California publishes draft amendments of cap-and-trade regulation

On 4 September, California’s Air Resources Board (ARB) released draft amendments for the cap-and-trade program, specifying changes required by last year’s AB-398 bill extending and adjusting the program to 2030. The proposed regulation addresses cost containment, offsets, allocation, the phasing-out of exemptions, administrative issues, and the delinking with Ontario.

A reform of the cost containment mechanism was a central feature of AB-398. Under the proposed regulation, the Californian Cap and Trade Program will operate with a hard price limit (ceiling) set at USD 65/ tonne in 2021. The Program will maintain its reserve price at auction, which effectively sets a lower price limit for allowances. In between the upper and lower price limits will be two “reserve triggers” (referred to as “speed bumps”) that if reached, would result in additional allowances being auctioned from the Cost Containment Reserve. All reserve prices increase by 5% annually and will be adjusted for inflation.

The proposed regulation also amends the offset rules to ensure half of offsets used have “direct environmental benefits” (DEBS) to the State of California. This is operationalised through a performance standard, which defines DEBS-eligibility by offset activity type. Offset projects implemented outside of California may still result in DEBS based on scientific evidence and project data provided. For example, projects involving the destruction of gases damaging the ozone layer, as well as those related to the avoidance of agricultural emissions are found to deliver direct environmental benefits to California regardless of where they are implemented. In addition, some forestation projects could also provide benefits within California by improving the quality of waters flowing through California.

The proposed regulation also formalises processes surrounding delinking. In this regard, it includes a suggestion to clarify the Executive Officer’s role, as well as options to guarantee the environmental integrity of the program should a linked jurisdiction seek to revoke their own program. For example, the amendment provides provisions for withholding future allocation to account for any net surplus of imported allowances from an exiting linking partner. The proposed amendments also include changes to methodologies for output-based allocation as well as administrative changes.

A public commenting period will run until October 22; a public hearing will also be held a few days later, before the ARB moves to finalize the regulation.