Cap-and-Trade in Washington State by 2012? Maybe Not

Cap-and-Trade in Washington State by 2012? Maybe Not

Washington Gov. Christine Gregoire has proposed legislation that would enable the state to participate in a regional greenhouse gas (GHG) cap-and-trade system in 2012.

But the details of how the system would work -- including the contentious issues of offsets and whether emissions credits will be auctioned or freely allocated -- are left to an as-yet unnamed panel to decide. By the time these hard decisions are made, a federal program may or may not be in place, which may or may not preempt some or all of the state provisions.

The regulated community will have to follow both processes because it remains anything but clear which program -- or combination of programs -- Washington entities will be required to comply with.

The Governor’s Cap-and-Trade Bill

Gregoire’s cap-and-trade bill (PDF) directs the Washington Department of Ecology (Ecology) to establish annual GHG caps beginning in 2012. Overall emissions under the cap will be reduced every three years to reach 1990 levels by 2020.

Starting in 2012, the bill would cap emissions from electric utilities and major industrial facilities that produce more than 25,000 metric tons of GHGs annually, such as cement, pulp and paper, and aluminum plants.  The program’s second phase in 2015 would expand to smaller industrial emitters. Motor vehicles and residential and commercial buildings would be covered under the system indirectly, beginning in 2015, through regulation of the potential emissions from fuels.

The bill establishes a new high-level oversight group to provide guidance to Ecology on rulemaking and to make a final recommendation to the governor by May 1, 2011 on the timing and terms of Washington’s participation in the regional cap-and-trade program. 

Devil in the Details: Allocation and Compliance

Ecology would presumably use a combination of auctions and free allocations to distribute emission allowances to regulated entities, but the bill does not stipulate how emission allowances are to be allocated. A previous draft of the governor’s bill would have auctioned 10 percent of total emission allowances and established a priority system for allocating free allowances between electric utilities and other regulated entities.

The final bill introduced two weeks ago removes these provisions entirely and instead creates a public stakeholder group that will make a recommendations on allowance distribution to Ecology, as well as actions to guard against market manipulation and disparities. The stakeholder group’s recommendations must consider the eventual transition to full allowance auctioning, competition of Washington industries and businesses in and out of the state, emission leakage potential, the impact on enhancing transition to clean energies, and strategic uses of auction revenues.

Companies that fall under the cap are opposed to an auction, believing the economic impact would be substantial and would place Washington businesses at a competitive disadvantage. They project the allowances for baseline emissions in 2020, when Washington hopes to have returned to 1990 emission rates, would cost $2.7 billion annually.

At the end of each three-year compliance period, regulated entities would be required to submit sufficient emission allowances or offset credits to cover their emissions for that period. Ecology would be responsible for enforcing compliance with the GHG caps, and the Pollution Control Hearings Board would have jurisdiction over appeals.

Regulated entities not in compliance would be required to obtain three allowances through the secondary market or offsets for each one that is due. Failure to submit penalty allowances could carry a civil penalty of up to $5,000 each. Since each allowance covers just one metric ton of emissions -- and with regulated industrial facilities emitting more than 25,000 tons of GHGs annually -- any significant shortfall in allowances could produce a substantial civil penalty. Failure to comply with other provisions of the legislation could expose entities to civil penalties of up to $10,000 for each day the violation occurs.

Money generated from penalties or auctions would be deposited in a climate protection account used for administrative costs, reducing consumer impacts, worker transition, creating green jobs, supporting emissions-reducing transportation projects, energy efficiency, renewable energy incentives, and carbon sequestration through forestry, agriculture, and other uncapped sources.

The Role of Forestry

Gregoire’s bill includes two provisions specific to the forest industry. First, a “financial incentives” provision requires Ecology to consult with the forest practices board, the department of natural resources, and the forest carbon working group in developing legislation by the end of 2010 to implement a financial incentives program for forestry and forest products. This legislation must specifically recognize activities such as forest maintenance and management, continuing the production of wood products while maintaining or increasing carbon stocks, optional retention of high carbon stocks, and the use of wood building materials by developers and builders instead of more intensive fossil fuel products.

The second provision requires Ecology to consult with the forest practices board, the department of natural resources, and the forest carbon working group to develop a Washington policy for forestry offset projects that includes carbon accounting standards and guidelines for participating managed forests, methods to ensure cap-and-trade eligibility of carbon reduced or sequestered by a forestry offset project, recognition of management activities that increase carbon stocks, and recommendations for how to verify or certify carbon stocks, among other considerations. 

Uncertain Future

While designed to begin in 2012, Washington’s cap-and-trade program would not take effect unless and until it is linked with other state or regional programs. Washington is a member of the Western Climate Initiative (WCI), and the bill proposes a threshold of caps being placed on the majority of the emissions included in the WCI, or an equal amount through links to other regional programs.

Although this appears to be a significant threshold, California’s cap-and-trade program -- also poised to begin in 2012 -- could alone account for a significant percentage of the emissions included in the WCI. The governor may also delay the start of the program or its expansion to include fuels in 2015, or suspend the program altogether in an economic emergency.

The governor’s bill does not fully explain what will happen to the state program if, as expected, a federal cap-and-trade program is put in place in the next few years. A federal cap-and-trade scheme could preempt all or part of the Washington program.

The governor’s representatives acknowledge this but remain hopeful that Washington’s legislation will influence federal actions, and that any federal program will consider the unique emissions profile in Washington and other WCI jurisdictions.

Meline MacCurdy is a Seattle-based attorney with the Marten Law Group whose practice focuses on environmental litigation and permitting. She has a background in state and federal cleanup laws, including brownfield redevelopment and cost-recovery actions, climate change and energy. Marten Law Group produces Environmental News, where this article originally appeared.

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