S&P Report Analyses How California’s Cap and Trade Program Could Affect Electric Utilities and Refineries

No state has leapfrogged past federal efforts to limit carbon emissions and other greenhouse gases faster than California, which, despite its economic difficulties, put in place final regulations in December 2010, to start a cap and trade market in 2012. The Standard & Poor’s (USA) Ratings Services report, titled California Set To Launch Ambitious Cap And Trade System As Federal Efforts On Pollution Control Falter, provides an overview of the newly approved framework in California, although we can’t fully assess the potential credit effect for companies until all the rules are finalized. The report provides our preliminary observations on the impact of the state’s cap and trade plan and other greenhouse gas regulations on the two largest affected sectors, electric utilities and refiners, which together produce an estimated one-third of the greenhouse gas emissions in the state.

California’s cap and trade is just one part of a larger number of programs the state adopted under Assembly Bill 32 (AB32), a sweeping carbon regulation bill that was signed into law in 2006. AB32 requires California to reduce greenhouse gas emissions to 1990 levels by 2020. The state expects to reach more aggressive goals of 80% below 1990 levels by 2050.

Given that California is by itself the world’s eighth-largest economy, the scope of its cap and trade program would make it the second-largest economy in the world to operate a carbon emission allowance market behind Europe, which began carbon regulation in 2005.