Picking Up the Pieces – Western Climate Initiative Releases Cap-and-Trade Program Design

On July 27, 2010, the Western Climate Initiative (WCI) released the Final Design for its regional cap-and-trade program. Formed in 2007, the WCI is a partnership between seven states and four Canadian provinces aimed at reducing regional greenhouse gas emissions. The WCI and other regional greenhouse gas reduction programs have recently taken on renewed prominence in light of Congress’ stalled efforts to establish a comprehensive federal emission trading program. However, the sustained economic downturn has withered state-level support for the WCI and cast doubt over the extent to which the program will be implemented by WCI’s January 2012 deadline. Some member states have expressly withdrawn support for the program, while others have indicated that they will not have regulations in place necessary to meet the January 1, 2012, implementation deadline. Nonetheless, the Final Design represents the clearest and most detailed articulation of an alternative to comprehensive federal climate change regulation.

The Final Design calls for a program that will apply to all major economic sectors in the participating states, including electrical generation, manufacturing, and transportation, beginning on January 1, 2012. The Final Design coalesces a series of WCI design recommendations published in a white papers over the past two years, and is intended to guide participating state and provincial governments as they develop the regulations necessary to implement the program.

I. Background on the Regional Greenhouse Gas Trading Programs

The lack of a comprehensive federal program addressing greenhouse gas emissions has spurred the development of regional alternatives. Currently, 23 states and four Canadian providences are participating in some capacity in the three regional programs – the WCI, the Regional Greenhouse Gas Initiative (RGGI), and the Midwest Greenhouse Gas Reduction Accord (MGGRA). These programs currently account for over half of the United States’ GDP and over 37 percent of the United States’ greenhouse gas emissions. As the prospects of a comprehensive federal climate legislation appear increasingly unlikely, the WCI, RGGI, and MGGRA are actively exploring options for linking the regional programs and establishing an expansive emissions trading market.

The WCI was formed in 2007 with the goal of reducing regional greenhouse gas emissions 15 percent below 2005 levels by 2020. Currently, seven states and four Canadian provinces are participating members of the WCI, while a number of other jurisdictions in the United States, Canada, and Mexico have joined as observers. The WCI’s cap-and-trade program is scheduled to take effect on January 1, 2012. The cap-and-trade program will apply to all economic sectors, including emissions from electricity generation, industrial sources, transportation, and residential and industrial fuel combustion.

RGGI, which caps emissions from coal- and gas-fired power plants in ten Eastern and Mid-Atlantic states, is currently the only greenhouse gas cap-and-trade program operating in the United States. RGGI has been conducting emission allowance auctions since 2008. See Cap and Trade: Nation’s First Carbon Auction Underway, Marten Law Environmental News (Aug. 15, 2008). MGGRA is in the nascent stages of development, having released draft program design recommendations last year.

II. WCI’s Final Program Design

The Final Design does not establish an enforceable cap-and-trade program. Instead, it is intended to guide member jurisdictions as they develop the regulations needed to implement the regional program. The Final Design sets minimum requirements for participating in the WCI market, but member jurisdictions are permitted to adopt more stringent standards. The Final Design covers seven principal topics, detailed below.

A. Program Coverage

The WCI cap-and-trade program will cover the six major greenhouse gases (carbon dioxide, methane, nitrous oxide, nitrogen trifluoride, sulfur hexafluoride, hydrofluorocarbons, and perfluorocarbons). Sources in the participating states that emit more than 25,000 metric tons of carbon dioxide equivalents annually will be subject to regulation beginning in 2012, or the first year its emissions exceed that threshold. Electricity sources subject to the cap will include facilities located within a member state or province, or the first purchaser or recipient of power produced outside the WCI’s jurisdiction. Fuel suppliers will be incorporated into the program beginning in 2015.

B. Requirements for Covered Sources

The Final Design outlines the compliance requirements for sources that are subject to regulation under the program. Covered sources will be required to turn in emission allowance certificates for each metric ton of greenhouse gases that they emit at least once every three years. To ensure compliance, covered sources will be required to quantify, monitor, and verify their emissions, and comply with stringent record keeping requirements. The programs greenhouse gas reporting program is detailed in the WCI’s Final Essential Requirements for Mandatory Reporting (July 2009).

C. Compliance Instruments

Beginning in 2012, each partner jurisdiction will establish a cap equal to anticipated 2012 emissions, so emissions reductions will not be required during the program’s first year. WCI previously published guidance on how each partner jurisdiction’s annual allowance budget will be established. See Guidance for Developing WCI Partner Jurisdiction Allowance Budgets(July 2010). Annual allowance budgets will be calculated based on a linear decline based on the 2020 emission reduction goals. The Final Design sets out a number of approaches for recognizing and incentivizing early emission reductions (reductions between 2008 and 2011). In general, all early reduction allowances must be voluntary, additional, real, verifiable, permanent, and enforceable.

D. Distributing Allowances

The Final Design largely leaves the issue of allowance distribution to the discretion of member jurisdictions. Member jurisdictions can choose to allocate emission allowances for free or via an auction, or a combination of both. However, all emission allowance auctions must be conducted on a common auction platform.

E. Program Administration

Participating jurisdictions will retain primary responsibility for implementing the cap-and-trade program, including establishing emission and compliance tracking systems, compliance accounts for covered sources, and enforceable certification requirements. State and provincial regulations will also include enforcement mechanisms, including provisions for penalizing facilities that exceed their emission budget.

F. Offsets

The WCI includes a fairly robust offset program. Offsets may account for up to 49 percent of emission reductions (not 49 percent of emissions). Each member jurisdiction will be required to establish regulations governing the registration, validation, monitoring, quantification, reporting, verification, certification, and issuance of offset credits. The WCI’s detailed recommendations for the design of offset programs were published in July 2010. See Offset System Essential Elements – Final Recommendations Paper (July 2010). The WCI, along with RGGI and MGGRA, also recently published a white paper recommending standardized concepts that would allow for linking the regional programs’ offset programs. See Regional Cap-and-Trade Programs Issue Recommendations for Standardizing Offset Programs, Marten Law Environmental News (June 10, 2010).

G. Linkage to Other Programs

Finally, the Final Design provides recommendations on the issue of how participating jurisdictions can link their cap-and-trade programs with other participating jurisdictions, as well as jurisdictions outside the WCI including RGGI and MGGRA states.

III. The Question of Implementation

While the Final Design represents a significant step towards the WCI’s January 1, 2012, start date, significant hurdles remain at the state level. Indeed, a number of states have either withdrawn their support for the program, or anticipate delayed implementation. In February 2010, Arizona governor Jan Brewer issued an executive order providing that the state would not implement the WCI’s cap-and-trade program and clarifying that any state-level rules regulating greenhouse gas emissions would require clear statutory authority. Governor Brewer subsequently signed legislation (H.B. 2442) which prohibits state agencies from adopting or enforcing a state or regional program to regulate greenhouse gas emissions without express legislative authorization.

In May, Utah officials announced the state would not be in a position to implement a cap-and-trade program in 2012. Dianne Nielson, the energy advisor to Governor Gary Herbert, indicated that Utah would remain a WCI member, but would shift its focus to “complementary policies” including energy efficiency and renewable energy. Washington, Oregon, and Montana have not yet passed the legislation needed to fully implement the WCI’s cap-and-trade program. See New Oregon Climate Change Laws Expand Emission Performance Standards, Renewable Portfolio Standards, GHG Reporting, and Energy Efficiency, Marten Law Environmental News (Aug. 26, 2009). Washington Governor Christine Gregoire, however, has issued an executive order instructing state agencies to continue to participate in developing the WCI. See Washington Governor Gregoire Issues Climate Change Executive Order (May 21, 2009).

Presently, California and New Mexico are the only states that appear to be on track to meet the WCI’s January 1, 2012, start date. The California Air Resource Board (CARB) is currently developing the regulations needed to establish an emission trading program pursuant to California’s bellwether climate change legislation – A.B. 32. CARB released its draft cap-and-trade regulations last fall. Under A.B. 32, CARB must adopt its final regulations by January 1, 2011. However, contentious gubernatorial election politics threaten to derail California’s efforts. Meg Whitman, the Republican candidate for governor, has indicated that her first act as governor would be to suspend work under A.B. 32. Furthermore, a public referendum will appear on the November ballot asking voters to suspend implementation of A.B. 32 until California’s unemployment rate has sunk below 5.5% for four consecutive quarters. The state’s unemployment rate is currently hovering at 12%.

In May, New Mexico published draft rules for implementing a greenhouse gas cap-and-trade program. The program would initially apply to sources that emit over 25,000 metric tons of carbon dioxide equivalents per year. The draft rules condition the state’s implementation of the program on having sufficient emission allowances available within the WCI to make the program efficient and cost effective.

For additional information concerning WCI’s cap-and-trade final design or other climate change matters, please contact Dustin Till or any other member of Marten Law’s Climate Change practice.