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Cap-and-Trade Legislation Proposed in Washington State

December 12, 2008

Washington Governor Christine Gregoire proposed legislation this week to meet statewide and regional greenhouse gas (“GHG”) emission reduction targets by establishing a cap-and-trade system beginning in 2012. Washington joins California, which announced its own, somewhat different, cap-and-trade program this week as well. Washington’s system would auction only a portion of GHG allowances, and distribute the remaining allowances for free. California proposes to auction 100% of its GHG allowances. Both Washington and California, along with several other states and Canadian provinces, are members of the Western Climate Initiative (“WCI”). WCI members have pledged to meet regional GHG reduction goals and have developed a joint framework for a regional cap-and-trade system, although the allocation of emission allowances and other details are largely left up the individual states. Varying state standards within the WCI, as well as the existence of nearby states that are not yet subject to GHG emission limits, creates at least the potential for competition for industries which emit large amounts of GHGs.

In the case of Washington, large industrial manufacturers, such as cement, pulp and paper and aluminum plants, would receive a threshold GHG emission allowance, but would have to either rapidly curtail their existing emissions or purchase an increment of allowances to cover the remainder. Electric power generators would receive a larger set of allowances free of charge, but also would need to offset load growth and some portion of their existing emissions by purchasing allowances or increasing their renewable energy sources – a step that may be required anyway to meet renewable portfolio standards.[1] Emissions from motor vehicles, residential and commercial buildings and smaller industrial emitters would come into the system in 2015. They would be regulated indirectly, by a cap on emissions from fuel production and distribution.

In order to meet its state and regional reduction targets, however, Washington State – which gets much of its electricity from renewable hydroelectric power – will have to achieve reductions in emissions from more than its manufacturing and utility sectors. That point was brought home in a report authored by a state GHG advisory committee, known as the Climate Action Team (“CAT”). The CAT issued its recommendations for GHG reductions to supplement the proposed cap-and-trade program in late November, 2008. Both initiatives are discussed in this article.

I. The Governor’s Proposed Cap-and-Trade Legislation

The Governor’s proposal would direct the Washington Department of Ecology (“Ecology”) to establish annual GHG caps beginning in 2012. Overall emissions allowed from regulated entities would be reduced every three years, toward the goal of returning to 1990 levels by 2020.

Starting in 2012, the draft legislation would cap emissions from electric utilities and industrial facilities that annually emit more than 25,000 metric tons of GHGs.[2] Ecology would use a combination of auctions and free allocations to distribute emission allowances to regulated entities. For the first three-year compliance period (2012-2014), 10 percent of the total emission allowances would be distributed via an auction, but electric utilities would receive allowances free of charge based on their historic emissions (less the percentage by which the statewide cap is reduced each year).[3] The allowances that remain would be distributed for free to industrial facilities, after accounting for the 10 percent that would be auctioned, those allocated to the electric power sector, and some that may be reserved by rule for other purposes. Industrial facilities and any utilities desiring additional allowances would have to obtain them through the auction or a secondary trading market. Money generated from GHG auctions would be deposited in a Climate Improvement Account, and could be used only for specific purposes, including worker transition and creating green jobs, promoting emission reductions and carbon sequestration through forestry, agriculture, and other uncapped sources, and reducing consumer impacts.[4]

The legislation also anticipates that regulated entities would be able to demonstrate compliance with the cap by purchasing a limited number of emission allowances from other regional trading systems (e.g. the Regional Greenhouse Gas Initiative or “RGGI”)[5] or by purchasing offsets.[6] At the end of each three-year compliance period (e.g. 2012-2014), regulated entities would be required to submit sufficient emission allowances or offset credits to cover their emissions for that period.[7]

The legislation proposes incorporating fuel use (both transportation and non-transportation[8]) into the program at the beginning of the second compliance period in January 2015. The legislation specifically excludes biofuels and fuels used by aircraft, trains, or marine vessels.[9] Although the legislation does not explicitly indicate at what point in the supply chain fuels should be regulated, it indicates that they will not be regulated at the consumer level.[10] Consistent with the WCI’s recommendations, it is expected that the point of compliance for fuels will be at the distributor level.[11] Beginning in 2015, allowances for transportation (but not residential or commercial) fuel use will be available exclusively through the regional auction.[12]

Ecology would be responsible for enforcing compliance with the GHG caps.[13] If a regulated entity failed to turn in sufficient allowances or offset credits to demonstrate compliance, Ecology would be authorized to issue an enforcement order requiring the entity to obtain three allowances for each one that is due.[14] In other words, the entity would be required to obtain additional credits through the secondary market or offsets. Failure to comply with other provisions of the legislation could expose entities to civil penalties up to $10,000 per each day the violation occurs.[15] The Pollution Control Hearings Board (“PCHB”) would have jurisdiction over appeals of orders and penalties.[16]

The draft legislation leaves significant detail for future regulatory development by Ecology. For example, while the legislation proposes auctioning 10-percent of emission allowances, it indicates that additional legislative action will be necessary to approve the auction design before Ecology could carry out an auction.[17] The draft legislation would also direct Ecology to prepare the following reports and regulations over the next two years which would flesh out the details of the cap-and-trade program:

  • December 1, 2010 – Submit report and proposed legislation for the design of the GHG auction mechanism.[18]
  • December 31, 2010 – Develop rules to implement the program described in the legislation.[19] The rules would go into effect May 1, 2011. Issues identified in the draft legislation that would require additional regulatory development include:
    • Determining what entities have the compliance obligation with respect to regulated fuels (e.g. distiller, wholesale distributor, or retail distributor);[20]
    • Establishing allowance set-asides for new entities doing business in Washington (i.e. new market entrants) after the cap is in place;[21]
    • Developing criteria for offset projects and limits on the amount of offset credits that can be used to demonstrate compliance;[22]
    • Developing criteria for using allowances from other cap-and-trade programs (e.g RGGI);[23]
    • Assessing options for recognizing early action credit (i.e. credit for GHG reductions before 2012), including whether to recognize early actions, and procedures for qualifying for early action credits.[24]
    • Establishing processes for distributing allowances, including a distribution schedule, procedures for banking allowances, and restrictions on borrowing allowances;[25]
  • January 15, 2011 – Submit report on the design of an efficient and functional GHG market, including auditing procedures, measures for addressing market emergencies, and provisions to prevent market manipulation and excessive speculation.[26]

II. The CAT Recommendations For GHG Reductions Beyond The Cap

The Governor’s cap-and-trade system, even if enacted in its proposed form, would not, by itself, achieve Washington’s aggressive emission reduction goals. Additional reductions will have to come from other strategies. While those strategies have not yet been proposed by the Governor, they may be proposed in bills sponsored by others, and they will likely have strong backing from the state’s environmental community. Many of those strategies can be found in the CAT’s Final Report. The report, issued in November, 2008, includes 14 recommendations for reducing GHG emissions from the built environment, transportation, and solid waste. The CAT Report also offers suggestions for integrating climate change issues into evaluations conducted under the State Environmental Policy Act (“SEPA”), Washington’s analogue to the National Environmental Policy Act (“NEPA”).

A. Buildings- Energy Efficiency and Community Design

The CAT recommended revising the Washington Energy Code, part of the State’s building code, in 2009 to achieve a 30 percent reduction in energy use by new buildings compared to the requirements of the 2007 Code. The CAT also called for code revisions that would increase efficiency standards for remodels and retrofits of existing structures.[27] These code changes could be made without legislative action.

The CAT also recommended that the initial round of code revisions be followed by legislation requiring continuous improvement in building energy efficiency standards, with a goal of reducing energy use per square foot and increasing reliance on renewable energy sources.[28] Governor Gregoire has not indicated whether she will endorse the CAT-recommended changes in the building energy code, or propose the legislation recommended by the CAT.

The CAT projected that increasing building energy efficiency standards could reduce annual GHG emissions by 6.4 million metric tons by 2020.[29] This is the single largest contributor to the emission reductions recommended by the CAT.

Other CAT recommendations included:

  • New tax incentives for energy efficiency investments in residential and non-residential buildings.[30]
  • Significant investments in upgrading the efficiency of existing public buildings, as well as raising the standards for new public buildings.[31]

Given Washington’s projected $5 billion state budget shortfall, it is not clear which, if any, of these incentives will be advanced in the coming legislative session. Governor Gregoire’s proposed budget will be released later in December, and administration officials have indicated it is likely to include modest climate-related incentives.

Finally, the CAT recommended “benchmarking” of the energy performance of private residential and non-residential buildings. This is intended to provide common methods of evaluating and reporting building performance, and to require disclosure of that performance during real estate transactions.[32]

B. Transportation

The CAT’s transportation recommendations focus on ways to reduce per capita vehicle miles traveled (“VMT”), as a surrogate for GHG emissions from the transportation sector.[33] This follows direction provided by Washington’s legislature in HB 2815, which called for reducing VMT by 18 percent by 2020, 30 percent by 2035, and 50 percent by 2030.[34]

The CAT recommendations for reducing VMT include:

  • Using transportation pricing – tolls or other user fees – to discourage single-occupancy driving while raising funds for transit and climate-friendly transportation projects;
  • Encouraging compact and transit-oriented land development;
  • Regulating the supply of parking, particularly in dense urban areas;
  • Expanding transit, rideshare, and other commuter choices, including human powered commuting; and
  • Using GHG/VMT impacts as a criterion for infrastructure funding decisions.[35]

Several of these recommendations are likely to prove controversial. For example, the idea of imposing tolls for the purpose of reducing driving may be a difficult sell given the economic conditions already facing Washington drivers. Similarly, given the current real estate market and economic conditions, there may be little support for discouraging certain types of development, even if it is more carbon intensive. As with the CAT’s “built environment” recommendations, Governor Gregoire has not indicated whether she will propose legislation to implement any of the transportation recommendations.

C. Integrating Climate Change Into SEPA Analysis

The CAT also evaluated options for assessing and mitigating GHG emissions under the State Environmental Policy Act (SEPA).[36] Over the past two years, Washington’s SEPA and similar environmental review statutes, which require planning agencies to consider environmental impacts as part of the project review and approval process, have taken an increasingly prominent role in efforts to address climate change. In California, for example, lawsuits filed under the California Environmental Quality Act (CEQA) have raised climate change challenges to a broad range of projects, including private developments and county-level comprehensive land-use plans.[37] Although Ecology issued a letter earlier this year to all potential SEPA lead agencies (including municipalities, counties, and state departments) indicating that authority already exists under SEPA to require climate change assessments, there are currently no state-wide SEPA standards with respect to climate change.[38]

Two Washington jurisdictions, King County and the City of Seattle, however, have enacted measures which require project proponents to quantify GHG emissions as part of the SEPA review process. Currently, neither King County nor Seattle affirmatively require GHG mitigation under SEPA. King County, however, has proposed legislation that would amend its SEPA ordinance and require all projects to mitigate GHG emissions by 15 percent below a “business as usual” approach.[39] The draft ordinance identifies a non-exhaustive list of potential mitigation measures, including high efficiency building design (i.e. LEED or Build Green) and facility-specific renewable energy. Significantly, King County has proposed amendments to its comprehensive plan that would allow it to condition or deny project approvals based on GHG emissions or other climate change considerations.[40]

The CAT set out to develop mechanisms for evaluating climate change under SEPA in a manner that both mitigates GHG emissions from projects covered under SEPA and minimizes the “legislation by litigation” that has occurred in California. The CAT advanced eleven SEPA-related recommendations, including:

  • Revise the SEPA checklist and publish clear guidance for evaluating climate change impacts;
  • Develop simple tools for quantifying GHG emissions for “typical” SEPA projects.[41] These tools should be designed to minimize the burdens and costs for both project proponents and lead agencies.
  • Develop an approach for determining the “significance” threshold.
  • Develop SEPA-related incentives and disincentives to promote climate-friendly development (i.e. leveraging SEPA), such as neighborhood or district-level SEPA exemptions to promote compact, “climate-friendly” development.[42]

The CAT’s SEPA recommendations have no effect without further regulatory work by Ecology and other agencies. In other words, they help clarify the questions but did not provide any concrete answers for project proponents and lead agencies. For example, it remains unclear at what point project emissions rise to the level of “significance” and which would trigger affirmative mitigation options and a lead agency’s substantive SEPA authority. While the CAT identified this as an issue for further development, project proponents and lead agencies remain, for the time being, exposed to potential litigation challenges.

D. Solid Waste

Through waste reduction and recycling efforts over the last 20 years, Washington currently diverts about 48 percent of the solid waste generated in the State to reuse, recycling, and other beneficial uses.[43] The CAT estimates that further waste reduction and recycling efforts could reduce GHG emissions by almost 6 million metric tons by 2020,[44] which is as much as it estimated can be achieved by steadily increasing building energy efficiency standards over the same period.

Most of the projected reduction would come from optimizing the collection of recyclables.[45] Fully implementing this recommendation would require all residential and commercial operations in the State to segregate wastes into at least three categories: recyclable materials; organic materials; and residual wastes. It would also require municipalities to establish or upgrade recycling programs, including new anaerobic digester programs for organic wastes.[46] Controlled anaerobic digestion of these wastes can be used to generate power, and could reduce GHG emissions up to 2 million metric tons annually through avoided methane production.[47]

As with the CAT’s transportation recommendations, the solid waste recommendations cannot be implemented without regulatory changes, including at the local municipal level, and some of them may require legislation. And as with the other CAT recommendations, it is not yet clear whether the solid waste recommendations will be advanced in the current legislative session.

III. Conclusion

These latest proposals for Washington State underscore the complexity of achieving the GHG reduction goals that Washington and other States have committed to pursue over the next several decades. They also prefigure debates that are likely to be joined at the federal level in the coming year, as Congress begins to get serious about climate change legislation.

For more information on Washington State climate change legislation, rulemaking and policy development, please contact Brad Marten, or any other member of Marten Law Group’s Climate Change and Sustainability Practice Group.

[1] See Renewable Portfolio Standards Drive Market for Alternative Energy, Marten Law Group Environmental News (November 20, 2008).

[2] Draft Legislation at § 6(1). Under the draft legislation, Ecology would have the authority to expand the program’s scope to smaller sources through regulation. See Draft Legislation at § 6(3).

[3] Draft Legislation at § 5(1)(a).

[4] Draft Legislation at § 11.

[5] Draft Legislation at § 4(4).

[6] Draft Legislation at § 9(1).

[7] Draft Legislation at § 10(1).

[8] Non-transportation fuel use would include, for example, residential oil and natural gas combustion, and on-site fuel combustion at commercial and industrial facilities.

[9] Draft Legislation at § 2(26).

[10] Draft Legislation at § 6(3).

[11] WCI Final Design Recommendations (Sept. 2008).

[12] Draft Legislation at § 5(1)(b)(i).

[13] Draft Legislation at § 10.

[14] Draft Legislation at § 10(4).

[15] Draft Legislation at 10(5).

[16] Draft Legislation at 10(6).

[17] Draft Legislation at § 8(1).

[18] Draft Legislation at § 8(1).

[19] Draft Legislation at §§ 14(1)-(2).

[20] Draft Legislation at § 6(3).

[21] Draft Legislation at § 5(4).

[22] Draft Legislation at §§ 9(1), 10(3). The WCI Design Recommendations indicate that no more than 49% of an entities compliance can be demonstrated through offsets.

[23] Draft Legislation at § 4(4).

[24] Draft Legislation at § 4(5).

[25] Draft Legislation at § 4(5).

[26] Draft Legislation at §§ 7(1), (3).

[27] CAT Final Report, p. 17.

[28] CAT Final Report, pp. 17-18.

[29] CAT Final Report, p. 18.

[30] CAT Final Report, p. 13.

[31] CAT Final Report, p. 15.

[32] CAT Final Report, p. 15.

[33] CAT Final Report, p. 19 n. 12.

[34] ESSHB 2815, § 8.

[35] CAT Final Report, pp. 25-31.

[36] SEPA is codified at Chapter 43.21C RCW.

[37] Settlement Requires California County to Inventory and Mitigate Greenhouse Gases, Marten Law Group Environmental News (Sept. 5, 2007).

[38] Letter from Department of Ecology Director Jay Manning (Apr. 30, 2008). SEPA regulations already include “climate” as an element of the environment that must be assessed under SEPA. WAC 197-11-444(1)(b)(iii).

[39] Draft King County SEPA Climate Change Ordinance (Apr. 30, 2008).

[40] Proposed King County Comprehensive Plan Element E-207.

[41] For example, King County has developed an electronic spreadsheet which calculates approximate project emissions using basic design information provided by the project proponents such as the number of units and square footage.

[42] California recently adopted legislation that uses the promise of a streamlined environmental review process to incentivize developers to incorporate greenhouse gas reduction strategies into new residential and mixed-use projects. See California Promises to Streamline Environmental Review for Residential and Mixed Use Projects that Reduce Greenhouse Gas Emissions, Marten Law Group Environmental News (Oct. 22, 2008).

[43] CAT Final Report, p. 33.

[44] CAT Final Report, p. 33.

[45] CAT Final Report, p. 34.

[46] CAT Final Report, p. 37.

[47] CAT Final Report, p. 37.

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