John J. Lormon, Partner with Procopio Law Firm, and James A. Westbrook, President of BlueScape, discuss California's final Cap-and-Trade Rule adopted in October 2011. The rule will impact about 350 companies and 600 facilities. Information is presented on how to determine whether a facility is a covered entity, thresholds for inclusion, compliance requirements, allowances and offsets, enforcement, and recent litigation activity. For questions or support, Mr. Lormon can be reached at 619-515-3217 or john.lormon@procopio.com. Mr. Westbrook can be reached at 877-486-9257 or jwestbrook@bluescapeinc.com.

1. The California GHG Cap-and-Trade Rule is Final:
What Do You Know?!
Webinar: December 8, 2011
James A. Westbrook John J. Lormon
President Partner
BlueScape Environmental Procopio, Cory, Hargreaves & Savitch LLP
jwestbrook@bluescapeinc.com
jwestbrook@bluescapeinc com john.lormon@procopio.com
john lormon@procopio com
www.bluescapeinc.com www.procopio.com
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2. James A. Westbrook Bio
• President BlueScape
President,
• Full-service environmental consulting
• Experienced with CA and EPA GHG regulations, and
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carbon offsets
• Technical capability to develop and manage climate
change programs
• Cap-and-trade compliance strategy, GHG emissions
and compliance calculations, data monitoring and
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reporting systems, allowance/credit management
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3. John J. Lormon Bio
• Partner at Procopio, Cory, Hargreaves & Savitch
LLP, specializing in environmental, climate change,
and air quality law
• Managed numerous Clean Air Act cases involving
stationary and mobile sources, including energy
generation and transmission facilities
• W k d on l
Worked large scale carbon emission, di
l b i i diesel and
l d
soot projects in Los Angeles and Long Beach Harbor
• Experienced in energy project siting and permitting
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• American Bar Association section on Energy,
Environment and Resource Vice-Chair Climate
Change, Sustainable Development and Ecosystems
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4. Agenda
• Subarticle 3: Applicability
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• Subarticle 4: Compliance Instruments
• Subarticle 5: Registration and Accounts
• Subarticle 6: Allowance Budgets
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• Subarticle 7: Compliance Requirements for Covered Entities
• Subarticle 8: Disposition of Allowances
• Subarticle 10: Auction and Sale
• Subarticle 11: Trading and Banking
• Subarticle 12: Linkage to External Trading Systems
• Subarticle 13: Offsets
• Subarticle 14: Compliance Instruments from Other Programs
• Subarticle 15: Enforcement and Penalties (and Litigation)
• Subarticle 16: Other Provisions
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5. Applicability
• Covered Gases -- CO2, CH4, N2O, SF6, HFCs, PFCs, NF3,
Fluorinated GHG
• Covered Entities
– Operators of Facilities, ex. refineries, cement,
cogeneration,
cogeneration stationary combustion
– First Deliverers of Electricity
• Electric Generating Facilities in CA
• Electricity Importers
– Fuel Suppliers
• Natural Gas, utility and intrastate
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• Gasoline Blendstock, Distillate (Diesel), LPG
– Carbon Dioxide Suppliers
• Opt-in, Voluntary,
Opt in Voluntary Other Participants
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6. Importer
Power Plant
IOU/POU
Power Plant
Out-of-State
Food Co Fuel Supplier
Oil/Gas
Producer
Refinery
Power Plant
IPP
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7. First Compliance Period
Inclusion Thresholds, Jan. 1, 2013*
Covered Entity CO2e Emissions any Year
2008-2011
Operators of Facilities 25,000
25 000 MT/yr
Electricity Generation Facilities 25,000 MT/yr
Electricity Importers
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specified sources that emit 25,000
MT/yr or more
2. All emissions for unspecified sources
are above the threshold
Carbon Dioxide Suppliers 25,000 MT/yr, include sum from different
capture processes
Petroleum and Natural Gas Facilities 25,000 MT/yr
*The rule becomes effective Jan. 1, 2012
Jan 1
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8. Second Compliance Period
Inclusion Thresholds, Jan. 1, 2015
Covered Entity CO2e Emissions any Year
2011-2014
Fuel Suppliers 25,000 MT/yr, full combustion or oxidation
of fuel imported and/or delivered
Electricity Importers 1. Zero MT/yr for specified source
2. Zero MWh/yr for unspecified source
as of Jan. 1, 2015
How Do I GET OUT!?
Not easy:
- Less than 25,000 MT/yr during one entire compliance period
- Drop out the next compliance period
- Sh tdo n
Shutdown
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9. Compliance Program
• Certain utilities and energy-intensive industries need
energy intensive
“Compliance Instrument” (“CI”) per metric ton of GHG
emissions
• ARB creates CI (§ 95820):
– CA GHG emissions allowances
– ARB offset credits
– Sector-based offset credits
– External GHG ETS offset credits
– ARB early action offset credits
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10. Compliance Program (cont.)
• Allowances allocated for free to some entities others
entities,
pay
• Primary methods to allocate allowances = auctions
• Allowances are tradable
• ARB set minimum price - $10 per metric ton
• Market demand for allowances will increase
– Result: higher prices for certain unwanted goods and
services (the “Price Signal”)
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• Goal: more clean and efficient energy compliance
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11. Compliance Program (cont.)
• Auction proceeds used in part for:
used, part,
– Alternative energy investments
– Utility customer rebates
• Cost increases for electricity, fuel, and goods passed
onto customer
• Reduce impact from out of state energy and goods
out-of-state
by:
– Imposing compliance p g
p g p program on importers of
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electricity
– Free allowances to certain at-risk industries
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12. Allowance Caps
• Goal: reduce GHG emission to 1990 levels by 2020
at approximately 3% per year
• First Compliance Period: 1/1/2013 – 12/31/2014
– 2013: 162.8M metric tons of CO2e
– 2014: 159.7M metric tons of CO2e
• Second Compliance Period: 1/1/2015 – 12/31/2017
– Natural gas and fuel distributors added
– Cap rises in 2015 to 394.5M metric tons CO2e
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– 2020 cap declines to 334.2M metric tons of CO2e
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13. Compliance Requirements
• Reporting and Recordkeeping
• Phase-In of Compliance Obligation
– 1st compliance period
– 2nd compliance period
– During a compliance period
• Emission Categories f C
E i i C t i for Compliance
li
• Biomass-Derived Fuels
• Compliance Obligations Related to Instruments
• Timely / Untimely Surrender
• Under-Reporting
p g
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14. Emission Categories for Obligations
Covered Entity Obligation Considerations
Operators of Facilities - Verified or assigned combustion and vented emissions
- Liquid fuels not included in 2015
First Deliverers of - Verified or assigned combustion and vented emissions
Electricity - Separate calculations for generators and importers
- Resource shuffling not allowed
- RPS and QE Adjustments
j
Natural Gas Suppliers - Verified or assigned fuel deliveries, full combustion
- Less deliveries to covered entities
Gasoline and Diesel - Verified or assigned fuel deliveries, full combustion
- Except deliveries outside California
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15. Compliance Instrument Obligations by Year
First Compliance Period*
Period Compliance Obligation
Prior to 2012 Rule not effective
2012 Register for Trading
Allowance Auctions in August and November
2013 Obligations begin
2014 Annual obligation – 30% surrendered for 2013 emissions, by Nov 1.
2015 Remaining obligations for 2013-2014 emissions
Surrendered b N 1
S d d by Nov 1.
*For a facility with a compliance obligation in the first period.
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16. Disposition of Allowances
• Different sectors – different treatment
– Free allocations
– Purchases: auctions and trades
• Electric distribution sector allocation of allowances:
– 2013: 95.8M metric tons of CO2e
– 2020: 83.1M metric tons of CO2e
– 8 year allowance decrease of 13 3%13.3%
• Industrial sector
– Remainder of electric and ARB’s reserve allowances
– Approximately:
• 2013: 64.6M metric tons of CO2e
• 2020: 226.9M metric tons of CO2e
• 8 year allowance decrease of 20.5%
y
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17. Disposition of Allowances (cont.)
• Electric generating utilities
– POUs
• Free
• Used for compliance
– IOUs
• Initially free
• Must be “monetized” by consignment to ARB for auction for
monetized
benefit of ratepayers
• Industrial
– First Compliance Period free to ≥ 25,000 metric tons of CO2e
25 000
– Approximately 90% of historical emissions
– Purchase 10%
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18. Disposition Allowances (cont.)
• Industrial sector decline in free allowances
– “Adjustment factor” to incentivize change in energy use
– “Leakage” – risk businesses will move out-of-state
• High risk industries
– Some 100% free allowances
– Others 75% in Second Compliance Period or 50% in Third
Compliance Period
– Zero allocation sectors
• Importers: electricity, natural gas, and covered fossil fuel
• Independent power generators
• Out-of-state entities
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19. Auction and Sale
• Allowances available at Auction:
– IOU allowances
– ARB reserves
– All
Allowances not allocated f f
t ll t d for free t industry
to i d t
• Auction procedure:
– Units of 1,000
– One-bid
– Bid is blind
– Highest bid wins
– Financial assurance of bidder
– Reserve price (floor)
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20. Auction and Sale (cont.)
• Price controls:
– Auction price
• 2012 and 2013: ARB maintains certain allowances in a
“price
“ i reserve” account t control spikes: $40/ ll
” t to t l ik $40/allowance
with 5% over inflation/year
• 2014-2020: reserve price plus 5% per year above CPI
• Limit on use of agents to hold allowances
• Corporate affiliation disclosure required
• Li it on number of allowances th t can b h ld b
Limit b f ll that be held by
regulated entity or affiliated parties
– 2.5M plus 2.5% above 25M = 5.9M for 2013
p
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21. Linkage
• Refers to external trading systems
• ARB procedures for approval
• Linkage options might include:
g p g
– Western Climate Initiative (WCI)
– Regional Greenhouse Gas Initiative
– E
European Union
U i
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22. Offsets for Compliance
• Up to 8% offsets for compliance obligations
• Project offsets can come from only the US
• Project p
j protocols are currently limited – forestry,
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urban forestry, dairies, ODCs
• Offsets may be available from sector-based
programs such as REDD
• Offsets must meet extensive, stringent requirements
• Early Action Offsets
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23. Enforcement and Penalties
• Failure to submit allowances for emissions or late
submission 4x the original requirement plus other
penalties
• Failure to properly report allowance allocations
– No penalty up to 5%
– 75% replacement of allowance
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24. Enforcement and Penalties (cont.)
• Criminal penalties per H&S Code § 42400:
– Strict liability: up to $1,000 and/or 6 months
– Negligence: up to $25,000 and/or 9 months
– Knowing: up to $40,000 and/or 1 year
– Willful and intentional: up to $75,000 and/or 1 year
• Injunctive relief and civil action not dismissed upon
filing of criminal complaint
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25. Enforcement and Penalties (cont.)
• Civil penalties per H&S Code § 42401:
– Violation of abatement order: $25,000
– Strict liability: up to $10,000
– Negligence: up to $25,000
– Knowing: up to $40,000
• Falsifies document: up to $40 000
$40,000
– Willful and intentional: up to $75,000
• Unreasonable risk of great bodily injury: up to $125,000
($500,000 for
($ 00 000 f corporation) )
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26. Enforcement and Penalties (cont.)
• Bounty hunter reward equal to 10% of civil or criminal p
y q penalties
up to $5,000
• Administrative penalties up to $10,000 per day up to $100,000
• In determining amount, ARB considers all relevant
circumstances, including H&S Code § 42403(b) criteria:
– Extent of harm
– Nature and persistence of violation
– Length of violation
– Frequency
– Record of maintenance
– Unproven or innovative nature of control equipment
– Mitigation actions taken by defendant, including nature,
extent and time of response
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27. Legal Challenges to Compliance Program
• Legislative, regulatory & judicial
– Illegal discrimination against out-of-state fuel and
electricity suppliers
– Violates Interstate Commerce Clause
– Imposes state mandated fees upon imports
– Prop 26, CEQA, consistency with federal CAA GHG
regulations
– Compliance program not consistent with AB 32’s
mandate:
• Cost effective equitable distribution of cost burden
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• Environmental justice claims
– State Case – Assoc. of Irritated Residents
– St t /F d Case: Our Children’s Trust “Public Trust”
State/Fed C O Child ’ T t “P bli T t”
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28. Action Items and Summary
• Recommend you PLAN for compliance now
y p
• Threshold issues - are you a covered entity or not?
• How do you plan to comply? How will you satisfy financial assurance
obligation?
• Do
D you need t b offsets, go to auction or plan to reduce emissions?
d to buy ff t t ti l t d i i ?
• How can you reduce cost and future risk and collateral impacts?
• When will you get registered for trading?
• What is your compliance management system?
– Information management and verification
– Trading plans
– Reporting p
p g procedures
• Monitor rule changes and court decisions?
• You need a team behind you! Role of Legal, Technical and Financial
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29. Contact with Questions
• James A. Westbrook
President
BlueScape Environmental
11440 West Bernardo Court, Suite 300
San Diego, CA 92127
office: 858.695.9200 x201
mobile: 858.774.2009
jwestbrook@bluescapeinc.com
j tb k@bl i
www.bluescapeinc.com
• John J. Lormon
Partner
Procopio, Cory,
Procopio Cory Hargreaves & Savitch LLP
525 B Street, Suite 2200
San Diego, CA 92101
direct: 619.515.3217
direct fax: 619.744.5417
john.lormon@procopio.com
www.procopio.com
i
The Webinar presentation will be posted on Slideshare.com and the Procopio website.
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