California's Cap-and-Trade Program Gets Green Light

Updated, 6:30 PM

California's Air Resources Board has formally adopted the state's greenhouse cap-and-trade program today, following a lawsuit that delayed compliance with the controversial scheme by a year.

The program, which will begin in mid-2012 with auctions of the emissions allowances, will be the nation's most stringent cap-and-trade mandate but not the first. It follows in the footsteps of the Regional Greenhouse Gas Initiative, a program that covers utilities in Northeastern and mid-Atlantic states.

"When fully implemented, it will cover 85 percent of the state's greenhouse gas pollution, making this the first-ever economy-wide market for greenhouse gas reductions in North America," Tim O'Connor, the director of the Environmental Defense Fund's California Climate and Energy Initiative, said earlier this week during a conference call with reporters.

The cap-and-trade program is one of more than 70 measures being carried out under the Global Warming Solutions Act of 2006, also known as AB 32. As O'Connor indicated, the program will cover 85 percent of the economy, namely the utility, natural gas, industrial and transportation fuel sectors, including power plants, cement factories and refineries. AB 32 calls for California, the nation's most populous state and world's eighth largest economy, to reduce global warming pollution to 1990 levels by 2020. The cap-and-trade program will deliver 20 percent of the emissions reductions needed to meet this goal.

Under the program, polluters must obtain and surrender an allowance for each ton of emissions they produce, O'Connor explained. Polluters can satisfy their obligations by making onsite emissions reductions, purchasing the emissions allowances and buying verified carbon offsets.

"The ability of polluters to make onsite reductions or purchase verified pollution reduction credits from others creates a market for emissions reductions," O'Connor said. "This market establishes a statewide incentive for regulated business, clean tech innovators, and third-party emissions reduction project providers to find ways to cut climate pollution as fast and as cheap as possible."

Thomson Reuters forecasts the price of each ton of CO2e to be about $36 on average from 2013 through 2020. The average price may drop to the $30 range if the ARB allows additional carbon offsets into the program.

The ARB will withhold 10 percent of allowances from auctions, forcing covered businesses to buy 10 percent of the permits they need, rather than receiving all or more for free. This has led some, including the AB 32 Implementation Group, to call it a "10 Percent Haircut" or tax. 

The program was threatened by a lawsuit from environmental justice groups that argued the cap-and-trade would disproportionately impact poor communities. A California Supreme Court judge ruled last month that the ARB could continue work on the program while the lawsuit is still pending. Before that, opponents tried to derail the whole AB 32 law last year through a defeated ballot measure that would have suspended it until the unemployement rate fell significantly.

This story was updated to reflect the unanimous vote by CARB to approve the cap-and-trade program.

Power plant image via Shutterstock.