Bill is the next phase of cap-and-trade in California

These are not times for the timid when it comes to climate change regulation. The Trump administration announced that it is pulling out of the Paris Accords, China and the European Union are stepping into the void and taking the lead for the global community, the California Clean Energy Act of 2017, introduced by California Senate President pro Tempore Kevin de León, would establish a target of 100 percent clean, renewable energy for California by 2045, and Gov. Jerry Brown continues to spearhead discussions with other countries and states to press full steam ahead on reducing greenhouse gas (GHG) emissions. In the midst of all of this, numerous bills are working their way through the California Legislature, including Senate Bill 775 which would significantly revamp California's groundbreaking 2006 GHG cap-and-trade program. SB 775 would completely change the way carbon credits and offsets are addressed.

Under the California Global Warming Solutions Act of 2006 (AB 32), California required statewide GHG emissions to be reduced to 1990 levels and be achieved by 2020. Reduction goals were extended by passage of SB 32 in 2016, which requires emissions to be reduced by another 40 percent by 2030. The state's cap-and-trade program, which went into effect in 2012 and will need to be extended, allows companies to bid on a finite amount of GHG emissions allowances during quarterly auctions at market prices. Proceeds from those auctions are allocated to "green" projects in California, which has included, among other things, California's high-speed rail project and projects in disadvantaged communities. The program also allows carbon "offsets," by which a regulated company could emit more carbon dioxide if it invested in other carbon dioxide reduction efforts outside of capped sectors. However, the carbon allowances under the cap-and-trade program have been priced much lower than expected (currently approximately $14/ton), a result due in part to the success of other California regulations, such as renewable energy standards and alternative fuel programs, which account for most of the overall reductions to date. In addition, there have been concerns raised that California's program has resulted in "leakage" - reductions in California being offset by increases of GHG emissions in other states that do not have similar regulatory schemes.

In response, State Sen. Bob Wieckowski introduced SB 775 in early 2017. SB 775 would significantly change the market-based compliance structures designed to reduce GHG emissions. There are a number of elements to the proposed legislation that are noteworthy:

First, the trading program under SB 775 would start from the ground up. There would be no carryover from the current system.

Second, allowance prices will be bound by a floor and ceiling "price collar." Beginning in 2020, the floor would be set at $20 per ton with a ceiling set at $30. Prices for both will increase incrementally - $5 per year for the floor, and $10 per year for the ceiling, both with adjustments for inflation. The price difference between floor and ceiling would increase to $60 per ton by 2030, by which time the ceiling would approach $100 per ton of carbon. However, there is no end point written into the proposed legislation - it would continue unless and until it was modified or discontinued by a subsequent law.

Third, it places conditions on "linkage" to "compliance instruments" issued by any other state, province, or country. If the California Air Resources Board (or any other state agency) seeks such linkage, the agency is required to notify the governor, and the governor must make certain findings, including that the other program is at least as stringent as California's program, California must have the ability to enforce against entities subject to regulation under the linked statutes, and that the other state, province, or country has adopted legally binding requirements for GHG emissions that include specified minimum carbon prices, including auction reserve prices, at or above levels required under AB 32.

Fourth, in one of the more controversial aspects of the proposed law, the revamped program would unequivocally prohibit any carbon offset allowances.

Fifth, to address the "leakage" issue, SB 775 would impose what amounts to a border adjustment tax, under the statute's proposed "Economic Competitiveness Assurance Program." That program is designed to maintain "economic parity" between producers of GHG-intensive goods subject to the California law and those who are not.

Last, in one of the more creative elements of the law, a substantial portion of revenues from the program will be disbursed under the "California Climate Dividend Program," which provides rebates to California residents on a per-capita basis, to be paid out on a quarterly basis. Mechanisms are built into the bill to ensure residents of difficult-to-reach communities - the homeless, undocumented immigrants, and those without bank accounts, are not bypassed. The remainder of the revenue would go to public infrastructure, disadvantaged communities, and climate and clean energy research.

The bill still has a long way to go. The next step is for it to get voted out of the Senate Committee on Environmental Quality, which has twice postponed a hearing on the bill, and then to the full Senate, the Assembly, and then likely the need for reconciliation before a vote in each chamber before heading to the governor for signature. And even then, notwithstanding that the bill was crafted such that it seems to have a little bit of something for everyone, legal challenges are sure to arise. Nonetheless, California yet again appears to be positioning itself to take a leading role in state efforts in response to the shift at the federal level.