The California state legislature last night approved a bill extending the state's carbon cap-and-trade program from 2020 to 2030, while ensuring statewide greenhouse gas emissions are reduced to at least 40% below the 1990 level.

The measure passed both houses of the state legislature by the two-thirds margin necessary to protect the law from future legal challenges relating to the enactment of new taxes and fees in the state. The Senate approved the measure 28-12, while the Assembly passed it 55-22.

AB 398 was accompanied in passage by a separate bill to address air quality in the state, as well as approval for a ballot measure that, if approved by voters, will give state lawmakers more say over how the proceeds of quarterly carbon allowance auctions are spent. Both were important provisions necessary for AB 398 to garner its two-thirds majority.

In addition to authorizing the California Air Resources Board (ARB) to manage the cap-and-trade program until the end of 2030, the bill makes significant changes to the structure of the cap-and-trade market. These changes include:

• Mandates ARB to establish a price ceiling for carbon allowances. When prices reach the ceiling, ARB will release for sale allowances from the price containment reserve. If the reserve is exhausted, ARB will offer allowances to covered entities at the ceiling price, with proceeds going toward emission reduction projects in the state.
• Establishes allowance price 'speed bumps' at two levels below the price ceiling. Covered entities will be offered allowances from the price containment reserve at ARB-determined price containment points. The price containment reserve will be filled with current vintage allowances that go unsold at auction for more than 24 months.
• Reduce the offset usage limit from 8% of a covered entity's compliance obligation to 4% from 2021 to 2025 and 6% from 2026 to 2030 - with no more than half of the offsets sourced from projects outside of California. A task force is established to consider new offset protocols for projects in California with a priority in disadvantaged communities.
• Requires ARB to establish allowance banking rules to discourage speculation and avoid "financial windfalls."

AB 398 will now be sent to Governor Jerry Brown for signature, which is expected in the coming days.

For additional information on AB 398 - and its impact on the market - please contact our U.S. Carbon Markets team at: +1 415.963-9138 or +1 914.323.0265.