CORRECTED-UPDATE 1-California carbon market on ice-Point Carbon

(Corrects last name of specialist to Costantino throughout)

(Published by Thomson Reuters Point Carbon)

By Valerie Volcovici

WASHINGTON, May 20 (Reuters) - A California judge has suspended the implementation of an emissions cap-and-trade scheme till air regulators can examine alternatives, dealing another setback to an ambitious program that could serve as a model for other states.

San Francisco Superior Court Judge Ernest Goldsmith ruled that the California Air Resources Board (ARB) should "take no action" to implement cap-and-trade plans until it analyzes other greenhouse gas reduction policy options.

The scheme is designed to help meet aggressive greenhouse gas reduction targets. But last month, Judge Goldsmith said the ARB, which crafted the state's cap-and-trade scheme, failed to adequately study alternatives to creating a carbon market.

The ARB said it will appeal the decision.

The proposed cap-and-trade program is a central part of the state's AB 32 law, which requires the reduction of greenhouse gas emissions to 1990 levels by 2020 via a mix of measures, including a renewable energy production mandate.

California is the last hope of U.S. environmentalists to revive a national climate change agenda. The state plans to set a limit on emissions and let factories and power plants trade rights to pollute. The hope is that the most efficient will profit from their knowledge and new industries will emerge.

If it succeeds, cap-and-trade could spread to other states. Similar legislation failed in the U.S. Congress and many hope national leaders would reconsider if California does well.

But the ARB was sued early this year by an environmental justice group called the Association for Irritated Residents, who charge that a greenhouse gas market could cut air quality in some parts of the state while others benefit.

Friday's decision appears to spare other aspects of AB 32, enabling their implementation to proceed on schedule.

"It was a big win for the ARB in that they will be able to proceed with other measures of the scoping plan," said Aron Potash, a Los Angeles-based attorney at Latham and Watkins.

The ARB has 15 months to comply with the California Environmental Quality Act, the law the judge determined obliges regulators to conduct further study.

Goldsmith said the writ "shall specifically enjoin ARB from engaging in any cap-and-trade related project activity" until it demonstrates it has extensively examined carbon market alternatives.

"This includes any further rulemaking and implementation of cap and trade," the judge wrote.

NO WORRIES?

The ARB voiced its objection Friday.

"We respectfully disagree with the court's determination," said ARB spokesman Stanley Young. "At the same time, ARB is working on a revised Scoping Plan alternatives analysis that will fully address the issues raised in the court's decision."

"We intend to bring the revised analysis to the Board for consideration as soon as possible."

Jon Costantino, a regulatory specialist on California climate and clean energy policy for Manatt, Phelps & Phillips, LLP, said the ARB was likely to submit their analysis way before the 15-month deadline.

"The ARB has been working on this (analysis) since the tentative ruling on the case in January," Costantino said.

Meanwhile, some of the key decisions that prospective carbon market participants are awaiting from the ARB, such as how allowances will be allocated to emitters and further specifics on carbon offset use, will be left unanswered.

And scheduled public hearings on the cap-and-trade scheme announced in February cannot go ahead.

The ARB had been working behind the scenes to carry out the next phases of its market implementation, but the ruling specifically puts that process on ice, Costantino said.

Brokers and traders have been eyeing the legal proceedings to get a sense of how far back the carbon market's start date could be pushed. Josh Margolis, CEO of environmental brokerage Cantor CO2e, said he doesn't expect much of a setback.

"Smart market participants will see the silver lining," he said, adding that the judge did not rule that the ARB's cap-and-trade focus was wrong, but that he just wanted to see more work to back it up.

"This is an administrative, not a substantive, problem." (Editing by Edwin Chan and Richard Chang)