AB 398: Extends state cap-and-trade program

On July 25, 2017, Gov. Jerry Brown signed Assembly Bill 398 into law extending California's market-based greenhouse gas emissions reduction program, aka "cap and trade," until 2030. In addition to extending the life of the program, AB 398 also strengthened its legal underpinnings with a 2/3 supermajority vote which foreclosed a further legal challenge as an improper tax under Proposition 26. Practitioners can expect significant regulatory action as the California Air Resources Board moves to cut greenhouse gas emissions to 40 percent below 1990 levels, the impacts of which may be amplified if California's program proves to be a model for other states.

Specific effects of AB 398 include:

• Required CARB to update its Scoping Plan by Jan. 1, 2018, with all greenhouse gas rules and regulations to be consistent with the scoping plan.

• Extends CARB's authority to utilize regulations for a market based mechanism, with declining annual aggregate emissions limits for sources or categories of sources that emit greenhouse gases until Dec. 31, 2030, and requires CARB to include specific price ceilings, price containment points, offset compliance limits, and industry assistance factors for allowance allocation.

• Reduces the amount of "offsets" to 4 percent between 2020 and 2025 and to 6 percent between 2025 and 2030 (and in both instances, with at least half of the offsets coming from projects which provide direct environmental benefits within California).

• Requires that proceeds of carbon allowances auctioned be appropriated to include priorities for air toxic and criteria air pollutants from stationary and mobile sources; low- and zero-carbon transportation alternatives; sustainable agriculture practices for cleantech; water and air quality; healthy forests and urban greening; short-lived climate pollutants; climate adaptation and resiliency; and climate/clean energy research.

• Requires three government entities to report on cap and trade issues.

• Prohibits local Air Quality Management Districts from enacting carbon emission reduction rules that are otherwise preempted by cap and trade.

• Expands the state's partial sales and use tax exemption for manufacturing, research, and development to include certain electric power generation and distribution, agricultural businesses, extends the life of the exemption to 2030, and clarifies the tax definition of "useful life" of such property.

• Suspends the state's controversial fire prevention fee.

California's renewed vigor for further emissions reductions via cap and trade will undoubtedly bring new legal challenges and rewards, as the state continues to push policies for climate change, clean technology, renewables, and transportation and zero-emission vehicles.