Update on Cap And Trade 

publication 

Fall 2010 - (Environment, Energy & Emissions Trading Brief Winter 2010/2011 )

Environment, Energy & Emissions Trading Brief Winter 2010/2011

On November 2, 2010 voters in California cleared the way to allow the State of California to implement a cap and trade system to regulate greenhouse gas ("GHG") emissions by 2012. Voters did so by defeating Proposition 23, which sought to suspend California's Global Warming Solutions Act of 2006. This was the largest public referendum on clean energy legislation ever held in North America and, in our view, is the single most significant step taken in 2010 towards development of a North American–wide cap and trade program.

California had previously published for comment detailed draft regulations for the program entitled "California Cap on Greenhouse Gas Emissions and Market Based Compliance Mechanisms." The 45-day public comment period on these draft regulations ends in mid-December and the Air Resources Board ("ARB") of the California Environmental Protection Agency will meet on December 16, 2010 to consider the cap and trade program. The draft regulations define which GHG emitters will be regulated (initially in 2012 large industrial facilities and electric power utilities); the proposed initial cap in 2012 and cap increases in later years; the allocation of emission allowances to regulated industries at no cost, with the remaining allowances to be auctioned; and procedures for trading and banking allowances. Of note is the ARB's decision to recognize offset credits for cap and trade compliance, and the ARB's proposal to utilize offset recognition protocols from external offset registries (such as the Climate Action Reserve). Even before the ARB's anticipated approval on December 16, 2010, pre-market trading has begun, with Barclays PLC and NRG Energy Inc. on November 17, 2010 completing the first trade for GHG emission allowances under California's planned cap and trade program for delivery in December, 2012.

The California regulations also include a framework for linking to comparable programs of other Western Climate Initiative ("WCI") partners. California and five other U.S. states are members of the WCI, together with the provinces of Ontario, Quebec, British Columbia and Manitoba. Each of the Canadian provinces that are WCI partners are at different stages in implementing their respective cap and trade programs. The leader is British Columbia, which on October 25, 2010 issued for comment two white papers on the proposed Emissions Trading Regulation and the Cap and Trade Offsets Regulation under B.C.'s Greenhouse Gas Reduction (Cap and Trade) Act . The 45-day public comment period ends December 6, 2010.

If California and B.C. move ahead with cap and trade, is Ontario sure to follow? Ontario's next provincial election is scheduled for October 6, 2011. A year ago the McGuinty government approved the Environmental Protection Amendment Act (Greenhouse Gas Emissions Trading), 2009, which is the enabling legislation for a cap and trade program in Ontario. However, the detailed regulations necessary to actually implement the program have not yet been published. Whether the McGuinty government will move forward and publish them before the election remains to be seen.

The California program may also link with the Regional Green house Gas Initiative ("RGGI"), an existing cap and trade program regulating GHG emissions in the power sector in New York and nine other participating states in the U.S. northeast. RGGI participating states conduct quarterly auctions of GHG emissions allowances, and there is a secondary market in which the allowances trade among the operators of regulated power plants. The RGGI program also allows power plants to use GHG offsets from qualifying emissions reduction projects to meet up to 3.3% of their compliance obligations.

From November 29, 2010 to December 10, 2010 the annual United Nations Framework Convention on Climate Change ("UNFCCC") conference will take place in Cancun, Mexico. This follows the 2009 UNFCCC meeting in Copenhagen, at which leaders were unable to agree on a new global climate deal to replace and extend the Kyoto Protocol. Expectations of the Cancun conference are not high; it is expected that the meetings will only lay the groundwork for another attempt at a legally binding agreement among participating nations at the next annual UNFCCC conference to be held in Durban, South Africa in December, 2011. Canada's federal government was criticized for failing to show leadership in Copenhagen, both for adopting a relatively weak national target for reducing GHG emissions and for not implementing a credible plan to meet that target. For a thorough commentary on the Government of Canada's positions on climate change heading into the Cancun talks, see the Pembina Institute's briefing note entitled "UN Climate Negotiations in Cancun, Mexico" (November 10, 2010) at www.pembina.org.

Regarding cap and trade, the Canadian federal government continues to wait and see what, if any, developments will occur at the federal level in the U.S. On July 22, 2010 U.S. Senators sponsoring the draft omnibus climate change and energy legislation called the American Power Act withdrew the legislation from the U.S. Senate. The legislation had proposed to create a cap and trade carbon emissions trading regime applicable to electrical power utilities and specified industrial facilities through out the U.S. As a result of this defeat, the Obama ad ministration has turned to its backup plan for regulating GHG. The U.S. Environmental Protection Agency ("EPA") is planning, as an alternative to cap and trade, regulations to regulate GHGs under the U.S. Clean Air Act. But the EPA is facing political opposition and can be expected to move cautiously and in small steps. For example, on October 25, 2010 the EPA proposed GHG emission standards for medium and heavy-duty trucks. While regulation of GHG emissions from mobile sources is necessary, regulation of large-scale stationary emitters should also be a priority.

This article appeared in Lang Michener's Environment, Energy & Emissions Trading Brief Winter 2010/2011.