California\u2019s Market Advisory Committee is recommending state energy regulators drop their work on a load based carbon cap for utilities and instead focus on a cap for in-state electricity generators and wholesale power importers. Otherwise, as anticipated in the June 1 report, the committee recommends that the state create a cap-and-trade program that would place companies under an emissions limit that declines through 2020 until final emission targets are met. Companies that keep their emissions under their cap would be free to sell their unused emissions allocations to companies that choose to emit more than their respective cap. \u201cThe attention on a cap-and-trade program is well-founded because such programs have been used to improve air quality while saving taxpayers billions of dollars,\u201d said Dorothy Rothrock, California Manufacturers & Technology Association vice president. A consultant on climate change policy to the Western Power Trading Forum called the panel\u2019s recommendation for the power industry \u201csimilar\u201d to an alternative power market participants have advanced to the CPUC\u2019s load-based cap for the electricity sector (see related story below). \u201cThe Market Advisory Committee\u2019s preferred approach is essentially a source-based cap for the electricity sector,\u201d said Clare Breidenich, Forum consultant. \u201cIt is fundamentally different from a load-based cap in that the point of regulation is different.\u201d Other business interests were slower to endorse the report, however. \u201cWe are studying the specific proposals in the Market Advisory Committee report,\u201d said Peter Robertson, Chevron vice president, \u201cbut we fully support the intent to create market-based solutions.\u201d The committee was formed by gubernatorial order to advise the state on how to use market-based programs to meet the goals of the Global Warming Solutions Act, AB 32. From its inception, the committee has been controversial. Democratic lawmakers harshly criticized the governor\u2019s order to form the panel. They feared it marked his attempt to unduly influence regulators to rely solely on emissions trading to reduce greenhouse gases (Circuit, Oct. 27, 2006). Once formed, another controversy developed over transparency after California Environmental Protection Agency attorneys ruled the panel was not subject to the state\u2019s open meetings law (Circuit, April 13, 2007). \u201cPeople were concerned that they met behind closed doors.\u201d said Lenny Goldberg, The Utility Reform Network lobbyist. However, he said that in the end the committee \u201cdid an intellectually honest and fair job.\u201d Panel chair Winston Hickox said that the group worked to gather information on emissions trading markets operating throughout the world, including in Europe. The panel sought to identify \u201clessons learned\u201d and \u201cmistakes to be avoided\u201d when it comes to crucial decisions the California Air Resources Board would have to make if it chooses to establish a carbon market. After studying key issues since the beginning of the year, the committee made recommendations for setting up a cap-and-trade market as follows (\u201ccarbon,\u201d in this case appears to represent all tradable greenhouse gases, although the report was not specific): -For the electricity sector, rather than pursue a load-based cap as being developed by the California Public Utilities Commission, the panel recommended a first-seller approach. Under a load-based cap, CO2 emissions associated with total electricity sales by investor-owned utilities and other load-serving entities would be capped. The load-serving entities would be the ones regulated. In contrast, under the first-seller approach, in-state power plants would be capped and could participate in the trading system. Power importers, whether utilities or wholesale marketers, also would be capped on the carbon associated with power flowing into California. However, because that carbon dioxide only could be estimated based on regional emissions averages, importers would not be able to participate in a CO2 trading market, at least initially. The panel also recommended that a portion of the \u201cvalue\u201d of credits for power generators and wholesale importers be used to partially offset the impact on consumers of any increase in the price of electricity that results from AB 32. -Other major in-state emitters of carbon dioxide and greenhouse gases should be capped and allowed to trade in a greenhouse gas market. That market should be designed to stimulate early action to reduce greenhouse gas emissions. -Credits should be allocated by auction when possible and the proceeds to the state used to finance greenhouse gas reduction projects. However, the committee said, the state may want to allocate emissions credits for free to some industries, at least at first. Free credits might be appropriate for California companies that compete with out-of-state firms not subject to greenhouse gas standards. Such competition would make it difficult for California companies to pass through the cost of purchasing credits to their customers and put them at a competitive disadvantage with out- of-state companies, the committee observed. -Offsets should be allowed in the market as along as they meet uniform standards developed by the state. (An offset is a package that can be bought that is supposed to use the proceeds to create a carbon sink to absorb or otherwise mitigate the creation of greenhouse gases.) The state should set no geographic boundaries or quantitative limits on offset projects. Quantitative limits would cap the number of credits a company could use to cover its emissions. For instance, such a standard might limit a company to relying on offsets for more than a certain percentage of its credits. The report noted that a minority on the committee advocated including such geographic and quantitative limits on offsets, at least until some experience is gained under a cap-and-trade program. -Credits should not expire and should be able to be banked for future use. The committee suggested that credits could be used to meet emission limits over a three-year compliance period, rather than expiring annually. -The California cap-and-trade market should be structured to easily link to other markets in both the United States and abroad. The document is available at: http:\/\/www.climatechange.ca.gov\/events\/2007-06-12_mac_meeting\/2007-06-01_MAC_DRAFT_REPORT.PDF.