Washington state aims to finalize changes to its "cap-and-invest" greenhouse gas (GHG) program next year with the hope of joining a larger North American carbon market in 2027, but regulated industries face compliance challenges with the uncertain timeline.
Washington this year advanced toward its goal of linking its program with the Western Climate Initiative (WCI) — a joint carbon market between California and Quebec — despite continued regulatory delays in the larger market. A lack of available allowances and rising costs for Washington Carbon Allowances (WCAs) are a continuing challenge for covered participants while a linked market is not imminent.
The state Department of Ecology spent much of 2024 drafting an agreement to link the markets and cap-and-invest amendments. The agency is also implementing HB 1975, which state lawmakers passed earlier in the year to align the program with the WCI.
Ecology's plan to finalize its program changes in early 2026 could ease concerns for covered participants looking ahead to 2027.
Washington began efforts to join the WCI in 2023, with support from then-governor Jay Inslee (D) and other state officials. Joining the larger market would address rising compliance costs in the state's program because of the larger allowance supply in the WCI. The WCI partners and Washington must still decide on the terms of a linkage agreement and each conduct required evaluations. A key uncertainty this year has been whether Washington market participants can access the WCI supply in 2027 to meet their 2023-26 emissions obligations.
Washington could join the WCI auctions as soon as the second or third quarter of 2027, but that timeline depends on the WCI partners finishing their own program amendments on schedule next year, the California Air Resources Board (CARB) said in October.
In a tight spot
WCAs for December delivery reached a record high $75.50/metric tonne (t) on 23 December, buoyed by compliance demand and bullish market expectations of a tight allowance supply.
The state's auctions cleared well above Ecology's estimates of $32.65/t during the program's first year in 2023. The August 2023 quarterly allowance auction settled at $63.03/t for vintage 2023 WCAs, the highest price before this year.
The most recent auction in December settled at $70.86/t for the current-year offering, a record high and the second one set this year.
Allowance prices have also climbed in the secondary market because of limited supply. The program's covered emissions exceeded the annual caps in the first two years of the program, 2023-24. Emissions have outpaced the available allowance supply by nearly 2.2mn t for 2023-24, the latest state data in November shows.
This potential compliance deficit does not include the program's supply of carbon offsets, which count against the cap. Ecology removes allowances equal to offset use after compliance deadlines. The agency removed 26,280t from this year's auction budgets to account for offsets used toward the required 30pc of 2023 emissions. The agency plans to remove 73,245t of allowances from the 2026 auction budget, which is equal to the number of offsets used toward the 30pc mandate for 2024 that had to be met earlier this year.
Covered industries reduced their emissions by 6.4pc from 2023-24. But participants would need to reduce emissions by more than 10pc from last year to be within the program's 2025 cap of 53.7mn t.
Stroke of the pen
State lawmakers added further cost-containment measures to the program through HB 1975. The bill, from state House of Representatives majority leader Joe Fitzgibbon (D), amended the program to temper compliance costs while Washington is operating a standalone market.
The law requires Ecology to pull forward 2-5pc of the 2027-2040 allowance budgets for use in the program's allowance price containment reserve (APCR). Ecology has not decided on a final percentage, the agency said in October. The agency is also weighing whether to introduce the new supply before or after the compliance deadline in 2027.
The December auction cleared well above the APCR trigger price of $60.43/t, and Ecology will hold a reserve auction on 11 February.
HB 1975 also shifts when Washington needed to achieve its statutory emissions reduction targets to 31 December rather than by 1 January of 2030, 2040 and 2050. Ecology believes this change will require adjustments to past and future allowance budgets. This adjustment adds more allowances to the regular quarterly auction, in addition to moving some into the APCR. Ecology did not provide an estimate of the total allowances this change adds to program budgets in its October workshop.
The program's price ceiling is also adjusted to $80/t for 2026-27 until Washington links with the WCI. The price ceiling for this year is $88.15/t. Ecology sells price ceiling units to covered participants by request. This occurs only after the reserve pool is empty and just before the full compliance deadline, in this case November 2027. This price is not a formal limit on how high bids can be at state auctions or on prices in the secondary market if demand remains high.
Program participants may pay above the ceiling for WCAs if they feel the risk of noncompliance is too high, a market source said.
Outside of Ecology's regulatory plans, the state legislature is unlikely to pursue further changes to immediate supply in 2025, Fitzgibbon said. Legislation focused on cap-and-invest will still appear in the next session, and one potential issue could add more participants through new legislation, he said.
Some fuelsuppliers appear to be trying to avoid the 25,000t threshold for coverage for cap-and-trade by spreading their imports across multiple importers-of-record, Fitzgibbon said.
Washington assigns an obligation for the emissions from the combustion of fuel entering the state to the in-state owner of the fuel, not the out of state exporter.
"They clearly seem to be trying to evade compliance with the law and so I'm interested in finding ways to stop that from happening," Fitzgibbon said.
The Washington legislature resumes on 12 January.
