California Legislature Approves Statewide Cap on Greenhouse Gas Emissions

On August 31, the California Assembly approved a bill establishing a cap on statewide emissions of greenhouse gases (GHGs). A.B. 32, the “Global Warming Solutions Act,” will cap emissions at 1990 levels by 2020 – the equivalent of a 20-25% reduction. The bill vests broad authority in the state Air Resources Board to develop and enforce regulations to meet the cap; the regulations must be in effect beginning in 2012. Governor Arnold Schwarzenegger is expected to sign the bill.

The bill directs the Air Resources Board to develop a “scoping plan” for its regulation by no later than January 1, 2009, and promulgate the regulations by no later than January 1, 2011. The Board’s program must achieve “maximum technologically feasible and cost-effective” reductions in furtherance of meeting the 2020 limit.

A.B. 32 is likely to have a significant influence on the national debate on establishment of a federal mandatory GHG emissions reduction program.

Market-Based Mechanisms

A.B. 32 authorizes – but does not require – the Air Resources Board program to include market-based mechanisms, such as allowance trading and offset crediting, after consideration of factors such as “localized impacts in communities that are already adversely impacted by air pollution.” Governor Schwarzenegger has pushed for the inclusion of market-based mechanisms, and if he remains Governor during the development of the regulations, he can be expected to use his influence to advocate for market-based approaches. Historically, the Air Resources Board has been independently-minded, but its members serve at the pleasure of the Governor.

“Safety Valve” Provision

In addition, at the request of Governor Schwarzenegger, A.B. 32 includes a “safety valve” provision, under which the Governor may push an individual emissions reduction deadline back by one year in the event of “extraordinary circumstances, catastrophic events, or threat of significant economic harm.”

Credit for Early Action

A.B. 32 directs the Air Resources Board to ensure that entities that have voluntarily reduced their GHG emissions prior to implementation of the A.B. 32 program “receive appropriate credit” for those reductions.

Regulation of Load-Serving Entities in the Electric Power Sector

Notably, the limit on “statewide greenhouse gas emissions” applies not only to emissions from in-state sources, but also to emissions from electricity imported into the state. Accordingly, A.B. 32 appears to contemplate a regulatory approach for the electric power sector along the lines of that under development by the state’s Public Utilities Commission (CA PUC) – and the extension of that approach to municipal utilities.

Instead of regulating power plants directly on the basis of their emissions, the CA PUC has proposed to require load-serving entities to meet an “emissions performance standard” for the electricity they sell – irrespective of whether the electricity is generated from in-state power plants or from plants in other states. The aim of this approach – as opposed to an approach that regulates in-state power plants on the basis of their direct emissions – is to avoid creating incentives to import power from out-of-state.

Motor Vehicle Emission Standards

The bill also makes reference to California’s GHG emissions standards for motor vehicles, which have been adopted by eleven other states. These standards currently are subject to a federal court challenge claiming that they are preempted by federal Corporate Average Fuel Economy (CAFE) standards. A.B. 32 provides that if the standards are invalidated, the Air Resources Board “shall implement alternative regulations” that “achieve equivalent or greater reductions.”

Potential Impacts on State and Federal Climate Policies

The bill acknowledges that national and international actions will be necessary to fully address the issue of global warming. However, one of the “findings” of the bill is that “action taken by California to reduce emissions of greenhouse gases will have far-reaching effects by encouraging other states, the federal government, and other countries to act.” Notably, the bill directs the Air Resources Board to consult with other states and nations, and to “facilitate the development of integrated regional, national, and international programs.”

Indeed, California’s A.B. 32 program could have substantial impacts on developing policies and markets for emissions trading and clean energy technologies. The state is the world’s sixth largest economy and, according to Governor Schwarzenegger, the twelfth largest emitter of GHGs. In addition, in the past, environmental and energy policies implemented by California have influenced the development of similar policies in other states and at the national level. A clear aim behind passage of A.B. 32 is to inspire the development of – and be a template for – an economy-wide federal program.

A.B. 32 also could spur further action by other states, including giving momentum to a number of the initiatives already underway. State officials from California have consulted actively with Washington and Oregon on climate policies. In addition, there have been discussions between California officials and state officials involved with the Regional Greenhouse Gas Initiative (RGGI). Through the RGGI, seven Northeastern states are collaborating on the development of a regional cap-and-trade program regulating carbon dioxide emissions from power plants (an eighth state, Maryland, has committed to joining the effort). The RGGI states recently published a “model rule,” which each participating state has committed to adopt in the form of legislation or regulations. The RGGI cap-and-trade program is scheduled to become effective in 2009.

Whether other states will take action as far reaching as A.B. 32 is not known at this time. Notwithstanding the emphasis on coordination, there are concerns that the different state and regional efforts could lead to “patchwork” regulation, complicating business and compliance planning for companies with facilities in multiple states. For example, the RGGI so far has rejected the CA PUC’s “load-serving entities” approach to regulation of the electric power sector in favor of an approach that regulates in-region power plants on the basis of their direct emissions.