While the federal government continues to tangle with Congress over a climate change law, the California Air Resources Board on Dec. 16 went ahead and endorsed its own cap-and-trade regulation.

The measure was a major component in AB 32, California’s climate change law signed by Gov. Arnold Schwarzenegger (R) in 2006. The regulation sets a statewide limit on the emissions from sources responsible for 80% of California’s greenhouse gas emissions and establishes a price signal needed to drive long-term investment in cleaner fuels and more efficient use of energy, according to CARB. It is also designed to provide covered entities the flexibility to seek out and implement the lowest-cost options to reduce emissions.

The cap-and-trade program also works in concert with other measures, such as standards for cleaner vehicles, low-carbon fuels, renewable electricity and energy efficiency, and complements and supports California’s existing efforts to reduce smog-forming and toxic air pollutants, says CARB.

The regulation will cover 360 businesses representing 600 facilities and is divided into two broad phases: an initial phase beginning in 2012 that will include all major industrial sources along with utilities; and, a second phase that starts in 2015 and brings in distributors of transportation fuels, natural gas and other fuels.

Companies are not given a specific limit on their greenhouse gas emissions, but must supply a sufficient number of allowances (each covering the equivalent of 1 ton of carbon dioxide) to cover their annual emissions. CARB says that each year, the total number of allowances issued in the state drops, requiring companies to find the most cost-effective and efficient approaches to reducing their emissions. By the end of the program in 2020, CARB says there will be a 15% reduction in greenhouse gas emissions compared to today, reaching the same level of emissions as the state experienced in 1990, as required under AB 32.

To ensure a gradual transition, CARB says it will provide significant free allowances to all industrial sources during the initial period (2012-2014). Companies that need additional allowances to cover their emissions can purchase them at regular quarterly auctions ARB will conduct, or buy them on the market.

Electric utilities will also be given allowances and they will be required to sell those allowances and dedicate the revenue generated for the benefit of their ratepayers and to help achieve AB 32 goals.

CARB says that 8% of a company’s emissions can be covered using credits from compliance-grade offset projects, promoting the development of beneficial environmental projects in the forestry and agriculture sectors. Included in the regulation are four protocols, or systems of rules, covering carbon accounting rules for offset credits in forestry management, urban forestry, dairy methane digesters, and the destruction of existing banks of ozone-depleting substances in the U.S. (mostly in the form of refrigerants in older refrigeration and air-conditioning equipment).

The regulation has been in development for the past two years since the passage of the Scoping Plan in 2008. CARB staff held 40 public workshops on every aspect of the cap-and-trade program design, and hundreds of meetings with stakeholders.