On August 30, 2006, Governor Schwarzenegger announced that he had reached an "historical agreement" with the California Legislature to create a new regulatory regime to combat global warming. The deal will lead to the enactment of AB 32, a bill introduced by Assembly Speaker Fabian Nunez and Member Fran Pavley. The "California Global Warming Solutions Act of 2006" creates a framework for development of a comprehensive program to limit emissions of greenhouse gases in the State. The program will regulate not only utilities, but the entire range of public and private entities that produce greenhouse gases, including manufacturers and other companies in the chemical, life sciences, technology, oil and gas, waste management, agriculture, and health care industries, among others. The details of the program will be elaborated through rule-making by the State Air Resources Board. Regulated entities and the associations representing them will want to actively participate in the rulemaking processes. On September 29, Morrison & Foerster will host in its San Francisco office the first of a number of seminars on the implications of AB 32 for the regulated community.

The framework created by AB 32 contains a number of important elements that California industries should understand both in evaluating their operations and in preparing for participation in the program.

First, to be clear on what is being regulated, the Act defines "greenhouse gases" as carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride. (Incidentally, these are the same greenhouse gases listed in the Kyoto Protocol (Annex A).) The Act is set up to establish limits based on annual emissions "expressed in tons of carbon dioxide equivalence," with every other gas evaluated for the amount necessary to have the same impact as one unit of carbon dioxide.

Companies that may be affected by this bill should focus on three main parts: (1) emissions reporting requirements, (2) adoption of enforceable emission limits, and (3) development of the State scoping plan.

Emissions Reporting: The first date that members of the regulated community should put on their calendars is December 31, 2006. Under the Act, any entity that has voluntarily participated in the emissions reporting program of the California Climate Action Registry by December 31, 2006, will be grandfathered under that program and will not be required to "significantly alter" their program when new or different requirements are later adopted by the State Air Resources Board. In addition, companies will receive "early action" credit for their efforts after specific emission reduction regulations are implemented.

The Air Board is required to adopt its own regulations for reporting and verification of emissions by January 1, 2008. While those regulations will likely reflect the Registry’s current program — the Act requires the Air Board to incorporate the Registry’s standards and protocols to the maximum extent feasible — companies may be able to obtain a level of certainty for planning purposes if they begin reporting emissions with the Registry by December of this year. An additional incentive to participating earlier rather than later with the Registry is to establish a verifiable track record for emissions so that any near term reduction measures taken can be identified and possibly credited once emission limits are implemented.

Enforceable Emissions Limits: By January 1, 2008, the Air Board is required to determine what California’s statewide greenhouse gas emission level was in 1990, and to approve that level as the statewide limit that will be achieved by 2020. While the bill does not specify the 1990 level, lawmakers supporting the bill have claimed that this will result in a 25% reduction from current emissions. Before these levels are set, the Board must hold at least one public workshop and provide an "opportunity for all interested parties to comment."

With respect to individual sources, by June 30, 2007, the Board will publish a list of discrete "early action" greenhouse gas emission reduction measures that can be implemented within the next three years. Formal regulations adopting those early action measures must be promulgated by January 1, 2010, and must be enforceable as of that date.

Development Of The State Plan: Following the initial publication of the early action measures, the Act directs the Air Board to develop a "scoping plan" by January 1, 2009, to achieve the maximum technologically feasible and cost-effective reductions in greenhouse gas emissions from specific sources or categories of sources by 2020. To develop the plan, the Board must consult with agencies with authority over greenhouse gas emissions (including the California Public Utilities Commission and California Energy Commission), conduct public workshops, and consider economic and noneconomic costs and benefits of any proposed programs. In addition, the Air Board must convene both an Environmental Justice Advisory Committee and an Economic and Technology Advancement Advisory Committee to assist in the development and implementation of the plan. The Economic and Technology Advancement Committee will be dedicated to identifying investment and funding opportunities for research and development of technologies that will help reduce greenhouse gases.

The Act describes numerous other factors that must be considered in the development of the plan, including national and international practices for greenhouse gas emissions reduction, effectiveness of voluntary reduction practices, relative emission contributions of various sources, and potential effects on small businesses. Because the State plan will likely have far-reaching impacts across a number of industries, participation in the public workshop and comment processes should be a top priority of the regulated community.

After the plan is published, the Air Board is directed to implement the identified emissions reduction measures through formal regulation before January 1, 2011; the regulations will go into effect one year later. Like the provision describing the various issues that must be considered in development of the scoping plan, the emissions reduction regulations must also consider a list of potential impacts on California’s economy and the public health. Notably, the Act permits the 2011 regulations to include market-based declining annual aggregate emissions limits beginning in 2012. In other words, the Air Board is authorized to create a regulatory mechanism for a cap-and-trade program. Any market-based program must be designed not to increase emissions of criteria air pollutants and must consider localized and cumulative emissions impacts.

In response to industry’s concern about the inflexibility of the reduction to 1990 levels, the bill includes an economic "safety valve," which allows the Governor to suspend the emission reduction measures for one year in the event of "extraordinary circumstances, catastrophic events or the threat of extreme economic disruption." The bill also explicitly states that the authority of the California Public Utilities Commission is not affected by the Act.

We have prepared the following summary of deadlines contained in the Act to help guide individual planning efforts.

TIMELINE

Date

Action

December 31, 2006

Last day to be grandfathered into California Climate Action Registry’s reporting program for emissions.

January 1, 2007

California Global Warming Solutions Act of 2006 becomes effective.

June 30, 2007

Deadline for Air Board to publish list of discrete "early action" greenhouse gas emission reduction measures that can be implemented within the next three years.

January 1, 2008

(1) Deadline for Air Board to establish a reporting and verification program for greenhouse gas emissions through formal regulation.

(2) Deadline for Air Board to determine state emission level from 1990 and to approve that level as the limit to be achieved by 2020.

January 1, 2009

Deadline for Air Board to prepare and approve scoping plan for achieving the maximum technologically feasible and cost-effective reductions in greenhouse gas emissions from sources or categories of sources of greenhouse gases by 2020.

January 1, 2010

Last day for Air Board to implement the early action emission reduction measures identified in June 30, 2006 list through formal regulation.

Regulations to be effective on this date.

January 1, 2011

(1) Deadline for Air Board to implement the emission reduction measures identified in the scoping plan through formal regulation.

(2) Deadline for Air Board to adopt regulations to establish market-based declining annual aggregate emission limits for sources or categories of sources that emit greenhouse gas emissions.

January 1, 2012

(1) First day that regulations based on scoping plan measures will be effective.

(2) First day that any market-based "cap-and-trade" regulations will become effective.

2020

State must achieve 1990 levels of greenhouse gas emissions.

All entities that have emissions of greenhouse gases in California should track, if not participate, in the regulatory process as the Air Board develops and refines this new program. With all of the questions surrounding implementation, including what mechanisms and methods will be available to achieve compliance, stakeholder input will be critical to a viable and business-compatible regulatory program.

Further analysis of the impacts of this new program will be provided at Morrison & Foerster’s first seminar on the implications of AB 32 for the regulated community currently scheduled for September 29, 2006, at our San Francisco office. Details for the seminar will be distributed shortly.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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