State of Washington paves the way for cap-and-invest program to start in January 2023
On 29 September 2022, the State of Washington adopted the rules for a “cap-and-invest” program that will set a cap on greenhouse gas (GHG) emissions and implement an allowance trading market modeled after the Western Climate Initiative (WCI) jurisdictions of California and Québec. The Climate Commitment Act Program is set to start on 1 January 2023 and will cover approximately 75% of Washington’s statewide GHG emissions.
The program fulfills the mandate of Senate Bill (SB) 5126, the “Washington Climate Commitment Act”, which was signed into law by Governor Jay Inslee in May 2021. The Act dictates the implementation of a mandatory cap-and-invest program as a cornerstone to achieving Washington’s goal of net zero GHG emissions by 2050. The program’s cap is thereby aligned with Washington’s statutory emissions limits of 50 million tCO2e in 2030, 27 million tCO2e in 2040, and 5 million tCO2e in 2050.
Washington’s Department of Ecology (WDE) developed the program rules based on economic analysis and broad public consultation. In September 2022, WDE published a key report presenting an economic and market analysis of the cap-and-invest program, conducted by Vivid Economics. The report models expected prices and emission trends under different policy scenarios, including in the case of linking with WCI.
The program establishes rules for cap setting and compliance. There will be four-yearly compliance periods, with the first period running from 2023 until 2026. The baseline for calculating the cap trajectory is currently set at 68 million tCO2e, based on the historical average annual emissions in 2015-2019. The cap for 2023 is equal to 93% of the baseline, that is, 63.28 million tCO2e. The cap will then continue to decrease annually by 7% of the baseline, or 6.72 million tC02e/year.
During the first compliance period (2023-2026), the program will cover industrial facilities, in-state electricity producers, electricity importers, natural gas distributors, and fuel suppliers emitting more than 25,000 tCO2e/year. In the second period (2027-2030), the program will be expanded to include waste-to-energy facilities, before landfills and railroad companies join in the third period (2031-2034). Uncovered emitters may voluntarily opt-in to the cap-and-invest program.
The program rules provide for price stability measures, including a price ceiling, a price containment reserve, and an auction price floor. These measures are consistent with current rules in the California-Québec market.
- The price ceiling for 2023 will be USD 72.29, increasing annually by 5% plus the inflation rate of the previous 12 months.
- The Allowance Price Containment Reserve (APCR) will hold 5% of the allowances of the annual cap for each year. Allowances will be released via auctions when prices reach trigger levels and when newly covered and opt-in entities enter the program. The APCR has a two-tier trigger: the Tier 1 price for 2023 will be USD 46.05, while the Tier 2 price for 2023 will be USD 59.17.
- The auction floor price starts at USD 19 per MtCO2e in 2023 and will increase by 5% per year. Below this price, allowances will not be sold, but will rather be transferred to an Emissions Containment Reserve (ECR).
Looking ahead, in October the WDE will send formal notices to covered entities that meet the program criteria, before the program rules enter into force in November. On 15 November, the WDE will then assign an allocation baseline for emissions-intensive and trade-exposed facilities based on the information submitted earlier in the year. Coming up in the first half of 2023, the WDE will hold the first two auctions, one of which will include future allowances (2026 allowances). By 31 March 2023, all covered entities will need to report their 2022 GHG emissions.