AB 617 & Extension of California s Cap-and-Trade Program

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1 AB 617 & Extension of California s Cap-and-Trade Program A&MWA West Coast Section Annual Conference Joshua T. Bledsoe September 21, 2017 Latham & Watkins operates worldwide as a limited liability partnership organized under the laws of the State of Delaware (USA) with affiliated limited liability partnerships conducting the practice in the United Kingdom, France, Italy and Singapore and as affiliated partnerships conducting the practice in Hong Kong and Japan. Latham & Watkins operates in Seoul as a Foreign Legal Consultant Office. The Law Office of Salman M. Al-Sudairi is Latham & Watkins associated office in the Kingdom of Saudi Arabia. Copyright 2017 Latham & Watkins. All Rights Reserved.

2 Agenda Pre-Extension Issues with Cap-and-Trade Program Assembly Bill 398 Assembly Bill 617 Looking Ahead to ARB Activity

3 Climate Stabilization or Bust Returning to 1990 level only first step in long journey to climate stabilization Executive Order B : 40% below 1990 (SB 32) 2050: 80% below limit designed to sync with 2 C global average increase necessary to avoid worst impacts of climate change

4 Pre-Extension Issues with Cap-and-Trade Declining auction revenues (see next slide) Arguably no statutory authority to continue the Program post-2020 Uncertainty regarding: Continued allocation of free allowances Banking of allowances (saving current vintages for use in later years) Level of the GHG cap post-2020 Continuing role of offsets in the Program Legal challenges to the Program based on Proposition 26 (attacking it as an unconstitutional tax) Environmental Justice concerns that state-wide programs were not addressing disadvantaged communities

5 Meager Auction Revenues May 2016: $10 million vs. $564 million Aug. 2016: $8.4 million vs. $564 million Nov. 2016: $364 million vs. $577 million Feb. 2017: $8.2 million vs. $593 million April 2017: Auction Litigation Decision May 2017: $511 million Aug. 2017: $642 million

6 Overview of Cap-and-Trade Extension On July 17, 2017 Governor Brown signed a package of three bills which extended the Cap-and-Trade Program through 2030: AB 398 Implements a number of cost-containment measures and preempts district-level regulation of GHG emissions from covered sources AB 617 Requires accelerated BARCT implementation and creation of community monitoring and risk reduction programs ACA 1 Requires a supermajority vote by the Legislature to allocate Cap-and- Trade Program auction revenues beginning on January 1, 2024 Further action by ARB required to effectuate extension of Cap-and- Trade Program and implementation of AB 617

7 AB 398: Program Extension The Cap-and-Trade Program has been extended through 2030 by a supermajority vote (immune from Prop 26 challenges) Industry assistance factors will be continued at present levels through 2030 However, AB 398 requires ARB to evaluate and address concerns related to overallocation in setting allowance budgets ARB also is required to establish banking rules to discourage speculation, avoid windfalls, etc. Emissions cap to decline at an annual average of 4.8% per year ARB must make recommendations to the Legislature on leakage, a border carbon adjustment, and other items

8 AB 398: Cost Containment Measures Allowance Prices Price Ceiling ARB will sell additional metric tons at a price ceiling level to be determined by ARB rulemaking Speed Bumps APCR allowances will be released at two price levels to be determined by ARB Offsets : limited to 4% of an entity s compliance obligation (2% with direct benefits in CA) : limited to 6% of an entity s compliance obligation (3% with direct benefits in CA)

9 AB 398: Allowance Price Containment Reserve Unsold Allowances Pre-Extension AB million If unsold for 24 months Pre-2021 APCR APCR Sale of allowances at APCR price tiers Sale of allowances at price ceiling Allowance Price Containment Reserve (APCR) 122 million as of September 1, /3 1/3 First Speed Bump Second Speed Bump 1/3 Price Ceiling APCR APCR 52.4 million 52.4 million Price Ceiling APCR to address concerns related over allocation OR 52.4 million Terminate new additions to APCR because market has a price ceiling

10 AB 617: BARCT Retrofit Requirements AB 617 requires nonattainment air districts to adopt an expedited schedule for BARCT implementation by January 1, 2019 Schedules must require implementation by the earliest feasible date, but no later than December 31, 2023 Meaning of implementation likely to be clarified by ARB Subject to existing rulemaking processes, including cost-effectiveness determinations Units with the oldest emissions controls will be prioritized Air districts will have flexibility to allow alternative BARCT, emissions tradingbased compliance, or equivalent emissions reductions at a lower cost Exceptions: units with new or modified permits issued post-2007 are exempt

11 AB 617: Community Monitoring Plans October 1, 2018: ARB must prepare a community monitoring plan for disadvantaged communities, identifying those with high exposure burdens for criteria pollutants and air toxics ARB also must prepare: (i) a statewide emission-reduction strategy (updated every 5 years); and (ii) select communities to implement emission-reduction programs Individual facilities could be required to reduce emissions commensurate with its relative contribution if it contributes to a material impact on a disadvantaged community July 1, 2019: Air districts must deploy a community monitoring system, and may require stationary sources to deploy fence-line monitoring

12 AB 617: Community Monitoring Plans Emissions reporting to ARB for Cap-and-Trade Program sources is expanded under AB 617 to cover all emissions (criteria, precursors, air toxics), and ARB may require 3 rd party verification Once a community is selected for an emission-reduction program, the affected air district must adopt such a program within one year, using cost-effective measures identified by ARB Community plans subject to ARB review and approval within 60 days AB 617 also increases penalties for violations of ARB and local air district rules from a maximum of $1,000 per day to $5,000 per day

13 AB 617 Budget Allocations (via AB 134 and AB 109) Use Amount Community Action Plans $250,000,000 SCAQMD $107,500,00 SJVAPCD $80,000,000 BAAQMD $50,000,000 Other Districts $12,500,000 Local Air District Implementation $27,000,000 ARB Implementation $11,700,000 Technical Assistance Grants to Community Organizations $5,000,000 **Appropriations from GHG Reduction Fund (i.e., Cap-and-Trade Auction Revenue)

14 Allowed Uses of AB 134 Funding Carl Moyer Memorial Air Quality Standards Attainment Program At its discretion, a district may allocate up to 40% of the funds it receives to incentivize clean trucks in accordance with ARB s Proposition 1B Guidelines, relative to funding amounts and truck evaluation Districts may use up to 6.25% of the funds to pay the reasonable costs of administering incentive programs

15 Looking Ahead To ARB Activity Key issues left to ARB to resolve through guidance and rulemaking: Price ceiling and speed bump levels Mechanics of the price ceiling (i.e., how ARB sells additional metric tons ) Overallocation ARB must evaluate and address concerns in setting allowance budgets Banking ARB must develop rules to discourage speculation BARCT ARB likely will clarify what constitutes implementation through guidance Community Monitoring Plan approvals Emission-reduction measures to be employed in high-burden communities

16 Questions? Joshua T. Bledsoe Orange County Phone: Latham & Watkins operates worldwide as a limited liability partnership organized under the laws of the State of Delaware (USA) with affiliated limited liability partnerships conducting the practice in the United Kingdom, France, Italy and Singapore and as affiliated partnerships conducting the practice in Hong Kong and Japan. Latham & Watkins operates in Seoul as a Foreign Legal Consultant Office. The Law Office of Salman M. Al-Sudairi is Latham & Watkins associated office in the Kingdom of Saudi Arabia. Copyright 2017 Latham & Watkins. All Rights Reserved.

17 Disclaimer Although this presentation may provide information concerning potential legal issues, it is not a substitute for legal advice from qualified counsel. Any opinions or conclusions provided in this presentation shall not be ascribed to Latham & Watkins or any clients of the firm. The presentation is not created or designed to address the unique facts or circumstances that may arise in any specific instance, and you should not and are not authorized to rely on this content as a source of legal advice and this seminar material does not create any attorney-client relationship between you and Latham & Watkins. Copyright 2017 Latham & Watkins. All Rights Reserved.