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It’s Getting Hot in Here – Western Climate Initiative Updates Scoping, Reporting Rules

July 30, 2008

Last week, the Western Climate Initiative (WCI)[1] announced further refinements to its regional approach to regulating greenhouse gas (GHG) emissions by releasing revised versions of two key documents. The first is a draft scoping paper that broadens the coverage of the WCI’s proposed regional “cap and trade” system to include the transportation sector. With that broadened coverage, the WCI would regulate nearly 80 percent of GHG emissions in member states and provinces. With the recent addition of the province of Ontario, the WCI now covers over 73 percent of the Canadian economy and almost 20 percent of the U.S. economy. Second, the WCI issued draft GHG emission reporting requirements. Both documents are updates to drafts circulated in May, and will be subject to further refinement. While still preliminary, these documents show how the thinking of the Western Climate collaborative has evolved and mark another significant implementation milestone. Final draft rules are set to be issued on September 22.

Changes from Prior Draft WCI Rules

The most significant changes from the previously-released rules are: (1) the inclusion of transportation fuels, residential and small commercial/industrial facilities in the program; (2) refinement of the role of offsets in meeting emission reduction targets; and (3) establishment of an annual reporting threshold of 25,000 tons of carbon dioxide equivalents.

Scope of Coverage

The WCI program covers all six greenhouse gases: carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride. The updated July Draft Design recommendations clarify the emission sources that will be included in the emissions baseline. The most significant updates are clarifications regarding how emissions from the transportation sector and residential, commercial and industrial emitters will be incorporated into the WCI’s emission reduction program. Emissions from electricity generation, including emissions from electricity imported into WCI jurisdictions from non-WCI jurisdictions, are included. Residential, commercial, and industrial fuel combustion at facilities below the WCI thresholds will be included in a second compliance period – starting in January 2015 – as will transportation fuel combustion from gasoline and diesel.

Biomass and biofuels are not included in compliance targets under the new recommendations. Emissions from solid waste management systems (landfills) and wastewater treatment facilities are also not covered. Instead, reductions achieved in those sectors would be included in the WCI offsets program. Discussion of offsets is set for 2009.

Emissions Reporting

Under the new draft rules, emission monitoring and reporting is scheduled to begin in January 2010, with mandatory reporting commencing in January 2011. This timeline is designed to accommodate member states and provinces that already have mandatory reporting in place.[2] While the new rules specify the sort of information emission reports are to include, they do not identify which agency will receive them.[3]

Reporting thresholds have been clarified – any facility emitting 10,000 metric tons carbon dioxide equivalent (CO2e) emissions or more must report emissions annually, although only those facilities with annual emissions in excess of 25,000 metric tons must meet emission reduction compliance targets.[4] The 25,000 metric ton threshold is consistent with California’s Draft Scoping Plan, but lower than the threshold adopted by Québec (100,000 metric tons) and higher than that of Washington State (10,000 metric tons); these are the only three WCI Partners that have already adopted regulatory threshold guidelines.[5] The WCI Partners have reserved the right to use information reporting by the smaller emitters to adjust the compliance threshold in the future.[6]

One question that remains open from the previous draft rules is whether emission reports go directly to The Climate Registry, a North American organization that provides guidelines for entity-wide reporting across sectors and a registry service, or to Partner agencies first and then to The Climate Registry.[7] In addition, decisions regarding whether emission reports are to be verified by third-party agents or government are left to the WCI Partners. The Climate Registry has already adopted requirements for quantification emissions.[8] The Reporting Subcommittee is currently drafting a “Third Party Verification” paper and will be soliciting public comments in the future;[9] it remains to be seen whether the Committee will adopt the Climate Registry’s emissions quantification system.

Compliance Options and Offsets

Under the new rules, regulated entities will have three basic compliance options:

  1. Do it yourself. Regulated entities could reduce or remove emissions using improvements in processes or investment in energy-efficient technology;
  2. Generate or purchase allowances. Regulated entities may use banked allowances that they generated or purchase banked allowances previously issued to other entities;
  3. Carbon offsets. Regulated entities may use credits generated by recognized offset projects that reduce or remove GHG emissions.[10]

The WCI Partners have yet to establish limits on the use of offsets, but are considering a limit of no greater than ten (10) percent of an individual entity’s compliance obligation.[11] This relatively low threshold is consistent with the WCI’s stated desire that a substantial portion of the emissions reductions represented by offsets occur at WCI covered sources.[12]

The WCI Partners have identified agriculture (soil sequestration and manure management), forestry (reforestation, forest management and preservation) and waste management (landfill gas and wastewater management) as priority projects for investigation of offsets, though the draft rules emphasize that this prioritization does not guarantee that these projects will ultimately be in an offset system.[13]

Starting in 2009, the WCI Partners will develop protocols for the types of projects that will be acceptable as offsets. The Partners intend to use offset protocols that are standardized to the extent possible, though the Partners may adopt additional criteria to ensure that WCI approved offset projects can be used in the cap and trade program. The Partners are currently considering restricting the amount of offsets from projects located outside of WCI jurisdictions, though no final rule on this point has yet been adopted.

Apportionment and Auctions

Emissions allowances are to be apportioned by each WCI Partner state or province, though the apportionment methodology is still under consideration and will not be completed until the fall. The main change on allowance allocation is the inclusion of additional details on market regulations.[14] Each Partner state will determine how to allocate its allowances, and a percentage (not yet specified) will be dedicated to public purposes such as energy efficiency incentives or research and development of clean technologies. In the past, WCI participants had suggested that between 25 and 75 percent of allowances would be auctioned, but the current draft recommendations do not address these recommendations.

Implementation Deadlines

WCI’s cap and trade program is to commence on January 1, 2012 and operate in three-year compliance periods. Regulated entities will have to begin to measure and monitor their greenhouse gas (GHG) emissions in January 2010.

Other Developments, Next Steps

The WCI’s geographic scope has extended eastward as a result of Canadian province participation. WCI added the Canadian province of Ontario to its list of Partners, bringing the total number of U.S. states and Canadian provinces that have committed to economy-wide emission reductions to 11. With the addition of Ontario, WCI participants represent 20 percent of the United States’ economy and 73 percent of Canada’s economy.[15]

At the stakeholders meeting held yesterday in San Diego, it was announced that final draft rules will be issued on September 22, though they will be refined through the end of the year. Reporting requirements are scheduled to be finalized in December 2008. Public comments on both documents should be received by August 13, 2008 and can be submitted to the WCI via its website at this link.

The WCI’s cap and trade program will require major reductions in GHG emissions across multiple sectors of the economy, and have significant economic impacts that will extend beyond the sectors subject to the emissions caps. In addition, the breadth of the WCI’s membership makes it likely that the program could influence the design of national Canadian and U.S. cap and trade programs.

For more information, contact any other member of our Climate Change/Sustainability Practice Group.

[1] The WCI is a collaboration among U.S. states, Canadian provinces and Mexican states to develop a greenhouse gas emission reduction strategy and cap-and-trade market for western North America. For more information on the WCI, go to Western Climate Initiative.

[2] WCI - Draft Essential Requirements of Mandatory Reporting for the Western Climate Initiative, Attachment A, Table A3 (July 23, 2008).

[3] WCI - Draft Design of the Regional Cap-and-Trade Program, Section 10 (July 23, 2008); WCI - Draft Essential Requirements of Mandatory Reporting for the Western Climate Initiative (July 23, 2008).

[4] WCI - Draft Design of the Regional Cap-and-Trade Program, Section 3 (July 23, 2008).

[5] WCI - Draft Essential Requirements of Mandatory Reporting for the Western Climate Initiative, Attachment A, Table A1 (July 23, 2008).

[6] WCI - Draft Design of the Regional Cap-and-Trade Program, Section 10 (July 23, 2008).

[7] WCI - Draft Essential Requirements of Mandatory Reporting for the Western Climate Initiative (July 23, 2008).

[8] The Climate Registry - General Reporting Protocol, Version 1.1 (May 2008).

[9] WCI - Draft Essential Requirements of Mandatory Reporting for the Western Climate Initiative (July 23, 2008).

[10] Id.

[11] WCI – Draft Design of Regional Cap-and-Trade Program (July 23, 2008), Section 9.

[12] Id.

[13] Id.

[14] WCI - Draft Design of the Regional Cap-and-Trade Program, Sections 7 and 8 (July 23, 2008).

[15] WCI - Ontario Joins Largest North American Climate Collaborative (July 17, 2008).

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