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Washington State Legislature Considers Cap-and-Trade Bill, Which May Start in 2012. Or Maybe Not.

February 5, 2009

Washington State Governor Christine Gregoire has proposed legislation that would enable the state to participate, beginning in 2012, in a regional cap-and-trade system for reducing greenhouse gas (GHG) emissions. But the details of how the system would work – including contentious issues of whether emission credits are auctioned or freely allocated and the use of offsets – are left to an as-yet unnamed panel to decide. By the time these hard decisions are made, a federal program may – or may not – be in place, and may – or may not – preempt some or all of the state provisions. The regulated community will have to follow both processes, because it remains anything but clear which program (or combination of programs) Washington entities will be required to comply with.

The Governor’s Cap-and-Trade Bill

The Governor’s cap-and-trade bill directs 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 bill would cap emissions from electric utilities and major industrial facilities – such as cement, pulp and paper, and aluminum plants – that annually emit more than 25,000 metric tons of GHGs.[1] The bill also would allow Ecology to expand the program to include smaller industrial emitters in 2015. Motor vehicles and residential and commercial buildings would be covered under the system indirectly, beginning in 2015, through regulation of the potential emissions from fuels.[2] The bill would direct Ecology to decide who among fuel refiners, importers, distributors, or sellers would be responsible for obtaining emission allowances based on the potential emissions from the fuels they sell.[3] This would avoid requiring the general public to obtain allowances for their cars or home heating oil, but the cost of the allowances still would be passed to consumers through higher fuel prices.

While designed to begin in 2012, Washington’s cap-and-trade program would not take effect unless and until it is linked with other state or regional programs. Washington is a member of the Western Climate Initiative (WCI), and the bill proposes a threshold of caps being placed on the majority of the emissions included in the WCI, or an equal amount through links to other regional programs.[4] Although this appears to be a significant threshold, California’s cap-and-trade program – which is also poised to begin in 2012 – could alone account for a significant percentage of the emissions included in the WCI. The governor may also delay the start of the program or its expansion to include fuels in 2015, or suspend the program altogether if she finds there is an economic emergency.[5]

The Governor’s bill does not fully explain what will happen to the State program if, as expected, a federal cap-and-trade program is put in place in the next few years.[6] A federal cap-and-trade scheme could preempt all or part of the Washington program. The Governor’s representatives acknowledge that fact, but remain hopeful that Washington’s legislation will influence federal actions, and that any federal program will consider the unique emissions profile in Washington and other WCI jurisdictions.[7]

The bill also establishes a new high-level oversight group to provide guidance to Ecology on rulemaking and to make a final recommendation to the Governor by May 1, 2011 on the timing and terms of Washington’s participation in the regional cap-and-trade program.[8] This eleven-member work group will include the director of Ecology, four legislators, and six members from the public, selected by the above five by September 1, 2009.

Stakeholder Group to Recommend Allocation of Emission Allowances

Ecology would presumably use a combination of auctions and free allocations to distribute emission allowances to regulated entities, but the bill does not stipulate how emission allowances are to be allocated. A previous draft of the Governor’s bill would have distributed 10 percent of total emission allowances via an auction, and established a priority system for allocating free allowances between electric utilities and other regulated entities. The final bill introduced last week removes these provisions entirely, and instead creates a public stakeholder group to make a recommendation to Ecology on the percentage of auctioned allowances and the method and process for allowance distribution.[9] This stakeholder group, comprised of members of business and the public, must also recommend to Ecology actions to guard against manipulation of the market, the number of allowances to be set aside for specific purposes, such as for use in low water years, and methods to address disparities in the distributional effects upon individual households. The stakeholder group’s recommendations must take into account the eventual transition to full auctioning of allowances, as well as competition of Washington industries and businesses within and outside of Washington, the potential for emission leakage, the impact on enhancing transition to clean energies, and strategic uses of auction revenues.

Companies whose emissions would be regulated by this bill are particularly opposed to the auctioning of emission allowances, believing the economic impact would be substantial and would place Washington businesses at a competitive disadvantage.[10] They project that the allowances for baseline emissions in 2020, when Washington hopes to have returned to 1990 emission rates, would cost $2.7 billion annually.[11]

Compliance and Enforcement

At the end of each three-year compliance period, regulated entities would be required to submit sufficient emission allowances or offset credits to cover their emissions for that period.[12] The bill 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),[13] or by purchasing offsets.[14]

Ecology would be responsible for enforcing compliance with the GHG caps, and the Pollution Control Hearings Board would have jurisdiction over appeals.[15] Regulated entities that fail to turn in sufficient allowances or offset credits to demonstrate compliance with the GHG caps would face an enforcement order requiring the entity to obtain three allowances – i.e., through the secondary market or offsets – for each one that is due.[16] Failure to submit penalty allowances could expose entities to a civil penalty of up $5,000 for each penalty allowance.[17] Because each allowance would be for one metric ton of GHG emissions, and regulated industrial facilities would emit more than 25,000 tons of GHGs annually, any significant shortfall in allowances could produce a significant civil penalty. Failure to comply with other provisions of the legislation could expose entities to civil penalties of up to $10,000 per each day the violation occurs.[18] Money generated from these penalties or GHG auctions would be deposited in a climate protection account, and could be used only for administrative costs in implementing the program, as well as for reducing consumer impacts, worker transition and creating green jobs, supporting transportation projects that will reduce GHG emissions, energy efficiency and renewable energy incentives, and promoting emission reductions and carbon sequestration through forestry, agriculture, and other uncapped sources.[19]

Forestry Provisions

The Governor’s bill includes two provisions specific to the forest industry. First, a “financial incentives” provision requires Ecology to consult with the forest practices board, the department of natural resources, and the forest carbon working group in developing legislation by the end of 2010 to implement a financial incentives program for forestry and forest products.[20] This legislation must specifically recognize activities such as forest maintenance and management, continuing to produce wood products while maintaining or increasing carbon stocks, optional retention of high carbon stocks, and the use of wood building materials by developers and builders instead of more intensive fossil fuel products.

Second, in a “forestry offset policy” provision, the bill requires Ecology to consult with the forest practices board, the department of natural resources, and the forest carbon working group in developing a Washington policy for forestry offset projects.[21] A report on the progress of developing this policy is due by the end of 2010, and the final policy is due no later than at the end of 2011, or as soon as necessary for presentation to the WCI. This policy must include the following elements: (1) standards and guidelines to support carbon accounting in managed forests participating in an offset program; (2) methods to ensure that carbon reduced or sequestered by a forestry offset project will be eligible for an offset credit within the regional cap-and-trade program; (3) recognition of management activities that increase carbon stocks; (4) standards and guidelines to support wood products accounting that recognizes the storage of carbon in wood products after harvesting; (5) guidelines on how offset projects and financial incentive programs in the forestry industry can together ensure that Washington forest landowners are not disadvantaged in comparison with other jurisdictions in the WCI; and (6) recommendations for how to verify or certify carbon stocks.

Other Elements of the Legislative Package, Bill to Implement Additional CAT Recommendations

Besides the cap-and-trade bill, the Governor has proposed additional legislation calling for investments and incentive programs to increase energy efficiency and create “green” jobs. These proposals include: (1) $455 million of investments over the next two years for energy-reducing transportation projects, energy efficiency projects, green buildings and clean-energy technology; (2) a state tax exemption for plug-in hybrid electric vehicles beginning in July 1, 2009 and extending through January 1, 2014; (3) a proposed partnership with the state’s clean technology industries to identify actions to safeguard the future of clean energy in Washington; and (4) requesting the State Building Code Council to improve building energy efficiency by 30 percent beyond the 2006 standards.

Some of the proposals in the Governor’s legislative package reflect recommendations from the Climate Action Team (CAT), a state GHG advisory committee, which made a long list of recommendations in a report last November. See Cap-and-Trade Legislation Proposed in Washington State, Marten Law Group Environmental News (Dec. 12, 2008). The Governor’s legislative package contains only a few of the CAT recommendations. However, a bill to implement many more of the CAT recommendations – HB 1718 – was also recently introduced in the legislature. HB 1718 would address, among other things, transportation, solid waste collection, handling, and management, and comprehensive land use requirements, including amendments to the Growth Management Act and the State Environmental Policy Act to include provisions pertaining to GHG emissions.

[1] Draft Legislation § 9.

[2] Draft Legislation § 9(2).

[3] Draft Legislation § 9(4)(a).

[4] Draft Legislation § 4.

[5] Draft Legislation § 21.

[6] See Draft Legislation § 20.

[7] Public statements, Jay Manning, Director of the Department of Ecology.

[8] Draft Legislation § 5.

[9] Draft Legislation § 8.

[10] Association of Washington Business, AWB statement on Gov. Gregoire’s climate change plan.

[11] Association of Washington Business, Cap and “Invest” Will Be Costly to Everyone in Washington.

[12] Draft Legislation § 15.

[13] Draft Legislation § 7.

[14] Draft Legislation § 12.

[15] Draft Legislation § 15.

[16] Draft Legislation § 15(4).

[17] Draft Legislation § 15(4).

[18] Draft Legislation § 15(5).

[19] Draft Legislation § 16.

[20] Draft Legislation § 13.

[21] Draft Legislation § 14.

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