissions from approximately 4,600 passenger vehicles; or
    3. Just over 58,000 barrels of oil consumed or 131 railcars’ worth of coal.

    Alternatively, a business may also choose to opt-in to the program voluntarily.

    What California’s Small Businesses Can Expect From AB 32

    Small businesses are not regulated by CTP regulations and are not likely to experience significant operating cost increases.

    Recent studies show that CTP would cause small increases in the price of electricity, natural gas and transportation fuels. The financial impact of these price increases on small businesses depends on the ratio of a business’s energy expenditures to its total revenues. On average, California’s small businesses spent 1.4 percent of their revenues on energy before the CTP regulations became effective. That figure is projected to rise to 1.7 percent by 2020, assuming that small businesses do not pursue incentives, rebates and other programs to help lower their use of electricity, gas and transportation fuels.

    Future of AB 32

    AB 32 and CTP are in the early stages of implementation, and must be closely watched for future developments along with other green initiatives that may impact California’s businesses.