[co-author: Gabriella Lanzas, Summer Associate]

The Washington Department of Ecology (Ecology) has proposed new rules to implement an economy-wide “cap-and-invest” program in Washington State. With comments due on June 30, 2022, these rules have the potential to impact businesses in many industries across the state.

Last May, the Washington State Legislature passed the Climate Commitment Act (CCA), the state’s economy-wide greenhouse gas (GHG) “cap and invest” program, which we described in detail here. The CCA mandates a declining cap on GHG emissions from major emitters in Washington supported by an emissions allowance auction and trading system. The CCA aims to achieve a 90% reduction in the state’s GHG emissions over 1990 levels by 2050. Revenues from the auction would be invested in a variety of programs aimed at supporting Washington’s decarbonization efforts, reducing pollution in historically underserved communities, and investing in climate resiliency.

On May 17, 2022, one year to the day after Gov. Jay Inslee signed the CCA, Ecology announced that it is seeking public comment on its proposed Climate Commitment Act Program Rule (Chapter 173-446 WAC). The proposal would adopt specific administrative rules governing operation of Washington’s “cap-and-invest” program.

Key Takeaways

• Comments on the proposed rule are due by June 30, 2022. A series of public hearings on the proposed rule will be held in late June. Final adoption of the rule is anticipated by September 29, 2022.
• The proposed rule provides specific guidance on how Ecology will administer the CCA’s 25,000-ton threshold to identify “major emitters” that will be subject to emissions limits and therefore be required to obtain emissions allowances. It also proposes requirements for application of the program to specific industries such as railroads, and for treatment of allowances owned by affiliated entities.
• The proposed rule provides critical details about how Ecology will run allowance auctions, distribute no-cost allowances to Emissions-Intensive Trade-Exposed industries (“EITE”) and utilities, and how allowance reserve accounts intended for new industries and to stabilize the allowance market will be treated.
• Ecology’s proposal lays out specifics related to a variety of administrative functions, including enforcement and reporting requirements.
• Ecology proposal would govern carbon offsets, which are verifiable carbon reduction or removal credits that can be sold by voluntary participants to major emitters needing allowances to meet their emissions limits.
• The proposed rule is of critical importance to any large emitter of greenhouse gasses in the State of Washington as well as for any entity wishing to sell offset credits in the state.

Summary of the Proposed Rule

Ecology’s comprehensive proposal provides critical details describing how Ecology intends to address several aspects of the CCA. These include:

• Allocating allowances, allowance budgets for the first compliance period (2023 – 2026), and distribution of allowances:
  • Allowance budget. The number of GHG allowances that may be auctioned or distributed will be determined annually by Ecology with the limit decreasing by 7% each year. For example, the 2023 allowance budget will be 93% of the total program baseline (the annual average of covered emissions from 2015 to 2019), the 2024 allowance budget will be 86% of the total program baseline, the 2025 allowance will be 79% of the total program baseline and so forth.
  • No-cost allowances for EITEs. To minimize the incentive for major industries competing in international markets to relocate their operations to locations with less-restrictive GHG requirements, the CCA includes provisions to minimize compliance costs for EITEs. During the first compliance period (2023 through 206), EITEs are allocated allowances equal to 100 percent of the facility’s baseline GHG emissions at no cost. During the second and third compliance periods, EITEs are allocated 97 percent and 94 percent of the allocation baseline at no cost. To be allocated no-cost allowances, EITEs must submit information documenting their GHG emissions to Ecology. Ecology proposes a specific method for calculating emissions baselines and allowance allocations for EITEs.
  • No-cost Allowances for Electric Utilities. CCA also provides for an allocation of no-cost allowances to utilities which is intended to minimize the costs imposed on utility ratepayers. To allocate allowances, Ecology proposes to consider utility-specific forecasts of retail electric loads, the generation resource fuel type to be used to serve those electric loads, emissions factors specific to natural gas, coal, renewable sources, or unknowable sources, and an equation to measure the cost burden on retail ratepayers.

• Auction registration requirements, floor, and ceiling prices:

Ecology will hold four auctions every year starting in 2023. Ecology will provide public notice of the auctions and all information needed to register and participate. Allowance prices are capped to ensure affordability, but also high enough to promote investment in decarbonization. The 2023 auction floor price is $19.70, and the ceiling price is $72.29. The ceiling price will increase every year by 5% plus inflation.

• Tier I and Tier II prices for allowance price containment reserve auctions:

To maintain stable compliance costs, whenever compliance costs rise unexpectedly, Ecology will hold a reserve of allowances that can be sold at predefined prices. Ecology will hold these auctions (1) if preceding auction prices reach the tier 1 price for allowances, (2) if allowances are exhausted by entry of new entities, and (3) once each year after the final auction for that year’s allowances. In the first compliance period, tier 1 price will be $46.05 and tier 2 price will be $59.17.

• Emissions containment reserve:

Ecology proposes to suspend the auction price floor until reinstated by future rulemaking. Hence, there is no trigger price below which allowances will be withheld from sale at auction by Ecology to increase allowance prices to a level that will support significant GHG reductions. Instead, Ecology proposes to withhold allowances if allowance prices in an auction are unacceptably low. Withheld allowances can then be sold in future auctions or allocated to new or expanding industries at no cost.

• Enforcement provisions:

If a major emitter fails to obtain enough allowances to meet its compliance obligation, Ecology proposes that the emitter will lose four allowances for every allowance that it falls short. Non-compliant entities thus risk losing allowances to emit four metric tons of CO2e for every allowance or offset credit they fall short. Entities who fail to submit penalty allowances are subject to a monetary penalty of up to $10,000 per day and violation. Every metric ton of CO2e emitted and not covered by an allowance or offset credit would be considered a separate violation. The non-compliance penalty may increase to $50,000 if Ecology finds that an entity provided false information, withheld material information, or violated any auction, registration, or conduct rules. Entities subject to fines may appeal to the Pollution Control Hearings Board under RCW 43.12B. In addition to these enforcement mechanisms, non-compliant utilities must notify their customers and the environmental justice council that they have paid a monetary penalty for non-compliance.

• Procedures and protocols for offset projects:

CCA permits carbon offsets to be used for compliance with GHG limits. To be used as a compliance instrument, an offset credit must meet the following criteria: (1) represent a quantifiable and permanent GHG reduction or removal, (2) meet the requirements for compliance reporting and recording emission reductions, and (3) be approved and listed as a verified offset project by Ecology. Ecology may approve an offset project only after it accurately quantifies the project’s potential for GHG emissions reduction or removal, establishes data collection and monitoring procedures, and accounts for “leakages” of emissions to other states. In addition, the offset project must provide direct environmental benefits in Washington, the project cannot already be required by law, and it must comply with all local, state, and national requirements for environmental impact assessments.

• Types of Offset Projects. Offset projects may include livestock projects, elimination of ozone-depleting substances, and forestry projects. Ecology proposes different protocols for each of these types of projects. Major emitters may use offsets to meet no more than 5% of the allowances they are required to submit to meet their specific GHG limits.
• Linkages. Although the CCA permits Washington to link its allowance auctions to similar programs in other jurisdictions, such as existing emissions markets in California, Quebec, and others, Ecology does not propose any such linkages.

Conclusion

The proposed rule is of interest to almost every industry in the state, including large GHG emitters who will be covered by the program, smaller industries that may be able to generate and sell carbon reduction credits into the program, and companies that can provide GHG reduction technologies.

Interested parties will have the opportunity to shape the final administrative rule through Ecology’s notice-and-comment rulemaking process. Ecology has published the following timeline for public participation:

Additional rulemaking materials may be viewed here.

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