Greenhouse Gas Emissions Cap-and-Trade Program Enacted By Washington Legislature – Environment

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The Washington Legislature passed Senate Bill 5126, the Climate Commitment Act,
on April 24, 2021, which establishes a greenhouse gas emissions
cap-and-invest program for utilities, industrial facilities, and
other operations with greater than 25,000 metric tons of emissions.
Covered entities will be subject to a statewide emissions cap that
decreases over time to match the state’s goal of net-zero
emissions by 2050. Under the Climate Commitment Act, the Washington
State Department of Ecology (Ecology) will seek to link the
cap-and-invest program’s market for emissions allowances and
offsets with California’s cap-and-trade program. Revenue from
Washington’s program is intended to fund emissions reduction
projects, emphasizing projects in communities overburdened by the
impacts of climate change and air pollution.

Past Efforts to Limit Greenhouse Gas Emissions in
Washington

Since 2008, the Washington legislature has twice declined to
pass bills that would have capped greenhouse gas emissions. Voters
also twice rejected ballot initiatives that would have established
a carbon tax or fee. In 2015, Governor Jay Inslee directed Ecology
to assess its authority under the state’s Clean Air Act
(Chapter 70A.15 RCW) to regulate greenhouse gas emissions. In
response, Ecology promulgated the Clean Air Rule in 2016 that set
greenhouse gas emission standards and required covered businesses
to reduce emissions by 1.7% every year. The Washington State
Supreme Court ruled in January 2020 that Ecology lacked
authority under Washington’s Clean Air Act to cap greenhouse
gas emissions from indirect emitters like natural gas and petroleum
product distributors, weakening the impact of the rule and
prompting Governor Inslee and legislators to seek another path
toward mandating statewide emissions reductions. In 2020, the
legislature enacted statewide greenhouse gas emissions limits,
requiring Washington to reduce emissions to 45% below 1990 levels
by 2030, 70% below 1990 levels by 2040, and 95% below 1990 levels
by 2050. The 2020 legislation did not authorize any new regulations
to achieve the limits.

The Climate Commitment Act Establishes a Cap-and-Invest
Program

The Climate Commitment Act directs Ecology to establish a cap on
greenhouse gas emissions by determining the proportionate share of
the state’s total greenhouse gas emissions emitted by covered
entities—utilities, industrial facilities, and other
businesses with at least 25,000 metric tons of annual greenhouse
gas emissions. Other entities with lower emissions may opt into the
program.

Based on the statewide cap, Ecology will then distribute
allowances or instruments that allow an entity to emit up to one
metric ton of greenhouse gases. A facility that emits more than its
budgeted allowances must purchase allowances from other entities or
purchase offsets. A facility that emits less than its budgeted
allowances could keep the extra allowances for future use or sell
them to other entities. The annual budget of allowances will
decrease over time to match the state’s emissions limits for
2030, 2040, and 2050.

Compliance Obligations

Covered and opt-in entities must meet their compliance
obligations over a four-year compliance period. The first
compliance period begins on January 1, 2023. Covered and opt-in
entities must transfer compliance instruments equal to their
covered emissions by November 1 for each calendar year with a
compliance obligation. Ecology must develop rules that require
covered and opt-in entities to transfer a minimum of 25% of their
compliance instruments each year to smooth out their compliance
obligations within the compliance period.

Allowances are submitted by the transfer of compliance
instruments from an entity’s holding account to its compliance
account. A covered or opt-in entity that submits insufficient
compliance instruments to meet its compliance obligation will be
subject to penalties. A covered or opt-in entity must transfer
allowances in the order in which they were purchased and may not
borrow from a future allowance year to meet a current or past
compliance obligation. Ecology will retire all transferred
allowances or offset credits used to meet compliance
obligations.

Auctions

Ecology must distribute allowances through a maximum of four
auctions annually. An auction may include allowances from the
current year’s annual allowance budgets and allowances yet to
be distributed from prior allowance budget years. A registered
entity must submit an application to participate and will only be
eligible to participate in an auction after receiving approval by
Ecology. Ecology may require a bid guarantee in an amount greater
than or equal to the sum of the maximum value of bids that will be
submitted by the registered entity.

Registered entities will be subject to auction purchase
limits:

  • A covered or opt-in entity may not buy more than 10% of
    allowances offered during a single auction;

  • General market participants may not buy more than 4% of
    allowances offered during a single auction and may not in aggregate
    own more than 10% of total allowances to be issued in a calendar
    year; and

  • No registered entity may buy more than its bid guarantee or
    allowances that would exceed its holding limit at the time of the
    auction.

Additionally, Ecology must adopt rules to guard against bidder
collusion and minimize the potential for market manipulation. The
legislation prohibits a registered entity from disclosing bidding
information, such as an intent to participate in an auction,
auction approval status, bidding strategy, bid price or quantity,
or bid guarantee. Ecology may cancel or restrict auction
participation if the registered entity has provided false or
misleading facts, withheld material information, or violated
auction rules or registration requirements. Finally, Ecology will
have the authority, in addition to any other penalties and fines,
to cancel or restrict participation permanently or for a specified
number of auctions.

Price Containment

The Climate Commitment Act requires a price ceiling and price
containment reserve to provide cost protection for facilities
obligated to comply with the program. Ecology must establish this
price ceiling at a level sufficient to facilitate investments to
achieve emission reductions beyond those enabled by the price
ceiling. Ecology must issue price ceiling units for sale at a fixed
price if no allowances remain in the allowance price containment
reserve. Funds raised in connection with sales of price ceiling
units must be expended to achieve emissions reductions.

Offset Credits

The Climate Commitment Act permits compliance through offset
credits from projects that result in greenhouse gas emissions
reductions that are real, permanent, quantifiable, verifiable, and
enforceable. These projects must be in addition to greenhouse gas
reductions otherwise required by law and must be certified by a
recognized registry within two years prior to the effective date of
the section of the Act creating offset credits. At least half of
the offset credits must be from projects that provide direct
environmental benefits in Washington state during the first
compliance period, and the remaining offset projects must be in a
linked jurisdiction with Washington. For the second compliance
period, at least 75% of offset credits must be from projects that
provide direct environmental benefits in Washington. However,
Ecology may reduce the requirement if it determines there is not
sufficient offset supply in the state to meet offset demand.

A covered or opt-in entity may use offset credits to meet no
more than 5% of compliance obligations for the period January 1,
2023, through December 31, 2026. A covered or opt-in entity may use
offset credits to meet no more than 4% of compliance obligations
for the period January 1, 2027, through December 31, 2030.

Offset projects on federally recognized tribal land do not count
against the offset credit limits for covered or opt-in entities and
may be no more than 3% of compliance obligation for the period
January 1, 2023, through December 31, 2026, and 2% for the second
compliance period January 1, 2027, through December 31, 2030.

Emissions-Intensive and Trade-Exposed Facilities

The Climate Commitment Act notes the legislature’s intent to
avoid leakage of emissions outside of Washington that may occur
when facilities lose market share to less energy-efficient
businesses not subject to the program’s restrictions. In an
attempt to avoid leakage, the Act establishes a separate compliance
pathway for emissions-intensive and trade-exposed facilities
(EITEs) and grants allowances through 2035 based on each such
facility’s efficiency improvements or other considerations. The
Climate Commitment Act identifies these facilities by industrial
sector and allows manufacturing businesses in other sectors to
apply for treatment as an EITE. The legislature will need to act
again to develop the compliance pathway for these facilities
through the end of the program in 2050.

Electric Utilities

In consultation with the Washington State Department of Commerce
and the Washington Utilities and Transportation Commission, Ecology
must adopt rules to provide allowances at no cost to electric
utilities subject to compliance with the Clean Energy Transformation Act. These
allocations must be consistent with a forecast of each
utility’s supply and demand and the cost burden resulting from
the inclusion of the covered entities in each compliance period.
Allowances allocated at no cost to electric utilities must be
consigned to auction for the benefit of utility customers,
deposited for compliance by the electric utilities, or a
combination of the two. Utilities may not receive any free
allowances after 2045, when all electric utilities must provide
carbon-free electricity under the Clean Energy Transformation
Act.

Natural Gas Utilities

Ecology must, in consultation with the Washington Utilities and
Transportation Commission, adopt rules to provide allowances at no
cost equal to emissions for the natural gas sector and declining
consistently with the cap. Again, allowances must be provided at no
cost for the benefit of utility customers, deposited for compliance
by the natural gas companies, or a combination of the two. However,
65% of the no-cost allowances, increasing at 5% annually, must be
consigned to auction for the benefit of utility customers,
prioritizing low-income customers. Revenues from allowances sold at
auction must be returned by providing nonvolumetric credits on
utility bills, prioritizing low-income customers, or may be used to
minimize cost impact on low-income, residential, and small business
customers for actions such as weatherization, decarbonization,
conservation and efficiency services, and bill assistance.

Other Aspects of the Climate Commitment Act

Revenue from the Climate Commitment Act’s cap-and-invest
program will go to a number of new accounts intended to fund
emissions-reduction projects and climate resiliency in Washington.
Environmental justice assessments by Ecology and recommendations by
an Environmental Justice Council will help identify projects to
receive funding. The legislation requires a goal of 40%, with no
less than 35%, of total investments to provide direct and
meaningful benefits to vulnerable populations within overburdened
communities.

The Climate Commitment Act also requires an air monitoring
network in overburdened communities to identify high priority
emitters and potentially prompt stricter air quality standards.

The Climate Commitment Act preempts the Clean Air Rule
promulgated by Ecology in 2016. The Climate Commitment Act does
not, however, preempt ongoing rulemaking by Ecology to promulgate
the Greenhouse Gas Assessments for Projects rule that will
potentially require life-cycle emissions analysis and mitigation
for greenhouse gas emissions of new or modified industrial and
fossil fuel projects going through state permit review.

Next Steps to Implementation

To implement the cap-and-invest program by January 1, 2023,
Ecology will promulgate rules for the baseline allowance budget,
the allowance auction, and offset credits or projects. Ecology must
also consider ways to develop Washington’s cap-and-invest
program so that it can be linked with greenhouse gas emissions
trading programs in other jurisdictions.

Importantly, the Climate Commitment Act ties the cap-and-invest
program to future enactment of a transportation revenue package.
Before the program may go into effect, the legislature will need to
pass transportation legislation that includes a gas tax increase of
at least five cents per gallon. California is currently the only
other state with a multi-sector emissions cap-and-trade
program.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.



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