WCI – GHG Accounting

California Holds Successful First Auction of Carbon Allowances

The California Air Resources Board (CARB) held its first auction on November 14, 2012 for the purchase and sale of carbon allowances for its planned cap-and-trade regime. Mary Nichols, chairman of CARB, declared the auction a success:

“The auction was a success and an important milestone for California as a leader in the global clean tech market. By putting a price on carbon, we can break our unhealthy dependence on fossil fuels and move at full speed toward a clean energy future. That means new jobs, cleaner water and air – and a working model for other states, and the nation, to use as we gear up to fight climate change and make our economy more competitive and resilient.”

The auction results were released to the public on November 19^th (available online) . A tonne of carbon for the 2013 vintage year sold for $10.09, which is slightly above the $10.00 price floor set by CARB. The highest bid was a whopping $91.13. Also, there was three times the number of bidders at the auction than actual buyers, indicating a healthy and competitive market. Furthermore, 97% of allowances were purchased by regulated entities indicating that prices were not influenced by speculative buyers. Instead, it seems to indicate that regulated entities are looking to retire allowances for compliance purposes. Perhaps most importantly, the auction sold out with all 23,126,110 2013 vintage year allowances being purchased, raising approximately US$233 million. This auction kicks off the largest carbon market in North America and the second largest in the world, behind the European Union Emissions Trading Scheme.

California’s partners in the Western Climate Initiative (WCI) – including British Columbia, Manitoba, Ontario, and Québec – are no doubt paying close attention. Apart from Québec, which will launch its emissions trading system on January 1, 2013 with California, the success of California’s cap-and-trade program may spur the other WCI partners into action to implement a similar scheme.

Québec introduces amendments to draft GHG Regulations

To help Québec meet its emission reduction targets, the province introduced amendments to two draft GHG regulations in the June 8, 2012 edition of the Québec Official Gazette: (i) Regulation respecting mandatory reporting of certain emissions of contaminants into the atmosphere, and (ii) Regulation respecting a cap-and-trade system for greenhouse gas emission allowances.

Amendments to the Regulation respecting a cap-and-trade system for greenhouse gas emission allowances are intended to link the Quebec system with the California system as well as those of future partners such as Ontario and British Columbia. To this end, it specifies system registration admissibility conditions and necessary documents, as well as the procedure regulating emission rights trading and auctions, and provides the conditions for the delivery of offset credits, including protocols regarding certain admissible projects. Finally, amendments were made to adjust the regulation further to the adoption of Bill 89, An Act to amend the Environment Quality Act in order to reinforce compliance, by providing for administrative penalties and stronger sanctions.

The Regulation respecting mandatory reporting of certain emissions of contaminants into the atmosphere was also amended in order to complete the necessary harmonization with Western Climate Initiative (WCI) rules by adding declaration protocols. It provides, among other things, that the obligation to audit GHG emission declarations only applies to emitters subject to the GHG cap-and-trade system. In Québec, 2012 is a transition year during which regulated entities will have an opportunity to become familiar with the cap-and-trade system. The first carbon market compliance period will begin on January 1, 2013.

Legal Challenges Unlikely to Delay 2013 Start of California’s Cap-and-Trade Program

According to a panel of legal experts, it is unlikely that recent legal challenges to California’s cap-and-trade program will delay the start of compliance with the system on January 1, 2013. Speaking at the Navigating the American Carbon World conference in San Francisco on April 12, 2012, lawyers said that state regulators have done a good job in designing a system that can withstand legal challenges from regulated industries including the oil, gas and power sectors.

“Even if lawsuits are filed, I don’t think we’re going to see anything between now and the end of 2012 that will actually delay it,” said Tim O’Connor, a lawyer with the Environmental Defense Fund (EDF). He added that: “There might be lawsuits that are continuing, but nothing that will actually derail it at December 31, 2012,” when compliance with the program begins. Other panel members agreed that it was difficult to envision a scenario where a lawsuit would knock the program completely off course.

The majority of the lawsuits filed so far against the California Air Resources Board (ARB), the state agency that designed and is implementing the program, have come from environmental groups, not industry.

A lawsuit by an environmental justice group known as the Association of Irritated Residents (AIR) last year contributed to the ARB’s decision to delay compliance with the program until 2013.

In March 2012, two employees at the Environmental Protection Agency (EPA), acting as private citizens, filed a lawsuit claiming the ARB overstepped its authority when it said offset credits could count for compliance with the system. State officials and independent legal experts at the conference said they were confident the state would prevail in that case.

One reason lawsuits from industry have yet to materialize may be because the state has designed a system that stands on firm legal ground, EDF’s O’Connor said: “I would hope that the reason we haven’t seen a lot of legal challenges so far is because there are a lot of options that have been taken off the table because of smart design and design that is in compliance with the law”.

(Sources include: Thomson Reuters Point Carbon)

Québec Prepares to Start Emissions Trading as it Formally Adopts Cap-and-Trade Regulation

On December 14, 2011, Québec formally adopted the Regulation respecting the cap-and-trade system for greenhouse gas emission allowances (the Regulation), which came into force on January 1, 2012 and is based on the rules established by the Western Climate Initiative (WCI).

With the adoption of the Regulation, Québec officially steps to the starting line next to California. The first year of implementation of the system will be a transition year, which will allow emitters and participants to familiarize themselves with how the system works. In particular, 2012 will provide emitters and participants with opportunities to register with the system, take part in pilot auctions and buy and sell greenhouse gas (GHG) emission allowances in the market. No reduction or capping of GHG emissions will be required during this transition year. Over the course of the year, emitters will also be able to make any adjustments that may be necessary to meet their emission reduction obligations, which will come into force on January 1, 2013. Starting on January 1, 2013, some 75 operators in Québec (primarily in the industrial and electricity sectors) whose annual GHG emissions equal or exceed the annual threshold of 25,000 tonnes of carbon dioxide equivalent (CO2e), will be subject to the capping and reduction of their GHG emissions.

It should be noted that starting in 2015, companies which import or distribute in Québec fuels that are used in the transportation and building sectors (and whose combustion generates an amount of GHGs greater than or equal to 25,000 tonnes of CO2e per year) will also be subject to the capping and reduction of their emissions.

For all participating WCI members, the adoption of a cap-and-trade regulation a cap is the first of two key steps towards the establishment of a regional North American carbon market. The second step will consist of concluding a series of recognition agreements, among the different partners, to link their systems together.

BC and Ontario in the meantime continue to dither on whether to join the cap-and-trade scheme and businesses in those provinces are losing out on key opportunities to participate in the transitional market, recently valued for 2012 at almost US$ 800 million by Thomson Reuters Point Carbon. By finalizing their cap-and-trade regulations in a timely way, BC and Ontario could continue to be leaders in regional efforts to reduce GHG emissions and to spur technological innovation in their provinces.

Québec releases draft cap-and-trade regulation

On July 6, 2011, Québec’s Ministry of Sustainable Development, Environment and Parks announced the publication of a draft regulation to facilitate the implementation of its cap-and-trade system based on the Western Climate Initiative (WCI) guidelines. The regulation is now undergoing public consultation for a period of 60 days.

The regulation to be adopted following consultation will enable Québec to implement its carbon market as early as January 1, 2012. The first year will be transitional in nature, allowing emitters and market participants to familiarize themselves with how the system will work. They will be able to register as system users, take part in pilot project auctions and buy/sell greenhouse gas emission allowances through the market. This phase will also enable partners to make any required fine-tuning in order to make a smooth transition to their obligations under the cap-and-trade system that will come into force on January 1, 2013.

Industrial facilities that emit 25,000 or more tons of carbon dioxide equivalent annually will be subject to the system for capping and reducing their emissions.

The draft regulation is available here.

California to delay carbon trading program to 2013, but targets remain the same

On June 29, 2011, chairwoman of California’s Air Resources Board (CARB), Mary Nichols, announced that the state will delay enforcement of California’s cap-and-trade program until 2013. The announcement was made at a hearing on the status of California’s cap-and-trade system, which had been called to explore the implications of a law suit brought by environmental justice groups advocating policies other than cap-and-trade to reduce greenhouse gas emissions. In that law suit, a judge ruled in March that CARB had not sufficiently analyzed alternatives to cap-and-trade as required under the state’s Environmental Quality Act. CARB has appealed the decision and an appeals court ruled recently that officials could continue working on cap-and-trade regulations pending the court’s decision. Ms. Nichols indicated that the law suit was not a deciding factor in her decision to delay the first carbon trading program in the U.S.

The delay in the cap-and-trade program, which was originally scheduled to come into force on January 1, 2012, was proposed because of the need for “all necessary elements to be in place and fully functional”. In particular, Ms. Nichols cited the need to protect the cap-and-trade system from potential market manipulation. The decision came after Ms. Nichols conferred with the state attorney general’s office as well as experts on California’s ill-fated foray into deregulated electricity sales which led to widespread fraud and rolling blackouts in 2000 and 2001. However, Ms. Nichols said that the postponement would not affect the stringency of the program or the amount of greenhouse gas reductions required to be made by industries. Under the cap-and-trade program, 600 industrial facilities (including cement manufacturers, power plants and oil refineries) would be required to cap their emissions in 2012, with that limit gradually decreasing over eight years. The one-year delay will enable CARB to test the system and carry out simulation models.

Ms. Nichols said that quarterly auctions of emissions allowances that each regulated emitter must turn in would begin in the second half of 2012, rather than February 2012 as originally planned. Entities emitting more than 25,000 metric tons of carbon dioxide equivalent per year will begin trading credits at the end of 2012 to cover their emission reduction obligations for 2012 and later. Hence, the first three-year compliance period, which originally covered the years 2012 to 2014, will be shortened to two years. CARB has indicated that it will release draft regulations covering allowance distribution and details on offset protocols within the next two weeks. In addition, CARB has said that it is still on track to finish its cap-and-trade regulations by the end of October 2011.

It is likely that BC and Québec, California’s anticipated carbon trading partners, will follow California’s lead and delay their carbon markets until 2013 as well.

California to Appeal Superior Court Decision to Halt Carbon Market

On May 20, 2011, San Francisco Superior Court judge Ernest Goldsmith issued a decision requiring the California Air Resources Board (CARB) to halt action on implementing its planned emissions cap-and-trade program until it has explored alternatives to meet California’s emission reduction targets. The decision follows a ruling delivered in March 2011 in which the judge said CARB had violated the California Environmental Quality Act by failing to adequately assess alternative emission reduction mechanisms, such as a carbon tax. The ruling is the result of legal action brought by the Association for Irritated Residents and other environmental justice groups, which argued that the proposed cap-and-trade program could damage air quality in some parts of the state.

The cap-and-trade program is part of AB 32 (Global Warming Solutions Act), California’s landmark climate change law, which is designed to lower California’s greenhouse gas emissions to 1990 levels by 2020. AB 32 also includes increased fuel efficiency standards and a renewable electricity target of 33% by 2020. Under the ruling, CARB must set aside its December 2010 decision approving the trading system for emitters over 25,000 metric tons per year, and must cease all rule-making and implementation activities related to cap-and-trade until it complies with the law. In particular, the judge said that CARB must go back and show why it made the decision to implement cap-and- trade. The trading program is designed to cover 85 percent of the state’s industrial emissions by 2020 and would include emissions from power plants, oil and gas refineries, transportation fuels and other heavy industries.

On May 23^rd, California’s top attorney initiated an appeal of Judge Goldsmith’s decision. Depending on the length of the appeal process, the cap-and-trade program could be delayed, perhaps until 2013. In the meantime, California can continue with its renewable energy targets, low-carbon fuel standard and energy efficiency measures, all of which are unaffected by the judge’s ruling.

Implementation of California’s Cap & Trade Program Faces Potential Delay after Court Ruling

In a decision issued on March 18, 2011, a California Superior Court judge threw up a roadblock to the implementation of California’s cap-and-trade program by suspending the implementation of A.B. 32, the state’s landmark climate change law on the grounds that the California Air Resources Board (CARB) failed to properly consider alternatives to a cap-and-trade system. While the Court upheld the validity of CARB’s Scoping Plan for implementing A.B. 32, thus saving CARB from having to revise the Scoping Plan, it found flaws with CARB’s environmental review of the Scoping Plan under the California Environmental Quality Act. As a result, not only has the proposed cap-and-trade program been put on hold, but at risk are other elements of the Scoping Plan, including the state’s low-carbon fuel standard and a 33% renewable portfolio standard for electricity by 2020. In his ruling, Judge Ernest Goldsmith of San Francisco Superior Court said that the CARB “seeks to create a fait accompli by premature establishment of a cap-and-trade program before alternatives can be exposed to public comment and properly evaluated.”

The ruling by Judge Goldsmith does not prohibit the CARB from adopting cap-and-trade or require the delay of the scheduled start of date of January 1, 2012, but Judge Goldsmith said that CARB must first analyze other options (such as a carbon tax) and explain why it did not choose such options. Given the tight timeline this year for finalizing the details of California’s climate change plan, the ruling represents a potentially significant hurdle in the timely implementation of the state’s greenhouse gas emission reduction initiatives. The CARB’s spokesperson, Stanley Young, expressed dismay at the scope of the ruling, which requires the board to conduct an environmental review and invite public comment before taking further steps to implement the law. Mr. Young has indicated that the CARB will appeal the decision, which could result in pushing back the cap-and-trade program’s January 1, 2012 start date. An alternative is for the CARB to seek a stay on the ruling that will allow it to implement the climate policies as planned until a final verdict is issued. Also, the CARB could complete the necessary analyses as quickly as possible, but the results of this approach would be uncertain. For example, if the CARB is unable to satisfy the court’s concerns by October 2011 – which is the key deadline for adopting cap-and-trade regulations – this would most likely put the January 1, 2012 start date at risk. If California’s cap-and-trade program is delayed, it is likely that other WCI jurisdictions such as B.C., Ontario and Québec, will also delay the implementation of their cap-and-trade programs until such time as California begins trading.

A.B. 32 was passed in 2006 and requires the state to reduce greenhouse gas emissions to 1990 levels by 2020. The legal challenge to California’s cap-and-trade program was brought by environmental justice groups (the Association of Irritated Residents and other groups) that consider the plan too weak. In particular, they argued that the cap-and-trade program would result in increased pollutants in poor and non-white communities. More mainstream environmental groups, however, have supported cap-and-trade and stayed out of the legal action.

The next likely step is that a Writ of Mandate will be filed within 10 days of the March 18 decision. The Writ is the plaintiffs’ interpretation of the decision and will include their preferred remedies. The judge will then decide on the final remedy. Any appeal to that decision would have to be filed within 60 days from the date the decision was entered.

At this stage, it is unclear what the court-ordered remedy will consist of and whether it will affect all work on measures to reduce greenhouse gas pollution – observers indicate that it most likely it will not. Following the decision, the Environmental Defense Fund issued a conciliatory statement that perhaps best captures the intent of the parties: “It is clear from examining arguments of both parties before the Court that CARB and the environmental justice groups bringing the action against the State are committed to improving California’s environment and fighting climate change and do not intend to bring AB 32 work to a halt.” Stay tuned as this story evolves.

California Adopts Cap & Trade Program after Landmark Vote

In a landmark 9-1 vote on December 16, 2010, California’s Air Resource Board (ARB) voted to adopt the first large-scale cap-and-trade program in the U.S.

In a landmark 9-1 vote on December 16, 2010, California’s Air Resource Board (ARB) voted to adopt the first large-scale cap-and-trade program in the U.S. This vote represents the culmination of an eventful year for California’s AB 32 legislation, which aims to reduce the state’s greenhouse house gas emissions to 1990 levels by 2020. In California’s general elections held in November 2010, AB 32 survived a ballot measure that would have indefinitely delayed the program. California’s progress towards cap-and-trade comes as federal efforts to establish a nation-wide emissions trading program have stalled in Congress.

Under the proposed California cap-and-trade rules, the state would initially give away allowances to regulated industries. In later years, California would auction allowances. Industries that could show the regulations were putting them at a significant competitive disadvantage to companies in other, less carbon-constrained, jurisdictions could qualify for additional free allowances. The proposed rules would establish a $10 per metric ton auction floor price on carbon. Regulated emitters would be able to purchase carbon offsets, which are expected to trade at a discount to emission allowances, to comply with 8% of their annual emission obligations.

Offsets under the California Program

In addition to the regulations for the cap-and-trade program, ARB adopted four protocols that will be used to generate offsets for compliance, marking the first time forest carbon offsets will be included as a part of a compliance carbon market.

Offsets will come from early action efforts, compliance offsets and a category known as sector-based offsets, which will come from programs managed in developing countries. Early action offsets include those from the 2005-2014 vintages of Climate Action Reserve (CAR) credits from projects in methane digestion, destruction of ozone depleting substances, forestry and urban forestry.

In anticipation of California’s cap-and-trade program, the carbon market has responded with a jump in offset prices. Analysts note that offset prices have doubled from about $4 per ton of to $8 per ton amid higher volumes of trading in recent weeks.

Analysts have also predicted a shortfall in the supply of offsets. CAR projects that the ARB-approved protocol types will be able to generate approximately 30 million tons of credits through 2014, which credits can be used in the California program. However offset demand is projected to exceed 200 million tons through 2020. Now that there is regulatory certainty, the market must now work to fill the gap between offset supply and demand.

New Mexico Approves its Cap-and-Trade Program

In other news, New Mexico narrowly approved its cap-and-trade program in early November 2010 as well as the state’s participation in the regional Western Climate Initiative market. These measures will not go into effect unless other U.S. states or Canadian provinces move ahead with similar systems for capping emissions. The New Mexico program would regulate approximately 63 large industrial sources.

Manitoba begins Consultation on Proposed GHG Legislation

The Manitoba government has launched a public consultation period to gather input on proposed cap-and-trade laws aimed at reducing greenhouse gas (GHG) emissions. The consultation is part of Manitoba’s commitment, announced in December 2009, to move forward on enabling legislation to create a cap-and-trade system.

In June 2007, Manitoba joined the Western Climate Initiative (WCI). It is expected that Manitoba’s system would integrate with the WCI, meaning that Manitoba will be able to participate in the WCI trading system with BC, Ontario, Québec, California as well as other several U.S. states. The WCI’s goal is to reduce GHG emissions in the region by 15% below 2005 levels by 2020.

In 2008, Manitboa’s GHG emissions was 21.9 megatonnes of carbon dioxide equivalent (CO2e) or approximately 3% of Canada’s total GHG emissions. Manitoba’s GHG emissions profile is unique among Canadian jurisdictions. Unlike other Canadian provinces whose GHG emissions come from a small number of large emitters, the majority of Manitoba’s GHG emissions come from many smaller emitters across a wide range of sectors.

Manitoba’s proposed cap-and-trade program would affect approximately 18 emitters that release more than 25,000 kilotonnes each of GHGs per year. Another group of about 36 emitters that each release 10,000 kilotonnes of CO2e per year or more (but less than 25,000 kiltonnes) would only be required to report their emissions.

According to data from Environment Canada, in 2008 the Koch Fertilizer plant in Brandon was the largest emitter in Manitoba, followed by Manitoba Hydro, Winnipeg’s Brady Road Landfill, TransCanada Pipelines and HudBay Minerals.

Comments on the proposed cap-and-trade program can be made online through the Manitoba Conservation Department website until March 15, 2011.