Momentous news in the Green supply chain arena, as California approved details of a new cap and trade program for carbon emissions this week, a developing story that has not been well followed but which could potentially represent a seminal change in the whole country's approach to greenhouse gas emissions.

The new set of rules and timelines was passed by the California's Air Resources Board. It will set up the world's second largest cap and trade program behind the one in Europe, with estimates that as much as $10 billion in carbon allowances will be traded on an exchange by 2016.

This particular move is just one of dozens of actions and new rules being put in place as a result of the state's Global Warming Solutions Act of 2006, also known as AB 32, which calls for the state to reduce carbon emissions to 1990 levels by 2020. But the cap and trade program is the one element of the total program that has generated the most interest and business concern.

The new rules survived a statewide vote last year to delay the program until unemployment levels in California dropped, and pressure by some environmental groups to have a direct tax on carbon-based fuels rather than a cap and trade regime, but in the end cap and trade won out.

"We will look back at this as an important date in California's transition to a clean energy economy," said Mary Nichols, the air board's chairwoman.

Detractors say the new program will add to the state's economic woes, drive businesses out of the state, and lead to job losses both from those business moves and from higher costs for the businesses that stay in the state as well as reduced economic activity.

Under the program, "allowances" will be initially created based on current carbon emissions levels. Some 90% of these allowances will be distributed to businesses at no charge based on their current levels of carbon emissions. Each allowance equals one ton of greenhouse gas emissions.

The other 10% will be sold on the open market, generating money for other environment programs. Estimates are these allowance sales will generate as much as $500 million.

Each year, the emissions cap will be reduced. So, businesses must either reduce their emissions, or compete in the exchange for allowances. As caps are reduced, the allowances will become more valuable and the price will go up.

This means energy efficient companies that produce less than the cap for their emissions can sell allowances and make a tidy profit. The theory also is that as the allowances become more expensive, more and more companies will find it makes financial success to find some way to their emissions rather than pay for more allowances.

In other words, no company will be directly forced to limit greenhouse gas emissions. But there will be an increasing financial penalty to not do so.

The program will come in two phases. In the first phase, about 350 of the state's heaviest carbon emitters, such as utilities and the largest factories, will be impacted. Those facilities represent about 20% of the state's total carbon emissions.

In Phase 2, starting in 2015, others, notably limits related to transportation fuels (gas and diesel) will be brought into the program - the point at which all supply chain and logistics operations will be directly impacted.

The caps will apply to a company's total carbon footprint in the state, not any individual facilities.

The European experience with such programs is unclear, as many nations, worried about the cost impact on consumers and not wanting to impact the competitiveness of their companies, have made many exceptions and/or produced more allowances than planned. The result has been that the impact on business there has been modest at best, and carbon emissions have risen rather than declined.

That is why many groups favor the direct carbon tax, which allows less room for manipulation.

Said SCDigest editor Dan Gilmore: "This could turn out to be a tremendously important inflection point in supply chain history. California is still a huge manufacturer, and represents something like 20% of overall demand for most goods. Companies need to be thinking about this right now, and developing strategies for compliance - and alternative supply chain strategies."

More details on this soon from TheGreenSupplyChain.com.

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