Forests in California absorb a certain amount of carbon, which can be measured through what is called sink capacity. Forestry sinks offset approximately seven million metric tons in 1990, which means net emissions into the atmosphere were about 427 million metric tons.

In 2008, the scoping plan for AB 32 was finalized and approved by ARB, making that year the benchmark for reduction efforts. The plan is available online at arb.ca.gov.

Emissions were at 475 million metric tons in 2008, according to Clegern. The 2010 target was 461 million metric tons, which was estimated to be the level in 2000. Through emissions monitoring by ARB and voluntary reporting from polluting entities, Clegern said the actual emissions level for that year is between 445 million and 450 million metric tons. Once the state reaches 427 million metric tons by 2020, AB 32 has a target reduction of another 80 percent by 2050.

In a series of articles, the Long Beach Business Journal will examine the regulations of AB 32 that impact the private sector, the public sector and the estimated economic impacts of the law statewide. In this first article, we explore four elements of AB 32 and their impacts on industry.

Mandatory Emissions Reporting

Since 2008, ARB monitors greenhouse gas (GHG) emissions levels through the reporting of entities that produce 25,000 or more metric tons of GHG, including GHG equivalent pollutants. Starting next year, facilities that emit 10,000 metric tons or more must also report emissions to ARB.

Reporting is required twice a year, in April and in June, according to Clegern. Reported information is tallied and verified at the end of each year by trained ARB staff. Once staff has completed year-end tallies, a third independent party audits the numbers to be sure they match up with the records kept by each entity. While there are no fees to report emissions, facilities must contract with a third party verification group. Many organizations have contracts in place, since they have been reporting to ARB since 2008.

All reporting is done electronically, and much of the documentation is based on fuel metering and purchase records. All supporting documents can be attached to reports for verification purposes.

Cap-And-Trade Program

About 20 percent of the AB 32 legislation is an enforceable emissions cap, known as the cap-and-trade program, for the purpose of reducing GHG and equivalent emissions from major industrial sources, such as power plants, refineries, cement plants and more. Program registration began January 1 of this year.

Entities that pollute at or above 25,000 metric tons annually are required to participate in the cap-and-trade program. Through emissions reporting, ARB has been able to track emission levels at facilities across the state since 2008. Once 2011 reporting has been completed and verified, ARB will use data from that year as the baseline for implementing the requirements of cap-and-trade starting January 1, 2013.

Effective that date, qualifying facilities must submit one permit (either an allowance or offset) per metric ton of pollution. Ninety percent of the required permits will be free for the first year, meaning facilities must reduce emissions by 10 percent or purchase permits.

With the mindset that businesses are more incentivized to be environmental stewards when there is a cost associated with emitting greenhouse gas equivalent, the cap-and-trade element of AB 32 includes the eventual trading of both allowances and offsets on the open market.

Offsets are projects that result in GHG and equivalent reductions regulated by ARB. Project proposals from developers are presented through an ARB protocol to see if it is applicable as an offset. Companies regulated under cap-and-trade would be allowed to purchase offsets for 8 percent of their required reductions. Offsets are either sold by developers or through registries under various protocols, Clegern said.

These permits tend to be cheaper than allowances, he said. Allowances, or carbon credits, are accrued by companies that maintain GHG and equivalent emission levels below the mandated threshold. Those credits may be sold as a “compliance instrument produced by the regulator,” who then determines allowance prices. They are first auctioned to facilitate what the California Legislative Analyst’s Office (LAO) has called “price discovery,” or the process by which the market determines the cost of what facilities must pay to reduce GHG emissions.

Facilities must meet certain requirements for retiring allowances based on scheduled compliance periods, Clegern said. There are also several leakage categories currently being examined that facilities fall into and restrict the amount of allowances they can take advantage of.

ARB provides allowances to utilities for free that are to be sold on the commodities market to facilities looking to fill permit requirements. Utilities must use the revenue from allowance sales on areas that may be a cost passed on to the consumer.

Allowances are not expected to be long-term investments. Rather, they are good for one thing – to eventually be retired back with ARB. The process is done electronically; all allowances have a serial number. All transaction on the market cannot be made without seller and buyer information being given to ARB; otherwise the allowance loses its value.

The first allowance auction is scheduled for November 14, 2012, which is when facilities will learn how many allowances they will get. Auction registration must occur by October 15. Transportation fuels come under the program in 2015.

Low Carbon Fuel Standard

The Global Warming Solutions Act also requires the reduction of GHG and equivalent emissions during the production and movement of transportation fuels. ARB examines the carbon intensity of a particular fuel – whether it was pumped or extracted through fracking, or grown like corn ethanol – and how the final product is made and transported to a facility for use.

Based on fuel carbon reductions monitored by ARB, the fuel standard baseline is readjusted annually. Producers that come under the baseline generate credits that may be sold on the market. Those who go over the baseline must purchase credits on the market. Some such transfers have already taken place, Clegern said. The goal is to create more clean transportation fuel options; with more choices becoming available to consumers, the idea is the market will become more competitive.

Many fuel producers have already begun compliance under the law, which will be enforceable starting January 1, 2013. According to Clegern, some ethanol makers have filed a lawsuit against the rule, which will likely be heard within the next year. Attorney for the plaintiffs took the lawsuit to a judge in Fresno, who granted a stay, but Clegern said ARB took it to a judge in San Francisco who ordered an injunction for them to move forward in implementation.

The biggest pushback ARB has received on this particular program is that some fuel producers feel they will be double regulated by this and cap-and-trade. However, Clegern said anything that producers do under the low carbon fuel standard would apply to cap-and-trade emission reduction requirements.

Advanced Clean Cars Program

Emission reduction goals for the auto industry doing business in California outlined in the advanced clean cars program of AB 32 are the newest generation of regulations that began in the early 1990s.

California’s clean vehicle program went into effect in 1993, Clegern said, and has since undergone several revisions based on both technological advancements and environmental needs. The goal is to make sure more than 15 percent of cars sold in California are zero emission vehicles (ZEVs). “We’ve worked closely with the auto industry over the years,” Clegern said. “There’s now a market for these ZEVs.”

According to Clegern, these emission reductions are realized by steering production of vehicles with a push for clean technology – electric vehicles, plug-in hybrids and fuel cell vehicles – and setting a yearly requirement for such vehicles to be offered on the market in California starting in 2018.

Because auto makers design their cars and order parts two or three years ahead of production, ARB is working with companies’ long-term projections and is providing makers with fuel resource developments. In addition, the program mandates construction of fueling infrastructure to coincide with production requirements.

Industry Weighs In

The Western States Petroleum Association (WSPA) has indicated the petroleum industry will work with AB 32 regulators to meet GHG reduction standards while keeping jobs in California.

According to its website, “In California, WSPA is working with a coalition that represents companies that employ more than one million workers. We have developed six principles that we believe will help achieve the goals of AB 32, resulting in actual emission reductions while protecting jobs and the economy. We believe these principles can and should be applied to all state and regional efforts to regulate and reduce greenhouse gas emissions.”

The AB 32 Implementation Group is a coalition of large and small businesses working together as a unified voice in the process of implementing AB 32. According to the group’s website, ab32ig.com, it’s goal is to make sure business competitiveness, consumer interests and the welfare of workers are maintained in that process.

Shelly Sullivan, spokesperson for the AB 32 Implementation Group, told the Business Journal, “For us, the bottom line is that businesses need certainty. We don’t believe, as currently planned, the cap-and-trade program is going to help them stay in business here in California.”

Gino DiCaro, vice president of communications for the California Manufacturers & Technology Association, agreed.

In an August 24 blog post by DiCaro, he wrote, “Manufacturers are growing outside of California. If the state sticks with its plan to charge for a majority of the carbon allowances and make California an even less competitive place to manufacture, the original bold and economy-cautious AB 32 greenhouse gas plan from 2006 will have morphed into a cash cow for government and an insurmountable burden for many of our leading employers.”