24 Oct 2011

The California Air Resources Board (ARB) has adopted final regulations for the world's second largest cap-and-trade system, despite unresolved concerns over allowance allocations, buyer liability for offsets and the size of the overall market.

Most regulated entities are expected to purchase offsets to meet their compliance requirements. But if an offset is subsequently deemed invalid, the buyer will be held liable under the rules.

Allan Bedwell of San Francisco-based BGC Environmental Brokerage Services told ARB staff that buyer liability would drive up the cost of compliance. "[The ARB] is having a chilling effect on companies being able to cost-effectively comply with this regulation," he said. "We've seen in the market place a difference between allowances, with no buyer liability, compared to a 50% lower price for offsets."

Limited liquidity in California's relatively small market has also raised concerns. ARB staff said that they would return next year with recommendations on how to link with the Western Climate Initiative, potentially expanding the programme to seven US states and four Canadian provinces.

Staff also said they would clarify compliance obligations for electricity imports into the state, in the middle of next year. Mary Nichols, ARB chairwoman, said: "Anything that changes the way the electricity market works is something we need to worry about. We don't have the answer at this moment, but before the programme launches we need to have this squared away."

Last month, the Supreme Court in California ruled that the ARB could continue to implement its cap and trade system. Environmental activist group the Association of Irritated Residents has appealed the decision and indicated that it will launch a fresh legal challenge.