Environmental Market Insights: New cap-and-trade programs

Author Argus

This second episode in a new mini-series will discuss the expanding cap-and-trade programs across the US.

Over the coming weeks we will be discussing growth in the US environmental markets including the new NOx allowance program, expansion of cap-and-trade programs, expansion of LCFS programs, and an update on renewable energy certificates. In this second episode, Michael Ball and Julia Martinez break down the new cap-and-trade programs coming online in Washington State, Oregon and the east coast. They will also provide a view into changes to come for the cap-and-trade program in California. 

Related links:

The Argus Energy Transition hub
Other Argus podcast episodes

Transcript

Mike: Hello and welcome to our new podcast mini-series that focuses on growth in the US environmental markets. So far we’ve discussed the EPA’s new Nox allowance program and today we’ll discuss the expected growth in state cap-and-trade programs.

Over the next few weeks we will also talk about new state low-carbon fuel standard programs and provide an update on recent developments in renewable energy certificate markets.

This podcast episode is brought to you by Argus Media, which as many of you know, is a leading independent provider of energy and commodity pricing information.

My name is Michael Ball, I am editor of Argus’ environmental markets publication Air Daily and based in Washington, DC. With me today is Julia Martinez, our carbon markets reporter based in Houston.

Julia: Thanks Mike.

Mike: Let’s go ahead and begin with Washington state. In the final days of this year’s legislative session, lawmakers in the House and the Senate came together to pass the Climate Commitment Act. Julia, why don’t you tell us what this new program will look like?

Julia: Sure! So the program is like California’s cap-and-trade program, which we’re all more familiar with. The Washington program, which they called the Climate Commitment Act, caps emissions and allows for credit trading between reporting entities. The law applies to sources that emit more than 25,000 tonnes of greenhouse gases a year and includes capping emissions from industrial facilities, power stations, natural gas suppliers and fuel suppliers.

There’s also an opportunity for Washington to link to programs like the California-Quebec market, known as the Western Climate Initiative. 
The Washington program also paves the way for creating an offset market that prioritizes in-state projects, which is pretty interesting.

Mike: There was a flurry of news following the end of the legislative session in April. What were some of the hurdles to passage of this bill?

Julia: Basically throughout the session there was some back and forth in committee as to whether the program should be linked to the passage of a separate transportation spending bill. 

As a last-minute compromise, lawmakers tacked on a provision that said the cap-and-trade program would only be implemented if that transportation bill passed by the end of next year and only if it included a fuel tax of at least 5¢ per gallon. 

With that provision, Democrats were looking for a way to secure some funding for that transportation bill, but Republicans remained opposed to any fuel taxes. 

The bill passed after hours of debate over climate change, and a couple of weeks later governor Jay Inslee signed several climate bills, including the cap-and-trade one. 

This is where those headlines come in: he vetoed the gas tax, which of course angered legislators that worked to get that provision in there. 

Mike: Should we expect any challenge to the veto, or is Inslee signing it a done deal now?

Julia: A challenge is definitely expected. Lawmakers, including Democrats who supported the bill, immediately came out and called the move unconstitutional and said they would look to challenge the decision in court. 

This also is not the first time Inslee has been in hot water over a veto. Back in 2019 he had vetoed some language in a transportation package. A county judge invalidated the vetoes last year, but the case is still tied up in the state supreme court.

So it remains unclear whether the court challenge for this recent veto will actually happen, but some folks in the legal space have said they definitely expect it to. 

But regardless of the legal issues, the Department of Ecology has already started preparing for rulemaking by hiring staff. They are expecting to begin work on the program in the summer, but there’s no date in the books yet. 

Mike: Thanks for that. Those are definitely all things to keep an eye on. What about Washington’s neighbor to the south, Oregon?

Julia:  Well Oregon is in the middle of its cap-and-trade rulemaking. That program is called the Climate Protection Program, and it’s expected to go into effect next year. 

The program would regulate in-state CO2 emissions from natural gas utilities, non-natural gas fuel suppliers, and large stationary sources that emit GHG on-site such as manufacturers and factories.

Oregon took a different route than Washington, though. Last year, Governor Kate Brown signed an executive order directing her administration to establish a program to cap the state’s greenhouse gas emissions. This was after proposals to create a program had stalled in the legislature. 

The Department of Environmental Quality has since initiated the rulemaking process, and a rule is supposed to be finalized by the end of the year. Their latest rulemaking was held on June 17 and regulators provided more insight into what the program could look like.

So far, the program includes the possibility of Community Climate Investments. Basically, a regulated entity would be able to invest in a local project that would help reduce greenhouse gas emissions, like electric buses for example. 

That investment would count as a credit that the regulated entity could then use to meet its compliance obligations. They’re still working out the specifics, but it’s an interesting component. 

There has been some discussion as to whether DEQ should cover emissions from power plants, and so far they’re not included in the program. 

There are concerns about the agency’s legal authority to regulate the electricity sector, particularly the emissions from out-of-state generators.
 
The final rule will make its way to the Environmental Quality Board in November, and the EQC gets to vote on the proposal in December. 

Mike: Let’s flip to the opposite coast for a few minutes. What is the latest with a new cap-and-trade program there to cut emissions from cars and trucks?

Julia: In the north-east, there’s a cap-and-trade program in the works called the Transportation and Climate Initiative Program, or TCI-P. 
The program could launch as early as next year and targets a 26pc reduction in CO2 emissions by 2032. 

It aims to cut emissions from the use of gasoline and diesel fuel in the transportation sector, and would cover owners of transportation fuel at large bulk terminals, companies that deliver fuel to filling stations, and terminal operators of large bulk fuel facilities.

The TCI started out in 2010 as a collaboration between 12 states and Washington DC to talk about how they could reduce emissions, but last year four members committed to implementing the TCI program, officially making them TCI-P members.

Mike: Who is in TCI-P now?

Julia:  Right now it’s Connecticut, Massachusetts, Rhode Island, and DC. 
Those folks signed onto a memorandum of understanding that said they would join the TCI-P and start reporting their emissions as early as next year and begin with compliance as early as 2023. 

But the agreement they signed says the program can only begin if at least three jurisdictions have cleared a legal hurdle of implementing their own program. 

That’s a problem, because a proposal to join TCI did not pass the finish line in Connecticut recently. 
There was a measure in the legislature that would have allowed for it, but lawmakers decided the votes were not there to pass it in the final days of the session. 

Connecticut governor Ned Lamont even threw the program into the budget, but eventually had to drop it during negotiations.
 
There’s still some optimism that the program will get pushed through somehow, but unless it gets brought up again during the special session, Lamont’s administration will have to find another way. 

Since Connecticut has kind of shelved the program for now, that only leaves three TCI-P members working on ways to launch the program in their own jurisdictions. 

We’ll have to see what happens in Rhode Island, where a proposal to join TCI advanced out of the Senate Environment and Agriculture Committee on June 16 and is on to the full senate for a vote.

Meanwhile, in Massachusetts, governor Charlie Baker’s administration recently said they were prepping legislation to be introduced in the fall that would allow the state to join the program.

The TCI-P members also recently put out a model rule for the program, which didn’t change too much from the initial draft model rule. 

It requires at least 35pc of all auction proceeds go toward frontline communities and opens the market for the use of offsets as compliance tools.
Other states that are part of the TCI club are also looking at possibly joining.

New York’s Climate Action Council, which is advising the state on how to best meet its climate goals, recommended the state join TCI-P as a way to do that.

We’ll need to see if that actually turns into any viable plan in the future, though.

Mike: Thanks for that run-down on future carbon markets. Let’s turn to the current cap-and-trade programs for a moment. Can you tell us a bit about what is going on with RGGI?

Julia:  The Regional Greenhouse Gas Initiative, or RGGI as we all call it for short, saw record-setting prices in the second quarterly auction at the start of June.

Before the auction, allowances for December 2021 delivery were at $8 a short ton, and most recently prices have been between $8.50/t.
The program is facing a review this summer and folks are waiting to see what will happen with the emissions cap and of course, seeing if Pennsylvania will finally join.

Pennsylvania lawmakers are continuing to put up a fight against governor Tom Wolf. The governor has set out this plan to join RGGI without needing legislative approval. He’s pushing the program through the appropriate environmental agencies instead. 

But Republicans and some Democrats have teamed up and said they want legislative approval for any program that would work to limit greenhouse gas emissions from the power sector. 

The RGGI market would expand significantly if and when Pennsylvania joins, so it’s all eyes on the state as it continues this back and forth between lawmakers and the governor.

Another state pursuing RGGI entry is North Carolina, where air quality regulators recently advanced a petition to the full Environmental Management Commission that would trigger a rulemaking process if its adopted.

That process would develop a rule that would cap CO2 emissions from the power sector and allow the state to join RGGI. The EMC is set to meet on July 13 to decide on the proposal.

Mike: And lastly, let’s turn to the Golden State for a moment, where there has also been record highs in the California cap-and-trade program. What can we expect to see ahead for the program?

Julia: California regulators just launched an 18-month process to update the state's wide-ranging climate change strategy, which could lead to changes to its cap-and-trade program.

The state Air Resources Board kicked off workshops marking the start of its effort to update the climate scoping plan, which lays out how California will meet its greenhouse gas emissions targets.

The updated plan intends to assess how California is progressing toward its mandate to reduce emissions by 40pc from 1990 levels by 2030 and put the state on a path toward carbon neutrality by 2045.

As part of this, the ARB will review the performance of the cap-and-trade program, which is currently set to run through 2030 to support the 40pc emissions reduction target. 

That will include a look at how the current oversupply of allowances may affect the ability of the state to meet its goals.
This is definitely something to keep an eye on for what the program will look like in the future. 

Mike: Thanks Julia. And if you enjoyed this podcast episode please be sure to tune in for the other episodes in this mini-series.  And for more information on Argus’ emissions coverage please visit
www.argusmedia.com/emissions/argus-air-daily

 

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