California Cap on Greenhouse Gas Emissions and Market- Based Compliance Mechanisms California Air Resources Board CDAWG November 2012 California Air Resources Board

Clean Cars Standard (AB 1493, Pavley) Authorizes world’s first vehicle standard for GHG emissions Climate Action Registry (SB 1771, Sher) Nation’s first inventory of GHG emissions Global Warming Solutions Act (AB 32, Nuñez and Pavley) Nation’s most comprehensive and aggressive law to reduce GHG emissions. Authorizes ARB to use “market- based compliance mechanisms” to reduce GHG emissions. Low Carbon Fuel Standard One of the first AB 32 measures, this standard requires refineries to cut by 10% the average life- cycle intensity of fuels by Western Climate Initiative Group of western U.S. states and Canadian provinces forms to coordinate development of cap-and-trade programs for potential linkage AB 32 Scoping Plan Outlines suite of policies, incentives and measures to cut state’s total GHG emissions to 1990 levels by Strategies include Cap-and- Trade. Building blocks of Cap-and-Trade Rev. 8/1/2012

2011Spring 2012 Summer 2012 Fall Cap-and-Trade Air Board approves final rule (Oct. 20) Sustainable Communties Strategy (SB 375, Steinberg) Regional GHG reduction targets that result in more livable communities and less driving. Advanced Clean Cars Air Board approves emission rules for 2017 – 2025 models: Tighter limits on smog, soot, GHGs and greater numbers of ZEVs. Building blocks of Cap-and-Trade Cap-and-Trade Air Board endorses economy-wide carbon-trading program to reduce GHGs Province of Quebec adopts similar program. (Dec. 15) Cap-and-Trade Practice carbon auction (Aug. 30) Cap-and-Trade Utilities receive free allowances (Oct. 1) Public notice of 1 st Cap-and- Trade auction (Sept. 14) Rev. 8/1/2012 Deadline for submission of bid guarantees (Nov. 7) Industries receive free allowances (Nov. 1) 1 st Cap-and- Trade auction (Nov. 14)

Emissions cap broadens Includes distributors of transportation fuels and natural gas 1 st compliance period Begins Jan. 1 1 st compliance period ends Industries turn in allowances for 30% of 2013 emissions. (Nov.) Building blocks of Cap-and-Trade Program continues Rev. 8/1/2012

5 What is Cap-and-Trade? One of a suite of measures to reduce greenhouse gas (GHG) emissions under AB 32 The “cap” limits total GHG emissions from all regulated sources The “cap” declines over time—reduces emissions Participants are allowed to “trade” state-issued GHG emissions allowances—creates flexibility, reduces costs of compliance “Works together with command-and-control measures (e.g. traditional regulation)

6 Definitions Covered entity—regulated party under cap&trade Compliance instruments—each is equal to 1 metric ton of GHGs Allowances—Issued by the State Offset credits—Issued for reductions that take place outside the program Cap—aggregate limit on GHG emissions from covered sources from 2013  2020 (about 2.37 billion tonne) Leakage—emissions going down in California that result in increases outside California

7 Goals of the program Reduce GHG emissions “Price” emissions to incentivize change Spur innovation in low emissions and efficient technologies Complement existing programs to reduce smog and air toxics Ensure AB 32 reduction mandates for GHG are realized through strict limit Flexible mechanism—allows covered entities to find most cost effective reductions

Who is covered? Stationary sources of emissions at or above 25,000 metric tons of CO 2 e per year Large industrial sources (e.g. cement, refineries, oil and natural gas producers) Electricity generation and imports Upstream coverage of small combustion emission sources (at fuel provider—e.g. fuel wholesaler, or first entity to offer fuel on the market) Transportation fuels (beginning in 2015) Residential and commercial use of natural gas (beginning in 2015) California Air Resources Board 8

9 Requirements of Covered Entities Register with ARB Report GHG emissions annually Surrender allowances and offsets to match emissions at the end of each compliance period Reductions are program-wide, not facility specific Comply with recordkeeping, market rules, verification, and other requirements in the regulation

How are Allowances Distributed? Free allocation to industrial producers to provide transitional assistance and to minimize emissions leakage Free allocation to electric utilities for the benefit of electricity ratepayers Electricity generators receive no free allowances. Utilities are issued free allowances to account for pass through costs to the end-consumer (CA ratepayers) A portion goes to a ‘reserve’ to contain prices should they get too high A portion goes to auction as proceeds to the State to be appropriated during the budget process This portion is what is left after free allocation to industry, and allocation to the reserve fund. Approx. 5% of market in 2013; Approx. 50% in 2015 California Air Resources Board 10

How are Allowances Distributed? California Air Resources Board 11

How Does Program Design Ensure Market Integrity? Purchase and holding limits—Prevent Market Manipulation All traders must register in the cap-and-trade tracking system The tracking system provides a chain of custody for allowances and offsets Balance need for transparency and safeguards to prevent market manipulation California Air Resources Board 12

Role of Offsets Entities may use offsets to satisfy up to 8% of their covered emissions Offsets are issued directly by the California Air Resources Board California Air Resources Board 13

General Offset Criteria Reductions must meet AB 32 criteria Real, additional, quantifiable, permanent, verifiable, and enforceable Additional = beyond regulation or what would otherwise occur Offsets must result from Board-adopted compliance offset protocols Offset credits cannot be issued for GHG emission reduction activities already covered under the cap California Air Resources Board 14

Current ARB Compliance Offset Protocols Forestry, Urban Forestry, Ozone Depleting Substances, and Livestock Digesters Originally developed for voluntary offset market Modified by ARB for compliance offset market Future Protocol Development Must be approved by the Board after a stakeholder process Coal mine methane Rice straw California Air Resources Board 15

Western Climate Initiative WCI is a coalition of Western States and Canadian Provinces seeking to reduce GHG emissions in a cost-effective manner Emissions Trading Group Core group pursuing market-based programs (cap & trade) Established a non-profit corporation entitled Western Climate Initiative, Inc., in November 2011 WCI Inc. will provide administrative and technical services to support implementation of linked programs. North America 2050 (NA 2050) WCI RGGI Midwest Accord California Air Resources Board 16

Important Dates Registration for tracking system: early July 2012 Practice auction: August 2012 Allowance allocation: Fall 2012 First auction: November 2012 Compliance obligation begins: January 2013 First compliance date: November 2014 California Air Resources Board 17