CLIMATE CHANGE AND ENVIRONMENTAL UPDATE

California Releases Draft Cap-and-Trade Proposal

December 3, 2009

While Congressional efforts to limit greenhouse gas ("GHG") emissions have recently stalled, state and regional efforts continue to move forward. The latest development is in California where, on November 24, 2009, the Air Resources Board (“CARB”) released a draft of its proposed cap-and-trade system. The proposed system covers 85% of all GHG emitters in California. The proposal defers on a key cap-and-trade detail—what percentage of emissions allowances will be auctioned—which will need to be determined before CARB votes on the proposal in October 2010. California’s proposal also envisions a more limited role for offsets (4% of total emissions) than the federal cap-and-trade proposals. If approved, California’s cap-and-trade system will go into effect in 2012 for approximately 600 major sources (mainly power plants, refineries and concrete factories) and 2015 for certain other emission sources.

 

This draft proposal is an integral component of California’s strategy to achieve 1990 GHG emissions levels by 2020 and is designed to be linked with other systems, especially the system still under development by the Western Climate Initiative, a group of Western states, including California, and Canadian provinces that have agreed to work together to reduce GHG emissions. However, unlike the recent Congressional bills, California is not relying on its cap-and-trade system to achieve the majority of its GHG emissions reductions. After full implementation, California’s cap-and-trade system will only account for approximately 20% of the reductions necessary to achieve its emissions target. The remainder of the reductions will be achieved via other regulatory programs. As Congress moves forward with its GHG reduction legislation, it remains to be seen whether state and regional programs, such as California’s, will be pre-empted in favor of a universal federal system or if the early state and regional actions will co-exist with a national scheme. 

 

See CARB’s preliminary draft cap-and-trade proposal.

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© 2009 Davis Polk & Wardwell LLP