Industry Coalition Launches AB 32 Plan

A coalition of companies rolled out its own plan May 15 to implement California’s climate protection law, AB 32, through a limited cap-and-trade program. This industry effort occurred as California’s own agencies struggle between implementing a market-based cap-and-trade system for reducing greenhouse gases and a regulatory approach. The proposal is aimed at how best “to integrate a regulatory approach with a cap-and-trade program,” said Latham & Watkins attorney Robert Wyman. He helped author the plan for the group of companies, known as the California Climate Coalition. A number of energy and oil companies are part of the coalition, including Reliant Energy, Chevron, and Shell Oil. Under the industry plan, first deliverers of power to the grid initially would be covered by a cap-and-trade program. Other stationary sources of greenhouse gas emissions, like cement companies and refineries, initially would be subject to regulatory limits. However, like those under cap-and-trade, they would be able to use offsets to meet carbon reduction requirements under an emissions averaging approach. In this approach, companies with multiple operations in California would be placed under a company-wide cap and allowed to average their emissions from different facilities to show compliance with a carbon limit. Eventually, they would be phased into the cap-and-trade program. Under the plan, offsets could be generated only by carbon reduction projects in California. Those designated projects could seek to achieve “community co-benefits” for areas “disproportionately-impacted” by conventional air pollution by targeting diesel vehicles and equipment at places like the state’s ports for cleanup. The proposal envisions allowing offsets to encourage investment in vehicle electrification or converting sources like pumps to run on lower carbon fuels in place of diesel. Companies would get to bank emissions reduction credits for future use. Compliance with emissions reductions under the cap-and-trade program would be based on three-year averaging periods. Compliance would be subject to verification and companies would be barred from increasing any toxic emissions. No agency or non-profit has yet been delegated to vet compliance. However, the Air Board would be the final arbiter. At first, what is expected to be an illiquid market might have a ceiling on the price of carbon as a safety valve. However, as the market widens and deepens the price ceiling would be phased out. The plan comes as the California Air Resources Board is working to draft a comprehensive program for carrying out AB 32 early this summer.