On 13 July 2021, North Carolina’s Environmental Management Commission (EMC) commissioned the state’s Department of Environmental Quality (DEQ) to start a rulemaking process to establish an ETS that is consistent with the design features of the Model Rule of the Regional Greenhouse Gas Initiative (RGGI). Aligning the system design features to that of RGGI would enable the state to join RGGI.

The decision of the EMC to start the rulemaking process comes after environmental groups in North Carolina – the Southern Environmental Law Center on behalf of Clean Air Carolina and the North Carolina Coastal Federation – on 11 January 2021 filed a petition asking for the development of RGGI-aligned ETS regulation in order to help North Carolina attain its 2050 carbon neutrality target.

To assess the most cost-effective options to achieve CO2 emissions reductions in the power sector, the DEQ commissioned an academic report to evaluate policy designs for a market-based carbon reduction program, among other policy options. The report from March 2021 lists the introduction of an ETS and participation in RGGI as one option to achieve emission reductions for the power sector. According to the modelling results of the report, RGGI participation would result in deep emissions reductions in North Carolina by 2030 compared to other policy scenarios.

The petition proposes an ETS with a cap of 35.1 MtCO2 (38.7 million short tons) starting in 2022 that declines to 21.8 MtCO2 (24.2 million short tons) by 2030. The annual cap reduction factor to achieve that trajectory would be more ambitious than RGGI’s 3% annual reduction factor for the period 2021-2030. The petition also proposes to adopt RGGI’s Emissions Containment Reserve (ECR) to withhold allowances at certain trigger prices and a Cost Containment Reserve (CCR) to inject allowances at certain price triggers. It calls for excluding any offset provisions in the regulation.

With regards to auctions of allowances, the petition calls for consignment auctions, where covered entities receive allowances for free but must consign them for sale at auctions on a quarterly basis.

Republicans in the state legislature oppose ETS regulation and RGGI participation. In May 2021 they introduced an energy bill (HB-951) in the Republican-controlled state legislature that aims at retiring coal-fired electricity generation and increasing renewable electricity generation and serves as an alternative approach to RGGI participation. At the same time, the consignment auction approach is believed to enable the DEQ to bypass the North Carolina legislature in the rulemaking process since the state under such a scheme would not generate any revenues and hence would not have to involve the legislature in introducing regulation. The petition does not spell out rules on the use of revenue from consignment auctions. In California, revenue from consigned allowances are returned to utilities but cannot be spent on ETS compliance. When undergoing rulemaking to join RGGI, Virginia considered a similar approach when planning to introduce an ETS via regulatory measures but implemented full auctioning after the state’s 2019 election allowed the adoption of ETS legislation and RGGI participation via the legislative route.

According to the petition, ETS implementation and RGGI participation are initially foreseen for 2022. However, according to the Air Quality Committee Meeting outcomes, any start date before 2023 is unlikely due to the length of the rulemaking process.