Inside WCI: Thresholds

This is the third in a short series of posts that explain some important but often overlooked policy issues in the Western Climate Initiative—the West’s regional cap-and-trade system.

One of the core questions in cap and trade—really, for any regulatory system—is who, exactly, participates. Ideally, the program would include as many sources of climate pollution as possible without creating an administrative nightmare. (In fact, administrative simplicity is one of the main reasons why an “upstream” approach to regulation works best.) So we want to include refineries and coal plants, but not necessarily the neighborhood propane dealer. This is a good deal for both the regulators, who can work with a manageable system, as well as for businesses. An oil importer is sophisticated enough to account for emissions and hold tradeable carbon permits, while a smaller business can’t do so as easily.

So to balance comprehensiveness with parsimony, WCI needs to establish an emissions “threshold” for regulation: facilities that generate more than the threshold participate in cap and trade, but smaller facilities don’t have to. Luckily, the lion’s share of emissions come from fairly large sources, so the trade-off isn’t too severe in most cases. Still, there is a trade-off and it’s important to get the balance right.

In it’s latest draft, WCI suggested a threshold of 25,000 metric tons of carbon-dioxide-equivalent (often expressed as 25,000 metric tons CO2e or 25,000 MTCO2e). That was at the very the high end of what they had been considering. In previous drafts they had said they would set the threshold “within the range of 10,000 to 25,000 metric tons of CO2e per year per facility.” The vast majority of public interest groups —Sightline included — have argued that the threshold should be set no higher than 10,000 tons.

A threshold above 10,000 tons is likely to exclude a significant share of emissions, though WCI has provided no estimate of exactly how much. Particularly in Canada (as in other places with energy extraction), the emissions from drills, wellheads, processors, refiners, and related equipment can be fragmented and dispersed such that on an individual level they fall below the threshold. That would give a free pass to the oil and gas industry and also erode the program’s environmental integrity.

The Pembina Institute has conducted some helpful analysis of the issue. In their comments on WCI’s “reporting,” Pembina points out:

In the upstream oil and gas sector, characterized by very large numbers of very small facilities, coverage of an adequate proportion of total emissions will require either (i) that the reporting threshold be set much lower than 10,000 tonnes CO2e per year per stationary source; or (ii) that a “source” for reporting purposes be defined to amalgamate many smaller neighboring facilities that may be part of a connected system. According to Environment Canada, a combined threshold of 1,000 tonnes CO2e per facility… would result in coverage of only 80% of the Canadian upstream oil and gas sector’s emissions. We regard this as insufficient coverage.

Those upstream oil and gas emissions are a big deal in British Columbia’s portfolio of emissions. As much as 1 ton in every 4 or 5 tons of BC’s total emissions are from fossil fuel production and processing, so even a 1,000 ton threshold might still exclude 5 percent of the province’s total emissions. A 10,000 ton threshold—the level public interest groups have asked for—might easily exclude 10 percent or more of BC’s emissions. How much would a 25,000 ton threshold exclude? I could only guess, but it’s likely a large fraction. And WCI should provide a good estimate before charting a course that leaves a gaping hole in the coverage of BC’s climate pollution.

New Mexico is in the same boat. An even greater share of that state’s climate pollution comes from the production and processing of oil and gas.

Pembina’s point is germane to the threshold question, but it also touches on a related issue: “reporting.” In order to know which entities are above the threshold for the cap and trade program, there need to be emissions reporting that starts at some level below the threshold. (I’m not planning to wade into the details of “reporting” in this series, but if you want to know more you can take a crack at WCI’s just-released 29-page reporting draft.)

Pembina believes that the reporting threshold should be lower than 10,000 tons. Sightline agrees.

Unfortunately, WCI has now proposed to start the reporting requirements at 10,000 tons. If reporting starts at 10,000 tons then, as a practical matter, it will be difficult for WCI to meaningfully lower its threshold for participating in the cap and trade program.

Finally, setting any threshold raises a batch of additional questions that will need to be sorted out eventually. For example, under the proposed threshold if a facility is generating 26,000 tons but reduces its emissions to 24,500 tons, will it still be included under the cap? Or would a 1,500 ton reduction in this case free the entity from regulation? And if it escapes the cap, how would that work exactly? Coud the firm sell all of its carbon allowances? And how would that affect market dynamics when 26,000 carbon allowances suddenly become available?

These questions aren’t necessarily problematic; they can probably be answered in satisfactory ways. We can expect that WCI will turn to these kind of market design issues once the big-picture guidelines are in place.