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New Regulations Adopted to Implement California's AB 32 Impose Fees on Greenhouse Gas Emissions


05/17/10

On May 6, 2010, the California Air Resources Board (CARB) adopted a new regulation imposing fees on "major sources" of greenhouse gas (GHG) emissions.  Proceeds from the fees will be used to cover the costs of administering the Global Warming Solutions Act of 2006 (AB 32).  The Act directs CARB to establish statewide GHG emissions limits, reducing emissions by the year 2020 to 1990 emissions levels.  AB 32 requires CARB to conduct technical studies and adopt and enforce numerous orders and regulations to reach the 2020 emissions goal.   In 2008, CARB approved the AB 32 Scoping Plan, CARB's blueprint to implement the AB 32 mandated GHG emissions reductions.  The Scoping Plan provides that CARB would adopt a fee regulation to cover the costs of implementing the Act. 

Emission sources subject to the Fee Regulation fall into three general categories that together comprise approximately 85 percent of California's total GHG emissions:   

  1. Combustion of fossil fuels in California, including fuels used for transportation, electricity generation, and industrial production.
  2. Major industrial processes, such as cement plants.
  3. Imported electricity, based on the fuels used for its generation.

The Office of Administrative Law has until June 18, 2010 to make a determination on the proposed regulation.  It is anticipated that the Office will approve the regulation.

If approved, the first annual fee will be due for the 2010/2011 fiscal year 60 days following notice from CARB.  CARB will calculate emissions fees annually based on the costs of implementing AB 32, including salaries and benefits for CARB and other State agency personnel and all other costs—currently estimated at $36.2 million per year--as approved in the California Budget Act for the fiscal year  Through fiscal year 2013/2014, the fees will include an added fee to repay debt amassed to administer AB 32 before fees were collected, calculated at $27 million for the first three years.  Fees would also cover costs associated with litigation to defend the regulation.  A balloon payment in an unknown amount would be paid with fees collected in fiscal year 2013/2014 Fee Regulation to discharge any remaining debt.

The industries subject to the Fee Regulation include the following:

  • Natural gas utilities, users, and pipeline owners and operators that distribute or use natural gas in California;
  • Producers and importers of gasoline and diesel fuels used in California;
  • Cement manufacturing operations;
  • "First deliverers" of electricity --with exceptions for cogeneration facilities and low GHG emitters; and
  • Facilities that combust or consume coal, petroleum coke, catalyst coke, or refinery gas except for electricity generating facilities.

Fees are based on the "Common Carbon Cost," which represents the cost of one metric ton of carbon dioxide (MTCO2) emissions.  The Common Carbon Cost is calculated as CARB's total annual revenue requirement divided by the total sum of the quantity of GHG emissions reported by the industries subject to the Fee Regulation.  Notably, the regulation provides that if any emission industry category is relieved from fee requirements, the remaining emission industry categories would be required to make up the difference to fully fund the annual revenue requirement.

The longevity of the Fee Regulation is uncertain.  CARB is also in the process of adopting another measure in the Scoping Plan, the Cap and Trade program, which would require capped industries to pay for GHG allowances to emit GHG.  CARB is currently conducting public meetings to discuss the proposed Cap and Trade program and scheduled to release a draft document this summer.  The Cap and Trade program is scheduled to take effect on January 1, 2012.  CARB has noted that it will need to evaluate the potential for an overlap between the Fee Regulation and a Cap and Trade program, possibly canceling the Fee Regulation in favor of Cap and Trade. 

The 2010/2011 fiscal year Fee may be the first and likely last for a decade or more if an initiative on this November's ballot to suspend implementation of AB 32 until certain Statewide unemployment metrics are achieved succeeds.

And at the national level, Congress is taking up climate change/energy legislation.  Certain bills under consideration may preempt some or all State regulation of GHG emissions; it is unclear as of this time whether Congress and the President will enact climate change legislation and, if so, what shape it will take.  What is certain is that the legal landscape relating to climate change and GHG emissions is evolving very rapidly.

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