Somach Simmons and Dunn, Attorneys at Law Somach Simmons & Dunn | Attorneys at Law

After Overcoming Legal Challenges, California’s Cap-and-Trade Program Is Extended Through 2030

Governor Jerry Brown signed Assembly Bill 398 extending California’s Cap-and-Trade program (Program) through 2030, and providing the State Air Resources Board (Board) with the primary mechanism to meet California’s goal of reducing greenhouse gas (GHG) emissions to 40 percent below 1990 levels by 2030.  Originally implemented in 2012, the Program’s ambitious goal of returning GHG emissions to 1990 levels by 2020 was set to expire unless the Legislature acted to extend the Program.

This bill comes shortly after litigation over the Program ended as a result of the California Supreme Court’s refusal to consider an appeal from a coalition comprised of business groups that appealed the case to the Third District Court of Appeal.  The coalition argued that the Program’s auction sales exceeded the Legislature’s delegation of authority.  However, affirming the trial court judgment in favor of the Board, the Court noted that four bills passed since 2012 affirmatively ratified the Board’s auction system.  AB 398, approved with a two-thirds supermajority, is now the fifth.

The Program is designed to provide a financial incentive for companies to reduce their GHG emissions.  With broad discretion from the Legislature, the Board created a regulatory system requiring covered entities (generally large emitters of GHGs) to either surrender sufficient compliance instruments (emissions allowances or offset credits amounting to one metric ton of carbon dioxide equivalent of GHGs) to cover the amount of pollutants they discharge, or pay monetary penalties.  For covered entities planning to emit GHGs in excess of their free emissions allowance, the Board sells additional emissions allowances – up to the cap – at quarterly auctions.  These capped allowances can also be traded on a secondary market, along with offsets resulting from voluntary reductions from a source that is not directly covered by the Program.  Summarizing, the Program “caps” the aggregate amount of GHGs that can be emitted by covered entities, but permits the entities to “trade” the emissions allowances and offset credits amongst themselves.  Total GHG emissions are thereby reduced over time as the Board lowers the cap by issuing fewer free emissions allowances to covered entities.

Assembly Bill 398 requires the Board to establish a price ceiling, offer non-tradeable allowances at two price containment points below the price ceiling, transfer current vintages unsold for more than 24 months to the allowance price containment reserve, evaluate and address allowance and over-allocation concerns, set industry assistance factors for allowance allocation, and establish allowance banking rules.  Proceeds from the Program will continue to be deposited in the Greenhouse Gas Reduction Fund, which is appropriated toward low and zero carbon transportation alternatives, sustainable agricultural practices, healthy forests, urban greening, climate and clean energy research, and climate adaptation and resiliency.  Thus far, funds have been applied to 30,000 home improvement efficiency projects, 105,000 rebates for zero-emission and plug-in hybrid vehicles, 16,000 acres of preserved or restored land, 6,200 trees planted in urban areas, 200 transit agency projects, 1,100 new affordable housing units, and various other efforts to improve California’s air quality.

For more information on this assembly bill, please contact Jared Mueller at jmueller@somachlaw.com.

Somach Simmons & Dunn provides the information in its Environmental Law & Policy Alerts and on its website for informational purposes only.  This general information is not a substitute for legal advice, and users should consult with legal counsel for specific advice.  In addition, using this information or sending electronic mail to Somach Simmons & Dunn or its attorneys does not create an attorney-client relationship with Somach Simmons & Dunn.