State Of California AIR RESOURCES BOARD Notice Of Public .

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State of CaliforniaAIR RESOURCES BOARDNotice of Public Availability of Cap-and-TradeDiscussion Draft and WorkshopARB staff is holding a public workshop to discuss draft changes to thegreenhouse gas cap-and-trade and mandatory greenhouse gas reportingregulations.DATE:Friday, July 15, 2011TIME:9 am to 3 pmLOCATION: Byron Sher Auditorium, 2nd Floor, Cal/EPA HQ Building,1001 “I” Street, SacramentoWEBCAST: http://www.calepa.ca.gov/broadcast/?BDO 1During the workshop, stakeholders may email questions toccworkshops@arb.ca.gov. A discussion draft including proposed changes to thecap-and-trade regulation is now available for download on the program andtrade.htmSpecial Accommodations or Language Assistance:If you require a special accommodation or need these documents in an alternateformat or language, please contact the Office of Climate Change at (916) 3222037 as soon as possible. TTY/TDD/Speech to Speech users may dial 711 forthe California Relay Service.BackgroundAt its December 16, 2010 public hearing, the Air Resources Board (ARB orBoard) endorsed the proposed finalization of sections 95800 to 96022, title 17,California Code of Regulations (CCR), which comprise the California Cap onGreenhouse Gas Emissions and Market-Based Compliance MechanismRegulation, including Compliance Offset Protocols.At the hearing, the Board considered the California cap-and-trade program InitialStatement of Reasons Staff Report released on October 28, 2010, and adoptedResolution 10-42 directing several modifications proposed by staff. The Boarddid not endorse the regulations as written and advised staff that additionalchanges were necessary. Resolution 10-42 and other regulatory documents forthis rulemaking action are available online at the cap-and-trade program websitereferenced above.

Some revisions in this notice reflect clarifications to better align California’s capand-trade program with rulemaking efforts in other Western Climate Initiative(WCI) jurisdictions to allow for future linkage to support a broader, regional capand-trade program. A broader program will provide more cost containmentbenefits to California-covered entities and ensure greater reductions in regionalemissions of greenhouse gases (GHGs) to the atmosphere.The discussion draft of the cap-and-trade regulation is being released alongsidea discussion draft of the Mandatory Greenhouse Gas Reporting Regulation(Subchapter 10, Article 2, sections 95100-95199, title 17, California Code ofRegulations), which provides the emissions data that are the basis fordetermining both inclusion in the cap-and-trade program and a covered entity’scompliance obligation. Proposed revisions to the Mandatory ReportingRegulation have been harmonized with both the federal greenhouse gasreporting requirements and these proposed revisions to the cap-and-traderegulation.In accordance with Government Code section 11346.8, in Resolution 10-42 theBoard directed the Executive Officer to take final action to adopt the proposedregulations, with the modifications identified in the Resolution and other suchconforming modifications as may be appropriate, after making the modifiedlanguage and any additional supporting documents available to the public for acomment period of at least 15 days. The Board also directed the ExecutiveOfficer to consider such written comments as may be submitted during thisperiod and to make such modifications as may be appropriate in light of thecomments received. ARB expects to release for public comment revisions to theregulation before the end of July 2011 pursuant to Government Code section11346.8. This discussion draft will be the basis for those revisions and thesubject of the July 15, 2011 workshop. As part of finalizing the regulation staffwill be finalizing the associated environmental document and developingadditional details about the adaptive management component of the cap-andtrade program. Staff is seeking comment on this component. The finalizedregulation must be filed with the California Office of Administrative Law (OAL) byOctober 28, 2011. Please note that while comments are appreciated and can besubmitted to this workshop, this workshop is not part of the formal rulemakingprocess pursuant to the Administrative Procedure Act (APA). ARB will releasechanges pursuant to the APA for 15 days as required by Government Codesection 11346.8(c) separately from this notice. In order for comments on theproposed changes to be included in the rulemaking file, comments must besubmitted again once the 15-day notice is published.Summary of Proposed ModificationsThe following sections detail the changes from the October 28, 2010 proposalthat are included in the discussion draft. Appended to this notice are documentsdescribing in greater detail the electrical distribution utility (Appendix A) andindustrial producer (Appendix B) allocation analysis and methodologies.2

Staff has modified the regulation in many places to reflect a proposal to begin thecompliance obligation in 2013, while conducting two auctions in 2012. Aswritten, many sections in the regulation refer to the beginning of the complianceobligation or of compliance periods when describing the requirements for marketparticipants. In this draft discussion document, the allocation, auction, trading,and other activities will begin in 2012 before the start of the compliance obligationand the first compliance period. Staff acknowledges that some additionalmodifications will need to be made prior to finalizing the proposal. Staff isrequesting comment on which program elements should begin in 2012 and whatadvantages there are to phasing in various components during 2012.Staff is also investigating ways to ensure that large industrial sources subject tothe recently finalized Energy Efficiency and Co-Benefits Audit regulation berequired to take all cost-effective actions identified under those audits. We areseeking stakeholder input on how to implement this policy.The staff’s proposed modifications in this discussion draft to the originallyproposed regulations are summarized below and are set forth in detail inAttachment 1 to this notice. All references to sections 95800, 95801, 95802,95810, 95811, 95812, 95813, 95814, 95820, 95821, 95830, 95831, 95832,95840, 95841, 95850, 95851, 95852, 95852.1, 95852.2, 95852.3, 95853, 95854,95855, 95856, 95857, 95870, 95890, 95891, 95892, 95893, 95910, 95911,95912, 95913, 95914, 95915, 5920, 95921, 95922, 95940, 95941, 95942, 95943,95970, 95971, 95972, 95973, 95974, 95975, 95976, 95977, 95978, 95979,95980, 95981, 95982, 95983, 5984, 95985, 95986, 95987, 95988, 95990, 95991,95992, 95993, 95994, 95995, 5996, 95997, 95998, 96010, 96011, 96012, 96013,96020, 96021, and 96022 are to title 17, CCR. The following summary does notinclude modifications to correct typographical or grammatical errors, changes innumbering or formatting; nor does it include all of the non-substantive revisionsmade to improve clarity. For a complete account of all modifications in theproposed regulations, please refer to the underline and strikeout sections in thediscussion draft.A.Modifications section 95801. Purpose.No modifications made to this section.B.Modifications to section 95802. Definitions.A number of definitions were added or modified. Many of the new or modifieddefinitions are necessary to implement the “first deliverer” approach for theelectricity sector as well as to implement the benchmarking approach fordistribution of allowances for several different sectors. Definitions were alsoadded or modified to improve clarity and to ensure that the terms used in thecap-and-trade regulation are consistent with those used in the MandatoryReporting of Greenhouse Gas Emissions Regulation (MRR). Adding thesedefinitions was required to ensure that all terms contained in the regulation havethe same meaning to the regulated public.3

Section 95802 was modified to include a definition for “carbon dioxide supplier,”“geologic sequestration,” and “process unit” to reflect changes to sections95812(c) and 95852.C.Modifications to section 95810. Covered Gases.No modifications made to section 95810.D.Modifications to section 95811. Covered Entities.Section 95811 specifies which entities are covered by the rule. One modificationwas made to section 95811(g) which specifies that suppliers of carbon dioxide(CO2) will be referred to as carbon dioxide suppliers for purposes of the rule.This change was made to simplify the regulation such that only one term wouldbe used for carbon dioxide suppliers instead of multiple terms (e.g., suppliers ofcarbon dioxide, suppliers of CO2, carbon dioxide suppliers, CO2 suppliers), thusmaking it easier to search for this supplier category within the regulation.E.Modifications to section 95812. Inclusion Thresholds forCovered Entities.Section 95812(a) was modified to specify that reported and verified annualemissions must be reported and verified pursuant to the verification sections ofthe MRR. This modification is necessary to be consistent with the MRR, and toclarify that a covered entity’s annual emissions must both be reported andverified.Section 95812(b) was modified to specify that an entity will be classified as acovered entity if the reported or reported and verified annual emissions in anydata year from 2008 to 2011 exceed the thresholds identified in sections95812(c) and (d), and to remove the term ‘aggregated.’ This modification isnecessary to be consistent with the MRR.Section 95812(c)(2) was modified to clarify the existing applicability thresholdsfor covered entities.Section 95812(c)(3) was modified to replace the original section 95812(c) andspecify that the inclusion threshold for carbon dioxide suppliers is based on theamount of CO2 captured from production process units and production wells, andsupplied for commercial application or geologic sequestration. This change wasrequired to ensure that all CO2 created and potentially emitted in California bycarbon dioxide suppliers would be covered, and to align with the federalgreenhouse gas reporting regulation.A new section 95812(c)(4) was inserted to be consistent with how MRRcategorizes these sources for reporting purposes.4

Section 95812(d) was modified to include assigned emissions levels consistentwith MRR. This section is necessary so covered entities that do not receive apositive verification are still included in the regulation.Section 95812(d)(2) was modified to be consistent with section 95812(c)(2).Various other minor and non-substantive clarifications were also made to section95812.F.Modifications to section 95813. Opt-In Covered Entities.Minor and non-substantive clarifications were made to section 95813 to betterorganize the section and otherwise clarify who can be an opt-in covered entity.G.Modifications to section 95814. Voluntarily AssociatedEntities and Other Registered Participants.New section 95814(a)(3) creates a new type of voluntarily associated entity(VAE) that will take only temporary control of compliance instruments when itprovides clearing services for transactions. Defining this new VAE allows ARB tospecify a new type of account that can only be used by that type of entity, whichARB can then conditionally exempt from the holding limit. This sectionspecifically adds derivatives clearing organizations registered with the U.S.Commodity Futures Trading Commission as eligible. Staff is requestingcomment on whether the new VAE category captures the types of clearingentities expected to be active in carbon markets.Section 95814(b)(1)(D) was modified to specify that entities approved as EarlyAction Offset Programs, pursuant to subarticle 14, do not qualify to holdcompliance instruments, but may qualify as a Registered Participant. Thismodification was necessary to ensure consistency between Offset ProjectRegistries and Early Action Offset Programs, as, in many cases, they may be thesame entities.H.Modifications to section 95820. Compliance InstrumentsIssued by the Air Resources Board.Minor and non-substantive clarifications were made to section 95820 to correctcross references within the regulation.I.Modifications to section 95821. Compliance InstrumentsIssued by Approved Programs.Minor and non-substantive clarifications were made to section 95821 to addconsistent terminology and correct cross references within the regulation.J.Modifications to section 95830. Registration with ARB.5

Section 95830(b) was modified to delete references to linking to externalprograms approved by ARB. This text was deleted because any additionalregistration requirements will be addressed in subarticle 12 at the time theregulation is modified to include linkage.New section 95830(c )(1)(F) exempts entities registering to provide clearingservices from having to meet the information disclosure requirements of95830(c)(1)(D) for compliance instruments it holds for the purposes of clearingtransactions. This provision was added to avoid burdening entities providingclearing services with the burden of reporting information on transactions thatARB will be getting directly from the entities involved in a transaction.New section 95830(f) adds the requirement that registered entities must updatetheir registration information within ten days of a change in that information. Thesection allows ARB to revoke, suspend, or restrict an entity’s registration orimpose penalties if an entity fails to update its registration information. Thissection is necessary because ARB will rely on registration information to conductmarket oversight and enforce rules on holding and purchase limits. These effortswill be undermined if entities are not required to update the information.New section 95830(g) adds provisions concerning the confidentiality of theinformation gathered through registration. Section 95830(f)(1) identifiesbeneficial holdings disclosures and information on the identity of real persons asinformation that should be treated as confidential. Section 95830(f)(2) allows forother registration information to be made public. ARB is proposing theseconditions to balance the need for market transparency with the protection ofinformation on individuals.K.Modifications to section 95831. Account Types.New section 95831(a)(4)(B) was added to allow a publically owned utility totransfer allowances from their holding account to the compliance account of jointpowers agency of which the publically owned utility is a member. Adding thisprovision alleviates the concern that some small publically owned utilities raisedabout being required to consign allowances when a joint powers agencypurchases electricity on behalf of the publically owned utility.New section 95831(a)(5) creates a new type of holding account, called anExchange Clearing Holding Account, for entities supplying exchange clearingservices. Entities transfer instruments to clearing entities on a temporary basiswhile a transaction is being cleared. The clearing entity then transfers theinstruments to the designated account of the entity receiving the allowances aspart of the transaction being cleared. Creating this account will allow ARB toexempt an entity clearing transactions from the holding limit.6

Original section 95831(b) was moved to new section 95921(f), because the textdeals with account restrictions that may be imposed for rule violations whilesubarticle 11 deals with the conduct of trading.Original section 95831(c)(5), now section 95831(b)(5), was modified to clarifyhow the Forest Buffer Account functions and when ARB may place ARB offsetcredits into the Retirement Holding Account from the Forest Buffer Account.These changes were made for clarification purposes and to align theserequirements with the updated requirements in section 95983.New section 95831(b)(6) creates a holding account under the control of theExecutive Officer called the Voluntary Renewable Electricity Reserve Account.This provision is needed to implement section 95870(c). The Executive Officerwill place allowances into the account, which may then be retired as part of thevoluntary renewable energy set-aside. The account will be closed when theallocation of allowances is depleted.Various other minor and non-substantive clarifications were made to section95831 to add and correct cross references within the regulation.L.Modifications to section 95832. Designation of AuthorizedAccount Representative.Sections 95832(a)(4), 95832(a)(6), and 95832(d) were modified to specify that anauthorized account representative and any alternative account representativemust attest to the validity of their application for an account with the accountsadministrator under penalty of perjury and under the laws of the State ofCalifornia. This addition is necessary to ensure that all information submitted istrue and complete under penalty of perjury.Various minor and non-substantive clarifications were also made to section95832 to correct cross references within the regulation and fix numbering.M.New section 95833. Disclosure of Direct and IndirectAssociations.New section 95833 is composed generally of modified text that originallyappeared as sections 95914(a) through (d). In addition to moving these sections,staff made two changes to the original text. The section requires all registeredentities to identify if they share specific types of relationships with otherregistered entities. This information is needed to monitor for suspicious activity inthe market program and ensure market rules are not circumvented.New section 95833(a)(2) was modified from original text to clarify an existingrequirement that an entity holding compliance instruments on behalf of anotherentity in a beneficial holding relationship is considered to have a direct corporateassociation with the other entity. New section 95833(a)(4) was added on theadvice of counsel to exempt from the corporate association requirements any7

entities already subject to state or federal rules which prohibit the sharing ofmarket information between entities that have a formal corporate affiliation.New sections 95833(d)(1) through (4) were moved from section 95914. Nosubstantial changes were made to this text.N.New section 95834. Disclosure of Beneficial Holding.New section 95834 provides detailed provisions for an existing requirement thatany entity holding compliance instruments on behalf of another entity disclose therelationship to ARB. New section 95834(a)(1) defines when a beneficial holdingrelationship exists. It also defines an agent as the entity holding allowancesowned by a second entity, which is defined as the principal.New section 95834 (a)(2) creates a type of beneficial holding relationship forelectric distribution utilities which may need to hold compliance instruments onbehalf of entities with whom they have long term electricity delivery contractswhich may not explicitly determine which party to the contract has theresponsibility to surrender compliance instruments. ARB has held extensivediscussions with electric utilities on this issue, and is requesting comment onwhether the proposed requirements address this concern.Section 95834(a)(3) allows entities which have disclosed a corporate associationpursuant to section 95833 to utilize the beneficial holding arrangements.Section 95834(b) contains requirements for the disclosure of beneficial holdingrelationships. Section 95834(c) contains requirements applying to an entitywhich may serve as an agent for more than one principal. The requirements areintended to prevent the disclosure of market information between marketparticipants, to prevent opportunities for collusion.O.Modifications to section 95840. Compliance Instruments.Section 95840(a) was modified to exclude 2012 from the first compliance periodand accommodate the new compliance obligation start date of January 1, 2013.P.Modifications to section 95841. Allowance Budgets CalendarYears 2012-2020.Section 95841 was mod

Regulation have been harmonized with both the federal greenhouse gas reporting requirements and these proposed revisions to the cap-and-trade regulation. In accordance with Government Code section 11346.8, in Resolution 10-42 the Board directed the Executive Officer to take final action to adopt the proposed

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