Electrical Distribution Utilities — All utility allowances are allocated freely to protect ratepayers from rate shocks. Utilities must use the value associated with the allowances to benefit ratepayers. Investor-owned utilities are required to return a portion of the value to consumers via a Climate Credit on their utility bill (see CPI’s blog for details).

Industry Sectors — Allocation determined according to leakage prevention and sector transition assistance needs.

For more details, see CARB’s allowance allocation page and Regulatory Guidance Document Section 3.5

CARB holds two allowance auctions quarterly:

• Current Auctions offer current and previous year vintages.
• Advance Auctions offer vintages of the subsequent calendar years.

Entities submit bids in a single-round, sealed-bid auction format. Allowances are awarded to entities starting with the highest bids until all available allowances are exhausted. The “settlement price” is lowest price at which the allowance supply is exhausted. All entities will pay the settlement price or auction reserve price (see below) — whichever is highest — for their awarded allowances.

See here for more details on auction procedures and here for further details and auction schedule updates.

For each auction, CARB sets an Auction Reserve Price — a minimum price below which allowances cannot be sold at auction. The Regulation (§ 95911) set the 2012 and 2013 Auction Reserve Price at $10/allowance for both the current and advanced auctions. Starting in 2014, the Auction Reserve Price increases annually by 5% plus the rate of inflation (Consumer Price Index for All Urban Consumers).

For more details, see CARB’s Regulatory Guidance Document Section 5.1.4

CARB sets a designated number of allowances from each compliance period budget into the Allowance Price Containment Reserve (the reserve).The reserve is designed to reduce the risk of higher-than-expected allowance prices.

Reserve volumes by compliance period:

• 2013-2014: 1% of allowance budget
• 2015-2017: 4% of allowance budget
• 2018-2020: 7% of allowance budget

Allowances in the reserve are available for purchase quarterly at three tiers of pre-established prices that increase annually by 5% plus rate of inflation (Consumer Price Index for All Urban Consumers). In 2013, APCR tiers are priced at $40, $45, and $50.

For more details, see CARB’s Regulatory Guidance Document Section 5.2.2. See here for general information on cost containment mechanisms.

A suite of legal precedents (summarized by California’s Legislative Analyst Office) establish that proceeds from allowance auctions must be used to mitigate GHGs or the harmful effects of GHGs.

Passed in 2012, SB535 (D-De Leon) requires that 25% of proceeds benefit “disadvantaged communities” and that 10% are spent within such communities.

Visit CARB’s implementing legislation page for an overview of auction proceed implementation laws.

Proceeds from cap and trade auctions flow into the Greenhouse Gas Reduction Fund (GGRF) and are then appropriated through a two-step process established by AB1532 (D-Perez):

1. State agencies draft three-year investment plans with priorities for auction proceed investment
2. Consistent with investment plans, the state legislature and governor appropriate funding through annual budget acts

For a summary of the programs and projects funded from the GGRF, visit CARB’s auction proceeds budget appropriations webpage.

2013-2020: First deliverers of electricity (in-state and imported) and large industrial facilities

2015-2020: Distributors of transportation fuels, natural gas, and other fuels

For more details on covered sectors, see CARB’s Regulatory Guidance Document Section 2.0. CARB also maintains a current list of covered entities, downloadable through the "List of Covered Entities" link on the left side of this page.

Generally, facilities that exceed annual emissions 25,000 metric tons of CO₂e (according to mandatory GHG emissions reporting) are covered by the program. As of 2015, all emissions from electricity-importers are covered (i.e., no threshold).

The following parties are required to participate in the Cap and Trade Program if they meet the thresholds delineated by the Regulation:

• Operators of industrial facilities
• Operators of electricity generation in California
• Importers of electricity from out of state
• Fuel suppliers and distributors
• Carbon dioxide suppliers

For full details, see the Regulation (§ 95811)

• Period 1: 2013-2014
• Period 2: 2015-2017
• Period 3: 2018-2020

Each year starting in 2014:

Covered entities report previous year emissions in September and submit required allowances in November.

• Each year, entities must submit allowances for at least 30% of covered emissions from the previous year.
• The year after the end of a compliance period, entities must submit allowances for remaining covered emissions for the period.

For further details, see CARB’s Regulatory Guidance Section 3.6.2.

Covered entities can save (“bank”) allowances for purposes of future compliance to guard against shortages or price swings. They cannot submit future year allowances for compliance with a previous year (i.e., “borrow” future vintage year allowances).

For further details, see CARB’s Regulatory Guidance Section 5.1.8.

An offset is a credit for greenhouse gas reductions achieved by an activity outside the capped sectors. Under the Program, each compliance offset credit is equal to 1 metric ton of CO₂e.

Covered entities can use CARB-issued compliance offset credits to meet up to 8% of their allowance obligations for each compliance period.

Offset credits can only be quantified using CARB-approved Compliance Offset Protocols. CARB has adopted five Compliance Offset protocols to date:

• U.S. Forest Projects Compliance Offset Protocol
• Urban Forest Projects Compliance Offset Protocol
• Livestock Projects Compliance Offset Protocol
• Ozone Depleting Substance Compliance Offset Protocol
• Mine Methane Capture Projects Compliance Offset Protocol

CARB is currently considering several additional protocols, which would allow additional offset types to generate credits.

See here for detailed and updated information on Compliance Offset Protocols.

California’s cap and trade program linked to the Province of Québec’s cap and trade program on January 1, 2014.

See here for details.