“Go West, Young Man” to See the Future of U.S. Carbon Cap and Trade

A logjam in the U.S. Congress over health care reform is causing further delay in consideration of national climate change legislation. However, California regulators are moving full speed ahead on designing a program that could end up as the model for a federal system.

       Environmental activists’ hopes for quick action on climate change by Congress and the Obama Administration have largely been dashed. Climate change legislation has bogged down in the Senate behind health care and financial services reform. Prospects for a substantive new international agreement in Copenhagen in December have sputtered out. But industries likely to be regulated under climate change would be wrong to take their eyes off the ball. A cap and trade regulatory scheme for the United States remains more a matter of “when” than “if” and the “what” of such a program is already being worked out in regulators’ offices in Washington, DC, and, possibly more importantly, California.

       On November 24, 2009, the California Air Resources Board issued its preliminary draft regulation for creating a cap and trade program.  Authorized by the California Global Warming Solutions Act of 2006 – better known by its Assembly Bill number “AB32” – California’s emerging cap and trade program may well turn into the template for a federal program once Congress acts. 

       Don’t think California doesn’t know that. According to the Silicon Valley Mercury News: " ‘This marks another important milestone in California's efforts to deal with the very difficult and complicated process of developing a broad program to address climate change,’ said ARB Chairman Mary Nichols in a conference call Tuesday. ‘California is exerting a leadership role ... California is the first out of the box.’ "

       First out of the box may be a bit of an exaggeration. There are a host of regional and voluntary carbon trading systems in various stages of development and implementation in the United States today. But California’s leadership role should not be underestimated. The scope of the state’s policy – not to mention the size of the state’s economy – make the cap and trade program being developed there an automatic bellwether for the rest of the nation. Furthermore, AB32’s broad legislative mandate gives the California regulators authority that other nascent programs lack.

       In Washington, climate regulation development is moving down two tracks – legislative and regulatory – both of which are facing serious hurdles.

       On the legislative front, the U.S. House of Representatives on June 26, 2009, approved by a narrow margin the "American Clean Energy and Security Act" – also commonly referred to as the “Waxman-Markey” bill.  This 1,200-page bill calls for widespread changes in American energy policy, including the establishment of a cap and trade system. For a number of reasons, however, the Senate has been slow to act. Climate change legislation proponents in the Senate are now predicting action by the full body in early spring 2010. But a lot will depend on the outcome of other reform efforts, the state of the economy when spring arrives, and the prospect of looming mid-term elections in 2010.

       On the regulatory front, the U.S. Environmental Protection Agency is moving forward on a number of fronts to develop programs that could be implemented if Congress ultimately fails to act. EPA has issued a proposed “endangerment finding” that would enable them to regulate greenhouse gas emissions as pollutants under the Clean Air Act. EPA has also commenced mandatory reporting of greenhouse gas emissions. But EPA has a serious problem in that the Clean Air Act is structured to regulate emissions of pollutants that are emitted in the hundreds of tons or less. Greenhouse gases are emitted in much greater volumes. EPA is trying to accommodate this by “tailoring” its proposed rules to apply only to the 11,000 or so largest sources of greenhouse gas emissions. But if a legal challenge forced EPA to conform to the letter of the Clean Air Act, the number of greenhouse gas sources requiring permits and regulation could swell into the millions – an insurmountable task for EPA to administer.

       While legislators and regulators on the federal level struggle with these kinds of basic political and jurisdictional issues, California is free to move forward aggressively with the design of a functional cap and trade program. The state’s 132-page preliminary draft regulation was formulated after 21 public meetings and extensive consultation with a wide variety of industry groups and nongovernmental organizations. The cap and trade program California is considering is an allowance based system covering about 600 of the state’s largest greenhouse gas emitting sources – primarily electric utilities and industrial plants.

       The California Air Resources Board is asking people to informally comment on this “preliminary draft” by January 11 so that they can prepare a “proposed regulation and staff report” for formal public comment in the spring.  A “final proposed draft regulation” would then be published for public comment in summer 2010.  The CARB board is scheduled to consider the final regulation at its October 2010 meeting. The first phase of program implementation would begin in 2012.
       With that level of focus on the nuts and bolts of cap and trade, California’s leadership position is indeed secure. Industries concerned with the details of how a carbon cap and trade system may ultimately be deployed in the United States may do well to decamp from the banks of the Potomac and spend some time on the banks of the Sacramento River instead.