Cows, Forests and Refrigerators

In January, California will begin to cap aggregate annual emissions of greenhouse gases, or GHGs, from the state’s largest emitters under the state’s new cap-and-trade regulations. If keeping GHG emissions at or below the cap becomes too costly or is otherwise unfeasible, regulated entities will have two choices: either buy GHG credits from other regulated entities, who can reduce their emissions below their allotted allowances, or buy offset credits from unregulated facilities, which voluntarily reduce their emissions in accordance with approved protocols. Protocols have only been approved for a few types of projects relating to forestry, livestock manure or destruction of refrigerants from old appliances. So if you are a dairy farmer, have timberland, can plant trees in cities or happen to have a lot of old air conditioners, the cap and trade program offers the opportunity to implement GHG-reducing projects that will generate “offset credits” to be sold at market prices. Whether those prices will be sufficient to spur enough projects to support a meaningful offset market remains to be seen.

California’s cap-and-trade program, Cal. Code Regs., Title 17, §§95800 to 96023, the centerpiece of the state’s greenhouse gas reducing legislation, the Global Warming Solutions Act of 2006, Cal. Health & Saf. Code §38500 et seq., commonly known as AB32, took effect Jan. 1. The program covers emissions of carbon dioxide (CO2), methane (CH4), nitrous oxide (N20), sulfur hexafluoride (SF6), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and nitrogen trifluoride (NF3) from the state’s largest emitters. The program is being rolled out in phases with the first compliance phase beginning in 2013 covering all major industrial sources and electric utilities. The second compliance phase, beginning in 2015, will include distributors of transportation fuels, natural gas and other fuels. Businesses subject to the cap will be required to furnish allowances, (tradeable permits to emit that are each equal to one metric ton of carbon), to cover their emissions. As the cap declines each year, the total number of allowances issued in the state drops, requiring entities to find a cost-effective and efficient way to reduce their emissions or face the prospect of buying additional allowances from other entities on the market. Importantly, the state allows up to 8 percent of an entity’s compliance obligation to be met with offset credits.