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Trading Carbon : December - January 2011
26 NORTH AMERICA Although it approved final r ules, California's carbon market has left itself the wiggle room to make policy changes to the programme as it goes on. Among those is the r ule on how many allowances an entity can hold. This is a hot issue with big emitters. Michael Gibbs, deputy secretary for climate change at the California Environmental Protection Agency, said that when the state begins steps to link its carbon market with its neighbours to the north, it could mean a reopening of the controversial issue of holding limits. "We could potentially make some changes people have suggested about holding limits, purchase limits or market monitoring," he said. California regulators included holding limits in their cap-and-trade regulations to prevent a cornering of the market by any single player. At the programme's start in 2013, no covered entity can hold more than 6 million of the programme's 165 million CCAs. But that limit is below the compliance obligation for some large oil companies after they've put allowances into an irreversible compliance account, and would force them into the secondary allowance market, company officials said. Those firms have repeatedly asked the ARB to change the regulation, an argument that is resonating with officials, said Jean- Philippe Brisson, an attorney with the law firm Linklaters. "Based on informal disc ussions with ARB, industry is hopeful that ARB will attempt to address this in the next r ulemaking in time for the start of the programme in 2013," said Brisson, whose firm represents some of the large covered entities. Oil giants Chevron, Shell and ConocoPhillips, as well as independently owned utility companies, such as Southern California Edison, are among the companies that have complained that their obligation will exceed ARB's holding limit. A problem they have said will become more severe as the programme matures. Market sources said an easing of the holding limits would provide more flexibility for companies to trade in the secondary market. "Right now there's a limitation on what they can buy and hold, which cuffs their hands," one broker said. "Removing the limit will cause more buying and increase overall liquidity." Whatever happens with the California CO2 market, there is no question that the world will be watching. Warnings from scientists continue to grow more alarming as weather-related catastrophes grow in frequency. The International Energy Agency recently said the world will within five years find it impossible to avoid r unaway climate change. The success or failure of this programme in California will likely render a final verdict on the concept of cap-and-trade for CO2 in the US, and maybe the world. l Above all else, market participants are on the lookout for potential lawsuits from industry that could derail the programme. Oil companies are one possible plaintiff. The sector's primary complaint is that the allocation of allowances to them in the first compliance period starting in 2013 is unfairly low. Chevron, Shell, ConocoPhillips and other oil companies with refineries in California will be given enough allowances to cover 90 percent of their expected emissions in 2013, not 100 percent as they have requested. Refinery workers and executives told ARB the 10 percent "haircut" r ules could cost the state jobs at a time when unemployment is already high. Starting the refining industry 10 percent short of the permits they'll need to cover their emissions amounts to an "illegal tax" on the industry, Brenda Coleman, an official with the California Chamber of Commerce, told the board. Tupper Hull, a spokesman for the Western States Petroleum Association, declined to comment on whether the trade association would file a suit. "Much too early for us to talk about litigation," he said. Ann Carlson, a law professor specialising in climate change policy at UCLA, said it is hard to say what action industry may take. "Oil companies seem to be miffed about the allocation of the allowances, but whether they think they have a legal claim is a different question," she said. "I've been somewhat surprised not to see more litigation to date, but the cap-and-trade r ules are where a big part of the game is so it might be the case that once they're adopted, we'll see some suits filed," she said. Out-of-state utility companies are also possible plaintiffs, sources said. The r umoured firms include Utah- based utility PacifiCorp and the Portland-based Bonneville Power Administration, as well as some oil companies, Van Aelstyn said. PacifiCorp has repeatedly said that imposing a compliance obligation based on the North American Electric Reliability Corporation's "e-tags" -- or electronic energy receipts -- could violate the federal interstate commerce clause. "Reliance on the e-Tag mechanism to identify the importer is also problematic because it calls into question the constitutionality of the cap-and-trade programme as it implies to importers," James Campbell, PacifiCorp's senior analyst of environmental policy and strategy, wrote in his September 27 comments to ARB. California's climate plan will serve as the model for a national programme Mary Nichols, California ARB Dec 2011/Jan 2012 www.pointcarbon.com