The Washington state legislature has passed a climate policy package that includes a mandate for a cap-and-trade program modeled after the Western Climate Initiative (WCI) jurisdictions of California and Québec.

Senate Bill (SB) 5126, “An Act Relating to the Washington Climate Commitment Act”, requires the Washington Department of Ecology (ECY) to set a statewide cap on greenhouse gas emissions. Lawmakers included a provision in the bill making its implementation contingent on the passage of a separate transportation-spending package by 1 January 2023, the mandated start date of the cap-and-trade program. However, Washington Governor Jay Inslee vetoed this section when he signed the bill, which means the program can go ahead without the transportation-funding package. It is unlikely the legislature will override the veto. 

SB 5126 requires ECY to introduce implementing legislation in the 2022 legislative session developed in consultation with emissions-intensive, trade-exposed (EITE) businesses, environmental advocates, and particularly impacted communities. The bill shall outline a compliance pathway for EITE firms to achieve their proportionate share of the state's emissions reduction limits through 2050.

The cap-and-trade program aligns with Washington’s statutory emissions limits of 50 million tonnes of CO2e in 2030, 27 million tonnes of CO2e in 2040, and 5 million tonnes of CO2e in 2050. It aims to contribute to reaching the state’s GHG reduction goals of 45% below 1990 levels by 2030 and 95% by mid-century. In the first compliance phase (2023-2026), the program covers transportation fuel suppliers, in-state power generators, and industrial facilities that emit at least 25,000 tonnes of CO2e per year, as well as electricity importers and natural gas suppliers whose electricity consumption corresponds to more than 25,000 tonnes of CO2e.

Covered entities will be able to surrender offsets from Washington or a linked jurisdiction for up to 5% of their compliance obligation, so long as half of these credits accrue direct environmental benefits to the state. California has a similar requirement.

In the second compliance period (2027-2030), the program expands to cover county waste-to-energy facilities and city solid waste management programs whose emissions equal or exceed 25,000 tonnes of CO2e. Offset usage will decline to 4% of covered entities’ compliance obligations, with 75% of these credits required to accrue direct environmental benefits to the state.

In the third compliance period (2031-2034) the program will again expand, covering landfill facilities and railroad companies whose emissions equal or exceed 25,000 tonnes of CO2e. The legislature intends to adopt separate greenhouse gas reduction policies specific to landfills, but if the policies are not adopted by 1 January 2030 landfills will be incorporated into the cap-and-trade program.

Non-covered entities, such as federal agencies or federally recognized tribes with tribal sovereignty, may voluntarily opt into the program, so long as they satisfy the same registration requirements as a covered entity. An opt-in entity may opt out of the program at the end of any compliance period by providing written notice to ECY at least six months prior to the end of the compliance period.

ECY will adopt annual allowance budgets for the program on a calendar year basis. Allowances will be distributed through a maximum of four annual auctions, plus any necessary reserve auctions, as well as output-based free allocation. In the program’s first compliance period, emissions-intensive trade-exposed (EITE) entities will receive 100% of their allowances for free at the sectoral benchmark level, declining by 3% for each subsequent compliance period. The bill also mandates ECY to adopt EITE allocation rules for the second compliance period by July 2024.

Consumer and investor-owned electric utilities will receive free allocation during the first compliance period. However, in the second and third compliance periods an as-yet-undecided portion of allowances must be consigned to auction, and the revenues of these consigned allowances must be used by the utilities for the benefit of ratepayers, with first priority given to mitigating the rate impacts on low-income customers. California also uses consignment for power generators with similar restrictions on revenue use. Natural gas utilities will receive full free allocation during the course of the cap-and-trade program; however, 65% of these allowances must be consigned to auction, with revenues directed to eliminate additional cost burdens to low-income customers and small businesses through credits on utility bills.

The bill also outlines market stability measures, specifically an emissions containment reserve (ECR), an auction floor price with a schedule for the floor price to increase by a predetermined amount each year, a price ceiling that increases annually in proportion to the price floor, and an allowance price containment reserve. Only covered and opt-in entities will be able to participate in the auction of allowances from the allowance price containment reserve. In the event that the Washington program enters into a linking agreement with a jurisdiction that has no emissions containment trigger price (as is the case with California and Québec), ECY is instructed to suspend the ECR.

SB 5126 requires ECY to submit a report to the legislature every four years that includes a comprehensive overview of the program’s implementation and performance relative to the state’s emissions limits as well as its impacts on overburdened communities, covered entities, and EITE businesses. Finally, the bill also enables ECY to pursue links with other jurisdictions that have established an allowance-based GHG reduction program.

Proceeds from the allowance auctions will be split between a Carbon Emissions Reduction Account, a Climate Investment Account, and an Air Quality and Health Disparities Account. All funds will be subject to an environmental justice assessment, with a minimum of 35% of investments going to benefit vulnerable populations and a minimum of 10% going towards supporting Native American tribes. Funding will be put towards clean transportation, natural climate resilience solutions, clean energy transition and assistance, and other mitigation projects. An environmental justice council will advise on all funding decisions.

SB 5126 builds on Governor Jay Inslee’s proposed climate policy package. The bill was deliberated in the Washington Senate Committee on Environment, Energy, and Technology and reconciled between the Washington Senate and House legislative chambers just before the end of the 2021 state legislative session. Carbon pricing policies, including a proposed cap-and-trade program, have repeatedly come before the legislature, and failed in two state referenda. In 2016 ECY adopted the Clean Air Rule (CAR), a baseline and credit system that reduces emissions from industrial sources, petroleum fuel producers and importers, and natural gas distributors. However, the CAR was suspended before it could be enforced due to a legal challenge. Laws establishing steep emissions reduction targets successfully passed in the 2019 session, but no carbon pricing measures previously were approved.