Calif. Set to Adopt Sweeping Cap-and-Trade Rules

SACRAMENTO, Calif. — California air quality regulators are poised to adopt the nation's most sweeping regulations to give power plants, refineries and other major polluters a financial incentive to reduce their greenhouse gas emissions.

The Air Resources Board was expected to pass this key piece of the California's 2006 climate law, called AB32, at its meetings Thursday or Friday, with the hope that other states and nations will follow the lead of the world's eighth largest economy.

"AB32 was passed primarily to fill the vacuum created by the failure of Congress to pass any kind of climate or energy legislation for many years now," said Mary Nichols, the air board's chairwoman. "The goal was to lead by example, and being a leader you have to bring others along with you."

California's cap-and-trade rules would set up the largest U.S. carbon trading market as the way to enforce the state's gradually tightening cap on emissions.

"It's a critical piece because it's the tool we're using to make sure we reward businesses that invest in efficiency and renewable technologies, and that we are pushing and creating the right incentives," Nichols said.

Grouped with strict renewable energy mandates for utilities, tighter fuel-efficiency standards for automobiles and low-carbon fuel standards, California has enacted the strictest climate-related regulations in the U.S.

Under the new rules, regulators would enforce limits on heat-trapping gas emissions beginning in 2012, ultimately from 85 percent of the state's worst polluters.

The amount of allowed emissions would be reduced over time, and the regulations would expand in 2015 to include refineries and fuel distributors like oil companies. The cap would reach its lowest level in 2020, when California wants its greenhouse gas emissions reduced to 1990 levels.

Each polluter would receive permits, called allowances, for the amount of emissions allowed under the cap. The sum of the allowances — which each represent 1 ton of carbon dioxide or the equivalent of another pollutant — would equal the cap amount.

Ninety percent of the allowances would be free in the first years of the program to give industry time to upgrade to cleaner equipment or account for increased future costs.

The regulations are meant to reward polluters that cut emissions by investing in cleaner technologies. Facilities that emit less pollution than legally allowed can sell their unneeded credits in a carbon market being set up for the purpose.

Over time, as the cap gets lower and fewer allowances are available, costs would rise.

"The idea is to incentivize clean technology over fossil fuels by putting a price on carbon," said Jon Costantino, an attorney in Sacramento, who formerly served as the climate change planning manager at the Air Resources Board.

Buying allowances from other polluters on the carbon market wouldn't be the only way companies can comply with the strict emissions standards.

Up to 8 percent of companies' emissions reductions can also be fulfilled by buying so-called carbon offsets — credits for forestry or other projects that reduce greenhouse gases.

These offset credits have been criticized by some environmental groups, which argue that they allow polluters to comply with the cap while continuing to belch harmful substances into the air. Also, under the regulations, polluters could buy offsets from lands owned by timber companies that clear-cut up to 40 acres of trees, another sticking point for some conservationists.

Industries regulated under the cap say it could put California at a competitive disadvantage with states and countries that do not require such strict — and expensive — emissions reductions.

The state's budget currently has a $28.1 billion revenue shortfall through June 2012, and industry leaders have voiced concern that the program's increased costs could further weaken the economy.

But Californians have shown widespread support for AB32. Voters last month soundly rejected a proposition backed largely by oil companies and refiners that sought to delay implementation of the law until the state's economy improves.

Catherine Reheis-Boyd, president of the Western States Petroleum Association, said California has to ensure the cap-and-trade program gets linked with other states and countries that plan to do the same thing, so that the market broadens and becomes more robust.

"California can't do it alone, we won't help fix climate change alone," Reheis-Boyd said. "If we're the only ones doing cap-and-trade, it will be a huge competitive disadvantage for California when compared to other states, and a huge competitive disadvantage globally."

Nichols said other states, the European Union, and Chinese and Canadian provinces are all in various stages of discussions with California to link their carbon markets. New Mexico's Environmental Improvement Board narrowly approved its own cap-and-trade program last month and OK'd the state's participation in a regional market.