SACRAMENTO -- California regulators are pushing back their first-in-the-nation greenhouse gas trading system by one year to insulate it from potential market manipulation, the head of the state's air agency said yesterday.

What was originally intended to be a routine legislative hearing on the status of California's cap-and-trade system became instead a pivotal moment in the state's climate policy, with a standing-room crowd hanging on Air Resources Board (ARB) Chairwoman Mary Nichols' every word.

Nichols said the quarterly auctions of emissions allowances that each large emitter in the state must turn in would begin in the second half of 2012, rather than February 2012 as planned. Since the cap was already set for 2012 at roughly the level of expected emissions, the state will not forgo any emissions reductions, she explained. Instead, entities that emit more than 25,000 metric tons of carbon dioxide equivalent per year will begin trading credits at the end of next year to cover their emissions reduction obligations for 2013 and later; the first three-year compliance period, which originally covered 2012-14, will simply be shortened to two years.

"We will be testing the system, doing simulation models, but no one will be held accountable during that year for compliance," she said. "But at the end of 2014, people will still be where they would have been if the program had started."

State Sen. Fran Pavley (D), had called the hearing to explore the implications of a lawsuit brought by environmental justice advocates against the state's favoring of cap and trade over other policies to reduce emissions. ARB is redoing its analysis of alternatives to cap and trade in the wake of San Francisco Superior Court Judge Ernest Goldsmith's decision last month that the original analysis was slacking (ClimateWire, June 14).

Nichols said yesterday the lawsuit was not a deciding factor in her decision to delay trading, which she said came after she conferred with the state attorney general's office as well as experts on the state's ill-fated foray into deregulated electricity sales, which culminated in widespread fraud and rolling blackouts in 2000-01. She said Gov. Jerry Brown (D) also did not impose any instructions.

"It was the issue of making sure there isn't gaming," Nichols said. "The governor is not designing this program. ... He's letting ARB do its job."

A 'prudent' move, or a 'sign of lack of faith?'
ARB will release a draft of regulations covering allowance distribution and details on offset protocols within the next two weeks, Nichols said. The agency is still on track to finish its regulations by the end of October, in time to meet a one-year internal deadline, she said.

Pavley, who authored the 2006 law that designed California's goal of reducing state emissions to 1990 levels by 2020, appeared sanguine at the news.

"This modest delay in implementation is prudent," she said. "The one-year period will provide flexibility; allowing us to road-test market mechanisms to see how they will work, while ensuring that the greenhouse gas pollution reductions required by the program remain intact."

Josh Margolis, CEO of emissions brokerage CantorCO2e, was also optimistic. He said the delay might have the effect of keeping more businesses in the state.

"Some who were breathing into a paper bag, who were fast running out of options and looking for the exit, can now take the time to develop compliance options," Margolis said. "Chairman Nichols has delivered an elegant solution that will keep the environment whole and have a minimal impact on sources."

But Peter Asmus, a senior analyst at Pike Research, noted the parallel with cap and trade's failure at the federal level, as well as the possibility that the delay gives Brown one more year to possibly rethink his approach.

"I think it's a sign of a lack of faith in the whole cap-and-trade concept, which was also shot down at the federal level, too," Asmus said in an email. "[It] shows the push back on environmental regulations is even occurring in California. Hard to imagine CARB will abandon the cap-and-trade framework, though Jerry Brown's history is peppered with examples of radical shifts in policy."

Nichols herself cited the failure of cap-and-trade legislation in Congress after the House approved legislation in 2009.

"When the House passed a bill ... there were people who simply chose to attack any action on climate change whatsoever," she said. "And because of that, we don't have national legislation at this moment at all on climate, and frankly that has been a tremendous loss of momentum and for all of us here who had hoped our program would be leading the way."

Reprinted from Climatewire with permission from Environment & Energy Publishing, LLC., 202-628-6500