California Pushes Forward in the Carbon Frontier, Overcoming Legal Challenge

January was quite a month for California’s cap-and-trade program. For one thing, the program went live. For the first wave of approximately 350 regulated entities, January 1, 2013 marked the beginning of mandatory compliance with the program. Those “covered entities” will need to come up with emissions allowances or approved offsets (for up to 8 percent of the entity’s total emissions) to meet their compliance obligations, which are based on a gradual reduction of historical emissions.

On January 25, proponents of the program also defeated a lawsuit that challenged the very validity of the offset program. Namely, the Superior Court for the County of San Francisco determined that the California Air Resources Board (“CARB”) was within its authority to use a standards-based approach (as opposed to a project-specific evaluation) to determine whether an offset project would result in “additionality,” or additional emission reductions that would otherwise not have occurred. You can find a copy of the decision here.

The offset program victory follows on the heels of the launch of the first auction. Despite a last-minute lawsuit challenging CARB’s authority to raise revenue by auctioning off emission “allowances,” the first ever auction went forward. Although the $290 million generated by the auction was less than was estimated (some predicted as much as $1 billion would be raised), the auction was an important milestone.

Since the framework for a cap-and-trade system was first adopted, there has been a number of lawsuits challenging either the legality of the program as a whole or its components. But, despite a year’s delay, the program has now commenced. The government faces a new domain and continuing objection as it implements the regulatory framework, but California’s program could serve as a model for other government programs, resulting in a possible expansion of the market. Already there has been a proposal to link California’s market with Quebec’s, and there has been chatter of linkage to Australia’s carbon economy as well.

Players in the market are looking forward to the prospect of numerous opportunities, from investments relating to the trading of allowances to the development, accreditation and verification of offset projects. As California pushes forward with the cap-and trade program, we are reminded that the State’s pioneering mindset is alive and well.