Sightline’s Line On The Western Climate Initiative

Update: We now have all of Sightline’s Western Climate Initiative work compiled in one handy page.

The Western Climate Initiative—North America’s biggest cap-and-trade system — just released its final proposal: here.

This is historic stuff. The proposal leaves room for improvement — I’ll get to that in a minute — but let’s take note of where we are. This will be the first major climate policy to tackle all the principle sources of climate pollution. And it’s by far the biggest cap-and-trade system proposed in North America. It’s a giant step forward.

With 85 million people spread out across 7 states and 4 provinces, WCI all by itself represents nearly three-quarters of Canada’s economy and a fifth of the American economy. (And in combination with states that are participating in other cap-and-trade programs, more than half of North America’s population and economy are in cap-and-trade jurisdictions.)

The WCI also brings together a very diverse group of players. There’s a big difference between Quebec and California, New Mexico and British Columbia. And the proposal WCI brings forward today represents ground rules—a common foundation that everyone can agree to. Today’s proposal is not a ceiling. Individual states and provinces can do better—and they will

Here in the Northwest, Washington Governor Gregoire and Oregon Governor Kulongoski have both demonstrated tremendous leadership on climate protection over the last few years. (So has British Columbia premier Campbell, on whom I’ve heaped praise in the past.) So there is every reason to believe that leaders in the Northwest will springboard from WCI’s recommendations to design a program that is effective and fair—and that makes sense for the Northwest.

In the end, we’ll benefit from joining other forward-looking states and provinces in a big program, even as we craft a local solution.

Now. None of this is say the proposal is perfect. To be frank, WCI’s position is not what we hoped for. It leaves unanswered some large questions about fairness. And in the early years it doesn’t go far enough—or quickly enough—to capture all the major sources of carbon. These are the sorts of things that local leadership will address.

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Cool update, 11:00 a.m.: Just as I expected, Northwest leaders are stepping up to make WCI fair and effective. Here’s Oregon’s Governor Kulongoski:

I will work with the state legislature, stakeholders and other jurisdictions to expand the scope of auctions because the ten percent minimum is just that—a minimum—and I believe we can achieve a balanced program that meets both our environmental and economic goals.

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How does cap and trade work? Check out Sightline’s brand new Cap and Trade 101: A Climate Policy Primer.

What exactly does WCI’s new proposal say? If you want to read the 122 page document you can find it here. Otherwise, I hit the highlights below the jump…

Allocation. The biggest news is how the carbon permits are distributed:

…the WCI Partner jurisdictions will auction a minimum of 10% of the allowance budget in the first compliance period beginning in 2012. This minimum percentage will increase to 25% in 2020. The WCI Partner jurisdictions aspire to a higher auction percentage over time, possibly to 100%. (See section 8.7.1)

These are low figures, but they are minimums, not maximums. To ensure fairness, Northwest jurisdictions will almost certainly want to auction a much larger share. And this is exactly the sort of issue where we can expect improvement from Northwest governors and legislatures. (Quick aside: it’s perfectly possible for each jurisdiction to settle on its own auctioning percentage.)

Revenue. The gist is that the WCI Partners agree to spend some unspecified portion of the “value”  of their allowance budget on at least one of these four items: 1) incentives for energy efficiency and renewables; 2) R&D for renewables, carbon capture, energy transmission and storage, and efficiency; 3) reducing or sequestering carbon in forestry and agriculture; and 4) adaptation to climate impacts. (See sections 8.2 and 8.3)

The biggest worry here is about fairness. Several hugely important items are missing—items that are relegated to the “optional” category, especially 1) “reducing consumer impacts, especially for low-income consumers”; and 2) “providing for worker transition and green jobs.”

On both substantive and political grounds, it would be a terrible mistake not to address consumer impacts and assist in economic transitions. Luckily, the use of revenue is an issue that will be left entirely to the discretion of states and provinces—and this is an area where the Northwest will need to show leadership.

Scope. As we expected, WCI will delay including transportation fuels until the second compliance period, which begins in 2015. Same goes for the natural gas that’s used in homes and businesses. (See section 1 for more details.) This is a bummer. See here and here for more on these problems.

Offsets. An improvement from the prior statement on offsets that also has implications for linking:

WCI Partner jurisdictions will limit the use of offsets, and the allowances from other GHG emission trading systems that are recognized by the WCI Partner jurisdictions, to no more than 49% of the total emission reductions from 2012-2020… (See section 9.2)

Half (or nearly half) of reductions is still probably much too high for an offsets program. Sightline would prefer to see something less than 10 percent of reductions.

There’s another potential concern about offsets: WCI appears poised to accept Clean Development Mechanism (CDM) credits (see section 9.8). While CDM is the most widely used offset program, it been plagued with problems. WCI will need to be sure to honor the language it attaches here: “…the WCI Partner jurisdictions may establish
added criteria to ensure similar rigor to WCI approved/certified offset projects or other requirements…”

Linking. But while offsets are rife with difficulties, using credits from other cap-and-trade systems is a potentially excellent idea, just so long as the other programs are as rigorous as WCI. As I explain in this post, linking can amplify the benefits of a big carbon market.

My biggest complaint in this section is that, with this draft, WCI has tangled up linking with offsets. (WCI is essentially treating linked credits as offsets.) I can’t see a good reason for that. They’re two very different things with very different benefits and costs.

On the other hand, a carbon credit from RGGI or Europe is probably better than an offset in the sense that it’s more credible. So I’m happy to see the potential for linked credits to push down the number of offsets deployed.

Thresholds. In the prior draft, we worried about WCI setting a threshold of 25,000 MMTCO2e (that’s the level of emissions at which a polluter gets regulated). In this draft, WCI has added some comforting language that suggests appropriate adjustments for certain industries. I’d be a little happier if they specifically identified the oil and gas extraction industries in Canada and the southwest US, but I’ll take it. (See section 3)

Biomass—updated and corrected at 2:15 p.m. In the previous draft, biomass was excluded; we believed this was an oversight. The new draft improves on the treatment of biomass in a couple of important ways. First, each state or province will make a determination about whether a biomass product is “carbon neutral” and hence eligible for exclusion. (Section 1.3) And second, WCI will begin tackling the critically important accounting for the upstream emissions that attach to both biofuels and fossil fuels alike. (Section 1.5)

As we diversify our energy into the world of biofuels — as well as into unconventional sources of oil, gas, and coal — the upstream carbon consequences really matter. In fact, the emissions that are connected to resource extraction, land clearing, processing, and refining can make all the difference about whether we should prefer one fuel source over another. This type of accounting for upstream emissions is far from simple, but it’s encouraging that WCI is aware of the problem and moving in the right direction.

If I have a concern with WCI’s treatment of biomass, it’s that it proposes to exclude “pure biofuels” (such as the biological component in, say, biodiesel). (Section 1.4) For reasons I don’t have the space to wade into here, I think it’s fairer simply to count the actual experienced emissions of our fuel sources without regard to their type. If we try to privilege biofuel content, on the grounds that it’s “all part of the carbon cycle,” I worry that we’ll end up encouraging climate-unfriendly practices.

Reserve price. This is something of a technical curiosity, but it’s a bright idea that just emerged in today’s proposal:

…the first 5% of allowances auctioned by any WCI Partner jurisdiction will have a reserve or minimum price. If any portion of the allowances offered at auction is not purchased at or above that reserve or minimum price, a fraction of the unsold allowances will be retired.

This reserve price will go a long way toward avoiding one of the problems in the European cap-and-trade system. At first, Europe distributed more permits than were needed and the price of carbon consequently fell to very low levels.

State apportionment (aka state carbon budgets). One of the most complicated and contentious issues — I’ve written about it here — but also one of the most important. Unfortunately, it appears that WCI will be setting the state carbon budgets on the basis of emissions:

For 2012, each WCI Partner jurisdictions’ allowance budget will be based on the best estimate of expected emissions for sources covered in the cap-and-trade program in the WCI Partner jurisdiction in 2012. (Section 7.2)

This could create inequities between the participating jurisdictions, as it will tend to reward states that export carbon (or carbon-intensive products such as coal-generated electricity) and punish states that import carbon products.

WCI seems to acknowledge this problem, at least for the electricity sector (in section 7.1), but leaves the resolution at this: “WCI Partner jurisdictions in such situations agree to an equitable solution…” Well, that’s nice. But what solution? The answer is far from obvious.

The state carbon budgets will also, apparently, be “adjusted” to account for electricity production, population growth, and emissions during the period from 2001 to 2005. They’re setting aside 1 percent of the total WCI budget in 2012 to make these adjustments. To be honest, I’m not sure how this is supposed to work or whether it’s even a good idea. And is 1 percent really enough to accomplish any meaningful adjustment? More later, perhaps (and clarifications are very welcome).

Early Reduction Allowances. This appears to be something new under the sun. (See section 8.11) Unless I’m misreading, WCI is proposing to create a new form of carbon permit, an “Early Reduction Allowance,” that will be additional to the WCI’s carbon cap. These Early Reduction Allowances may be given out to polluters who reduce emissions between 2008 and 2012 and when the “reductions are voluntary, additional, real, verifiable, permanent, and enforceable.”

Leaving aside the very big puzzler of how a reduction could satisfy all of those terms even in principle—for instance, how can a reduction be both voluntary and enforceable? — this proposal raises questions. While early reductions are environmentally beneficial, it is critical that WCI does not effectively increase the amount of carbon allowed under the cap.

The ERAs will be “treated like other allowances in the cap-and-trade program.” Now, this may not threaten the integrity of the cap if the early reductions are really and truly reductions. But being certain will be extremely difficult. And even if we do get certainty, it raises other questions about fairness. Skipping over the technical explanation, the result will be that consumers will pay polluters to make early reductions. Now, again, this may be a fine idea in certain limited circumstances, but it’s also a threat to the program’s basic fairness.

Unless I hear some compelling evidence otherwise, I’m inclined to believe that this is an unnecessary distraction—and a potential loophole.

Other stuff. Banking: yes. Borrowing: no. Start date: January 1, 2012.