California GHG Cap and
Trade Program
Clare Breidenich
Western Power Trading Forum
Overview
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Background

Program Scope

Electricity Imports

Allowance Distribution
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Market Rules

Looking Ahead
Background
AB32
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Reduce GHG emissions to 1990 levels by 2020
• Emissions to be further reduced after 2020
• Emission reduction measures to be in place by
1/2012
Mandatory reporting and verification of GHG
emissions
• Must cover emissions from all electricity
consumed in state
Authorizes market-based mechanisms, but does
not require
Contains safety-valve
Implementation Status

Regulation in force as of 2012
• Reporting
• Registration
• Auction
• No emission obligation until 2013
Cap and Trade Scope
Program Scope
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Declining annual cap on:
• Electricity generation & imports, stationary combustion,
energy-intensive manufacturing, petroleum refineries

As of 2015: Transportation fuels, & residential & commercial fuel
consumption
• CO2,CH4, N20, SF6, NF3, HFCs & PFCs
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25,000 MTCO2e annual emission threshold except non-specified
power imports
Reported under Mandatory Reporting Rule
Voluntary participants:
• Opt-in covered entities (incurs compliance obligation)
• Voluntary associated entities (e.g. marketers, offset
developers)
Compliance Obligation

Capped entities must surrender compliance instruments to
cover emissions
• 3 year compliance intervals (first period 2 years)
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Retire instruments equal to 30% of previous year emissions in first
two years
Remainder after 3rd year
Failure to surrender sufficient compliance instruments by
deadline:
• Compliance instrument penalty equal to 4 times the excess
emissions
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One fourth of penalty instruments may be offset credits
May be additional financial penalties, which escalate after 45 days
Treatment of Electricity
Imports
Electricity Imports

All power generated and imported to state
subject to program, except
• Specified imports from facility that is below 25,000 MMT
annual threshold
• Wheel-throughs and exports that can be netted against
imports within same hour

Compliance obligation falls on entity that delivers
power to California (“First Jurisdictional Deliver”)
• PSE on NERC tag between balancing areas
• Facility operators or scheduling coordinator if no tag
Attribution of Emissions to
Imports
• Unspecified power assigned default emission rate
• Initially set at .428 MT/MWH
• Importers can claim facility - specific emission rate if
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Facility is owned by or under contract to importer and
registered as specified source, and
Power is directly delivered
• Resource-shuffling prohibited
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Defined as any plan, scheme or artificial to receive credit
based on emission reductions that have not occurred,
involving the delivery of electricity to the California grid.
Importers must submit annual attestation
• Special emission rate for ‘asset-controlling suppliers’
Renewable Imports
• Direct delivery of renewable power treated as
specified import
• “RPS Adjustment” for firming and shaping
power, if:
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Importer has contract for procurement of renewable
generation or importing on behalf of entity that does
RECs generated must be used for compliance with
RPS in same year firm and shaped power is claimed
Renewable resource is not located in a capped
jurisdiction
Firmed and shaped power has emission rate less than
default
• Else power gets difference between default rate and
facility specific rate
Allowance Distribution
Allowance Distribution by
Purpose

Annual Caps distributed to separate pools:
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One-time Carve-out for Price Containment Reserve
Allocation to electric utilities
Allocation to natural gas utilities ( as of 2015)
Allocation for covered industry sectors
Set-aside for voluntary renewable energy purchases
Any remainder to auction
Electric Sector Allocation
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Allowances freely allocated to IOUs and POUs
IOUs must consign allowances received to ARB
auction
• Revenue must be used for consumer benefit, consistent with
AB32 goals
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POUs may consign to auction or retain to cover own
compliance obligation
Generators, importers (including IOUs and other retail
providers) must purchase allowances through auction
or secondary market
Allowance Auctions and Sales
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Consignment auction:
• Utility-allocated allowances
• Advance auction of future vintages
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Price Containment Reserve (PCR) Sales:
• Set-aside from annual caps
• Penalty allowances
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Auctions & PCR sales held quarterly
• First consignment auction planned for August 15, 2012
• PCR sale 3 weeks after consignment auction
Consignment Auction
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Format:
• Sealed bid, single-round, uniform clearing price
• Lots of 1000 MT
• Different vintages auctioned separately
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Auction Reserve price: $10/ ton initially
•
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increases 5% annually + inflation
Open to all market participants
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Must register 30 days prior
Financial assurance through bid guarantee
Purchase limits
• 15% of auction volume for capped entities
Does not apply to IOUs
• 4% for voluntary associated entities
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Price Containment Reserve
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Allowances sold from three equal-sized tiers:
• Prices initially set at $40, $45 and $50 per ton
• Increases 5% annually plus inflation
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Only entities with compliance obligation may
purchase
• Allowances must be used for compliance
• No purchase limits
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Proceeds from PCR sales go to Air Pollution
Control Fund
Market Rules
Transaction Rules
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Holding limit on allowances (not offsets) for all
participants
• Set relative to annual cap; 6.02 MMT in 2012
• Does not apply to allowance in compliance accounts up
to level of compliance obligation (emissions to date)
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No restrictions on secondary transfers of
allowances
Unlimited banking of allowances and offsets
(subject to holding limit)
Use of Offsets
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Limited use of offsets from California and other
programs
• 8% of compliance obligations
• Of which ¼, increasing to ½, can be sectoral
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Offsets subject to potential invalidation (buyer
liability) up to 8 years after issuance
Currently approved offset categories
• forestry; urban forestry; livestock
management; and removal of ozone-depleting
substances
Market Oversight
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All participants must register in tracking system:
Disclosure of direct or indirect corporate
associations & beneficial holdings
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Applies for auction purchase limits and holding limits
General prohibition of manipulative or fraudulent
behavior
Independent entity to be hired to monitor and
report to CARB on functioning of market and
behavior of participants
Looking Ahead
Expectations for 2012

Formal Rule-making
• Linkage of the California and Quebec systems
• Revisions to cap and trade regulation
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Resource-shuffling?
• Additional offset protocols
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Infrastructure development & implementation
• Tracking system registration, testing and training
• Market simulation
• Allowance allocation and auction
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Legal Challenges?
• Peabody Energy
• Treatment of Electricity Imports
• Other