01.26.15

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Washington Weighs Carbon Cap

PRACTICE GROUPS


Last week, Washington state legislators introduced Governor Jay Inslee’s $1 billion plan to regulate carbon emissions from 130 industrial facilities, fuel distributors, and electricity importers.  While current political dynamics may hold up the Carbon Pollution Accountability Act (CPAA) of 2015, with state and federal action on carbon emissions in the works, businesses should understand how carbon cap-and-trade programs like the CPAA could affect them and identify opportunities to shape these programs going forward.

Carbon Allowance Auction and Trading

The CPAA’s centerpiece is a market for auctioning and trading carbon emissions allowances that would launch in 2016.  The number of allowances auctioned would be determined by a carbon budget set by the Department of Ecology (Ecology) to reach greenhouse gas (GHG) emissions reduction targets established by statute.  The market would operate under a number of constraints, including:  (1) a price floor, (2) an allowance reserve to alleviate upward price pressure, and (3) limits on the market power exercised by program participants.

In addition to the auction, businesses could sell or buy allowances among each other, using an online registry to track the exchanges.  These allowances must be submitted to the state according to certain compliance schedules.  Carbon offset credits could be submitted instead to cover a small proportion of emissions.

Covered Entities

The CPAA would require participation by:  (1) facilities with at least 25,000 metric tons of annual GHG emissions, (2) electricity suppliers who import electricity from an out-of-state source that has at least 25,000 metric tons of annual GHG emissions, and (3) fuel suppliers that sell or distribute enough fuel to cause 25,000 metric tons of annual GHG emissions.  An estimated 130 businesses in Washington would be covered.  The CPAA also contemplates voluntary participation in the carbon allowance market by entities with lower and even no carbon emissions.

Emissions exempt from the program would include those from:  (1) biomass combustion when the fuel is harvested according to various forest or habitat management plans, (2) biofuel combustion, (3) unintentional “vented or fugitive emissions,” (4) national security facilities, (5) the state’s one existing coal-fired power plant, (6) municipal solid waste landfills, (7) industrial landfills, (8) industrial wastewater treatment, and (9) manure management.

Carbon Offset Program

Carbon offset credits could be used instead of allowances for up to eight (8) percent of an entity’s carbon emissions.  Offset projects would be subject to numerous requirements, including registration with the state and verification by independent, accredited third parties.  The projects also must be “quantifiable, permanent[,] enforceable[, and] in addition to other existing requirements.”  Until 2021, the only eligible projects would be those that reduce emissions from ozone-depleting substances or by reducing GHG emissions through anaerobic digestion of organic waste, capturing methane from resource extraction and transmission projects, and sequestering carbon through forestry and agricultural practices.

Linkage with Other Jurisdictions

The CPAA would allow the integration of its cap-and-trade program with market-based carbon reduction programs in other jurisdictions.  If the programs were harmonized, market participants could utilize allowances and carbon offset credits from other jurisdictions to satisfy their Washington compliance obligations.

Issues for Consideration

  • Even if the legislation is enacted without major changes, legal challenges based on issues like federal preemption could push back program implementation several years.
  • A host of key program elements would be left to state agency rule-making, creating uncertainty as to actual costs and operations associated with the program.  A non-exhaustive list of agency action areas includes the carbon cap, the carbon market price floor and rules for relieving upward price pressure, protocols for carbon offset projects, and the process for exchanging carbon allowances and offset credits.  Also, the initial rules to implement the program would not be subject to a full-blown notice-and-comment process.
  • The Washington Office of Financial Management has estimated that auctioning allowances would raise nearly $1 billion.  However, gaps filled by agency rule-making make it difficult for businesses to assess impacts.  In addition, only a small portion of the allowance revenue would be guaranteed to reduce costs for affected businesses.
  • The CPAA contains policies to support stakeholders, like the timber and forest products industry and rural communities, that would be affected by carbon regulation.  These entities could benefit by taking advantage of available support.  However, the scope and content of the support is ambiguous in the draft legislation.

By David C. Weber and Augustus E. Winkes

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