After three years of development, dozens of public workshops, and hundreds of meetings with stakeholders, the California Air Resources Board (ARB) on Thursday adopted a final rule to cap California’s greenhouse gas emissions and put a price on carbon. The cap-and-trade program starts in 2013 for electric utilities and large industrial facilities.

California is the first state to adopt a cap-and-trade program. Its adoption is part of the state’s efforts to cut its carbon dioxide emissions to 1990 levels by 2020, as required by AB32, a state greenhouse gas (GHG) law passed by the Legislature in 2006. GHG reductions expected from the cap-and-trade program will only cover 20% of that goal; the remainder will come from other rules, including renewable energy mandates and energy efficiency requirements.

“Cap-and-trade is another important building block in California’s effort to create a clean and vibrant economy,” said ARB Chairman Mary D. Nichols. “It sends the right policy signal to the market, and guarantees that California will continue to attract the lion’s share of investment in clean technology. When the nation addresses the growing danger of climate change, as I believe it must and will, California’s climate plan will serve as the model for a national program.”

On Thursday, the board also approved an adaptive management plan to closely monitor the effect of the program on localized air quality and forests, in particular.

The regulation sets a statewide limit on sources responsible for 85% of California’s GHG emissions, covering 360 businesses and representing 600 facilities. The program is designed to provide covered entities the flexibility to seek out and implement the “lowest-cost options” to reduce emissions, the ARB said. The rule is divided into two phases: the first, beginning in 2013, will include all major industrial sources along with electricity utilities; the second, starting in 2015, brings in distributors of transportation fuels, natural gas, and other fuels.

Companies are not given a specific limit on their GHG emissions but must supply a sufficient number of allowances (each the equivalent of one ton of carbon dioxide) to cover their annual emissions. As the cap declines each year, the total number of allowances issued in the state drops, requiring companies to find the most cost-effective and efficient approaches to reducing their emissions. The first compliance year when covered sources will have to turn in allowances is 2013.

“By 2020 the state will reach the equivalent of the 1990-level of greenhouse emissions, as required under AB 32, California’s climate change legislation,” ARB said. “This is a 15 percent reduction compared to what the emissions would be in 2020 without any programs in place—the so-called ‘business-as-usual’ level.”

To ensure a gradual transition, ARB will provide the majority of allowances to all industrial sources during the initial period (2013-2014), using a calculation that rewards the most efficient companies. Those that need additional allowances to cover their emissions can purchase them at regular quarterly auctions ARB will conduct, or buy them on the market. The first auctions of allowances (for 2013 allowances) are slated for August and November 2012.

Electric utilities will also be given allowances to be sold at auction for the benefit of their ratepayers and to help achieve AB 32 goals.

Eight percent of a company’s emissions can be covered using credits from ARB-certified offset projects, promoting the development of beneficial environmental projects in uncapped sectors such as forestry and agriculture. Included in the regulation are four protocols, or systems of rules for quantifying offset credits: in forestry management, urban forestry, dairy methane digesters, and the destruction of existing stores of ozone-depleting substances in the U.S. (mostly in the form of refrigerants in older refrigeration and air-conditioning equipment).

The regulation includes rigorous oversight and enforcement provisions, and is designed so that California may link up with programs in other states or provinces within the Western Climate Initiative, including British Columbia, Ontario, and Quebec.

Sources: POWERnews, California ARB