Once again taking a forefront position in innovative environmental programs, California, for good or ill, is poised to launch the first of its kind and scope in the nation greenhouse gas (“GHG”) emissions trading system (“Cap and Trade”). 

On November 14, 2012, the California Air Resources Board (“CARB”) will hold an auction mandated by California’s 2006 “Climate Change” law, AB32, in which pollution permits (“Allowances”) will be bartered to more than 350 businesses, including utilities and refineries.  The concept behind Cap and Trade is that polluters must either cut carbon emissions to the level of a specific emission cap placed on individual types of pollutants by AB32, or buy allowances for each metric ton of carbon discharged over cap limits from other companies whose emissions did not reach cap levels.  Through the Cap and Trade program, excess carbon polluters can achieve up to 8% of emissions reductions needed. 

In an effort to make the program palatable to the businesses who will pay a major portion of the price, such as utilities, the program calls for “a ‘free allowance’ holiday during its first two years whereby large industrial emitters can receive up to 90% of their allowances for free, and use the time to develop and/or implement new technologies to reduce the absolute, instead of relative, level of GHG emissions. 

Nevertheless, California businesses including, most notably, utilities, are not happy with the program.  A number have already planned to add a billing surcharge to their bills in 2013 to make public the cost of the program.  The exact amount of the surcharges cannot be estimated until after Wednesday’s auction where prices will be set.  Rate payers will be able to offset some of the utility price increase with rebates on their bills.  The precise parameters of the rebate program will be established by the California Public Utilities Commission in 2013. 

In the end, the biggest remaining mystery is what will happen to the money the State earns in the auction.  AB32  mandates that it be distributed, out of a dedicated GHG reduction account, for programs the goals of which are consistent with AB32.  Given California’s fiscal crisis, however, it remains to be seen how the legislation will ultimately deal with the new money generated by the Cap and Trade process.