There’s Plenty of Room at Hotel California

Pretend you’re the governor of Oregon or Washington, or the head of a key committee in the state legislature in Salem or Olympia. Let’s say you’re convinced: Climate change is real, it’s a huge risk, and we need a fast, smooth transition beyond carbon fuels. Putting a price on carbon is the single best way to nudge the whole economy in that direction.

What do you do? Designing an entire carbon pricing system from scratch… that’s a lot of work! Isn’t there an “off-the-rack” option available? There is! There are, actually. British Columbia’s carbon tax shift is ready to copy. Or, if you prefer to link up with the best US carbon market, California has spent the past eight years building a state-of-the-art cap-and-trade program and writing all the rules and regulations to go with it. Not only that, but Oregon and Washington have already done some of the groundwork for linking to California by contributing to the Western Climate Initiative’s 2010 framework.

Linking isn’t just a way to avoid recreating the wheel. It has a lot of benefits: it can cut the cost of reducing pollution, reduce the risk that emissions will “leak” across state borders, trim the costs of administering the program, and make it simpler for multi-state entities to comply because the rules are the same across borders.

That all sounds great. What do you need to do? Here is a summary of what Oregon or Washington would need to do to link, with comparisons to California’s linkage with Quebec this year.

Enact State Policies

Before linking with California’s cap-and-trade program, Oregon or Washington would need to pass laws and develop regulations putting the following policies in place:

Cap

Oregon or Washington would need to enact a cap as stringent as California’s: reducing emissions to 1990 levels or lower by 2020. Washington and Oregon already have sufficiently strict goals in place: Washington aims to reduce emissions to 1990 levels by 2020 while Oregon has a stricter target of 10 percent below 1990 levels by 2020.

Compare: Quebec’s target is 20 percent below 1990 levels by 2020. Like California, Quebec’s program covers six greenhouse gases and starting in 2015 will cover approximately 85 percent of Quebec’s emissions, including imported electricity. The cap declines at a rate of about 4 percent per year from 2015 to 2020.

Offsets

Offsets requirements at least as strict as California’s. All offsets must be real, additional, quantifiable, permanent, verifiable, and enforceable. By definition, offsets must come from outside the capped sectors. This means that energy efficiency cannot be an offset if the electricity sector is capped, otherwise the reductions would be double counted. Oregon or Washington could simply adopt some or all five of California’s compliance offset protocols: US forests, urban forests, livestock, ozone depleting substances, and mine methane capture. Or they could develop their own equally strict protocols. Or they could not allow offsets at all, avoiding one of the trickier regulatory challenges in a cap-and-trade system.

Compare: Quebec has adopted three offset protocols: livestock manure management, landfill gas capture, and destruction of ozone depleting substances from foam. Quebec will likely be a net purchaser of allowances and offsets from California.

Reporting and Verification

A reliable system for reporting and verifying emissions is a cornerstone of effective policy. It allows authorities to set the cap based on actual emissions, not on speculation. California emitters must comply with California’s reporting regulation and use its on-line reporting tool. Oregon and Washington already have greenhouse gas (GHG) reporting protocols in place. However, to avoid possible self-reporting errors, California also requires business to get an independent verification of emissions. Oregon and Washington would need to add third-party verification of emissions before joining the cap-and-trade program.

Compare: Quebec has a similar mandatory reporting regulation.

Allowance Tracking and Auctioning

Oregon and Washington companies would need to use the Western Climate Initiative, Inc. (WCI, Inc)’s Compliance Instrument Tracking System Service (CITSS) to issue, track, and monitor the trading of allowances. Using a joint tracking system makes the program more secure and lowers administrative costs.

Though not required, Oregon and Washington would probably want to hold joint auctions with California and Quebec to increase market liquidity and avoid unnecessary administrative overhead of running parallel auctions. Quebec and California are holding a practice joint auction in August and plan to hold the first joint auction in November 2014.

Strong Enforcement

California is serious about enforcement, and Washington and Oregon would need to be too. California entities face a hefty incentive to buy enough allowances to cover their emissions: for every ton that they fall short, they have to turn over four times as many to comply after the deadline. (Section 95857(b)(2)). If an entity falsifies or omits information, it will have to pay fines and may even face criminal penalties. About 350 businesses are regulated under the California cap. Oregon and Washington would each have just a fraction of that number so it will be a relatively small administrative burden to make sure they are all playing by the rules.

Communicate with California

Linking requires good communication between the linking jurisdictions. California and Quebec staff formed several workgroups to discuss specific aspects of implementation:

• Tracking System Workgroup
• Auction and Monitoring Workgroup
• Management Workgroup
• Consultation Committee

Oregon and Washington already have open lines of communication with California through the Pacific Coast Collaborative. Oregon and Washington would probably want to join California, Quebec, and British Columbia on the Board of Directors for WCI, Inc. State staff might also want to form some workgroups like the ones above.

Follow the Process

Oregon and Washington’s state agencies would of course need to follow their own Administrative Procedures Acts when implementing the cap-and-trade program in each state.

California also has a law specifically governing linking of cap-and-trade programs. The California Air Resources Board (ARB) must notify the Governor that it intends to link. The Governor, with advice from the Attorney General, has 45 days to find that the linking jurisdiction meets the four requirements below, and to present his findings to the legislature.

1. The linking jurisdiction has adopted GHG reduction requirements, including offsets, at least as stringent as California.
2. California can enforce its own law against any regulated entity within the linking jurisdiction.
3. The linking jurisdiction has enforcement provisions at least equal to California’s.
4. The linkage will not impose liability on California.

Once both jurisdictions have complied with their own state process requirements, they may sign a linkage agreement similar to the one California and Quebec signed in September 2013. They may also wish to prepare a Linkage Readiness Report as California and Quebec did in November 2013.

Timeline

The whole California-Quebec process took about five years, but Oregon or Washington might be able to trim that to three years. Here are the steps:

Pass legislation and enact regulations:

• Quebec took a little over two years from the time it passed legislation enabling cap and trade (June 2009) to the time it implemented its cap and trade regulations (Dec. 2011).
• Oregon or Washington would also need two years (possibly more) to go through the rulemaking process.

Harmonize with California:

• Quebec took an additional year to harmonize its regulations with California and allowing linking (Dec. 2012).
• Washington and Oregon could skip this step by harmonizing from the start.

Authorize linking and sign a Linkage Agreement:

• California took about 9 months to amend its regulations to enable linking and for the Governor to issue his findings that the linkage met requirements.
• This process could probably be condensed to about 4 months because California will not need to rewrite the rules, it will only need to authorize a new trading partner.

Hold joint auctions:

• From the time they were officially linked (Jan. 1, 2014), Quebec will take eight months to hold the first practice auction (Aug. 2014) and 11 months to hold the first official joint auction (Nov. 2014).
• Washington and Oregon could be auction-ready from the time they sign a linkage agreement.

In Conclusion

The linking framework is in place. If Oregon or Washington implements a well-designed cap-and-trade program with the elements above, then it will be straightforward to negotiate a linking agreement with California. So, if you were the governor of Oregon or Washington, or a committee chair in Salem or Olympia, you’d have a simple, off-the-rack option for putting a price on carbon.