Will Washington Link Its Forthcoming Greenhouse Gas Emissions Cap-and-Trade Program With California's?

On May 17, 2021, Washington Governor Jay Inslee signed into law the Climate Commitment Act. The legislation creates a market-based, economy-wide cap-and-trade program for greenhouse gas emissions in Washington state. The legislation includes provisions ordering the Washington Department of Ecology (Ecology) to "consider opportunities to implement the [cap-and-trade] program in a manner that allows linking the state's program with those of other jurisdictions."

Until now, California has been the only state with a greenhouse gas emissions cap-and-trade program. California's program began operation in 2013, and has been linked with Québec's cap-and-trade system since 2014. Now, Washington's new cap-and-trade legislation paves the way for a Washington-California linkage agreement.

What Is Linkage?

Linkage refers to a bilateral or multilateral agreement between emissions trading systems to accept each other's allowances or credits and to otherwise coordinate activities to facilitate operation of a joint market.

Linking cap-and-trade systems provides covered entities with a more cost-effective way to meet their compliance obligations: if the price of allowances in one system is lower than that of another, then participants have an incentive to purchase allowances from the less expensive system until prices are equalized between the two, resulting in net cost savings.

Linkage Provisions in Washington's "Climate Commitment Act"

The Climate Commitment Act orders Ecology to "seek to enter into linkage agreements with other jurisdictions with external greenhouse gas emissions trading programs." Those agreements must include, amongst other things:

• Provisions relating to quarterly auctions, including requirements for eligibility for auction participation, the use of a single auction provider to facilitate joint auctions, publication of auction-related information, processes for auction participation, purchase limits by auction participant type, bidding processes, dates of auctions, and financial requirements;
• Provisions related to holding limits to ensure no entities in any of the programs are disadvantaged relative to their counterparts in the other jurisdictions;
• Other requirements, such as greenhouse gas reporting and verification, offset protocols, criteria and process, and supervision and enforcement, to prevent fraud, abuse, and market manipulation; and
• Common program registry, electronic auction platform, tracking systems for compliance instruments, and monitoring of compliance instruments.

Before approving a linkage agreement, Ecology must:

• Ensure that the linking jurisdiction has provisions to ensure the distribution of benefits from the program to vulnerable populations and overburdened communities;
• Determine that the agreement does not yield net adverse impacts to either jurisidcitons' highly impacted communities or analogous communities in the aggregate, relative to the baseline level of emissions; and
• Determine that the agreement does not adversely impact Washington's ability to achieve its statutory emission reduction limits.

Ecology must adopt rules to implement the cap-and-trade program, including the linkage provisions. The statute permits Ecology to adopt emergency rules for the program's initial implementation.

Linkage With California?

Linking Washington's cap-and-trade program with California's will be a complex process. California law requires state agencies (in this instance the California Air Resources Board (CARB)) to notify the governor if the agency intends to take action to link with another emissions trading system, and the governor to make specified findings prior to the agency taking action to approve the linkage.

When California's governor made findings for linkage with the Québec cap-and-trade system in 2013, he directed CARB to take a number of additional steps prior to linkage, including preparing a linkage readiness report. In addition to taking the actions required by the governor, CARB must initiate a full rulemaking process to amend the existing cap-and-trade regulations.

Because California already has a linkage agreement with Québec, that agreement will likely serve as the starting point for any agreement between California and Washington state. However, there will be added complexity as Ecology works through the many technical issues listed above.

The most interesting hurdles are likely to be the requirements relating to environmental justice, such as how to determine that "the agreement does not yield net adverse impacts to either jurisdictions' highly impacted communities."